Russell rises after tame inflation data
Small-cap shares are edging higher in midday trading, supported by a reversal rally that was triggered ahead of the opening by an inflation report suggesting that the economic slowdown is moderating inflation related to soaring food and energy prices. At 1:20 p.m. ET, the Russell 2000 (NYSE:IWM) was up 6.71, or 0.91%, at 743.56.
The consumer price index (CPI) headline figure came in at 0.2%, which was below the forecasted 0.3%. The “core” reading, which excludes food and energy costs, came in at 0.1%, also below the median forecast of 0.2%. The CPI report suggested inflation wasn’t out of control, which means the Federal Reserve can keep interest rates low in response to the sputtering economy.
“Headline consumer inflation rose moderately in April because a sharp rise in food prices was partially offset by no change in energy costs,” Steven Wood, chief economist with Insight Economics, said in an email. “Meanwhile, core consumer inflation rose only slightly with largely offsetting price accelerations and decelerations in the various expenditure categories. Although energy prices are expected to rise sharply over the next several months, weakening economic activity over the next several quarters should help cap the gains in core inflation. Although the Fed is currently on hold, at least temporarily, they have heaved a collective sigh of relief with the release of this data,” Wood said.
The market appeared to take away a perception of a hawkish tone from the array of Federal Reserve speakers that were out and about Tuesday, and the CPI report helps soothe some inflation jitters.
“Compared to Russia, we look great! I think countries outside the United States are more concerned about inflation from energy and food. The U.S. middle class is getting squeezed and that's why Wal-Mart provided the guidance they did,” Andy Busch, foreign exchange strategist for BMO Capital Markets, said in an email. “It's interesting to remember that the Bernanke Fed was anticipated as a group that was going to focus on targeting inflation like Canada and the U.K. Now, they have clearly focused intensely on the growth aspect of their job. Clearly, this was the correct thing to do during this credit crunch. The time will come soon to see if they can remember the inflation aspect of their job and make difficult decisions to raise interest rates during slow growth.”
Crude oil futures edged lower in midday Wednesday trading, which might encourage the bulls. Crude oil prices were pulled down by comments from Iranian officials that there are no plans to cut exports — a day after the Iranian president threatened to review a cut in crude output.
Large-cap stocks in the news include Deere & Co. (NYSE:DE), which was down about 8% in midday, pulled lower by a cautionary outlook for 2008 despite solid Q1 results. Also, Whole Foods Market Inc. (Nasdaq:WFMI) was down some 12% on sloppy earnings. On the upside, Freddie Mac (NYSE:FRE) was up about 9% after posting a smaller-than-expected loss for the quarter.
Among broad market sectors, the top-performing groups in midday action include companies related to recreational products, computer storage, airlines, school services and audio and video equipment. Sectors attracting sellers include construction and agricultural machinery, non-cyclical crops, alcoholic beverages and advertising services.
As for individual small-caps, BCSB Bankcorp, Inc. (Nasdaq:BCSBD) is up about 81%, gapping higher despite no news. China Architectural Engineering, Inc. (AMEX:RCH) is jumping some 33% on earnings. On the downside, Transcat, Inc. (Nasdaq:TRNS) is slipping 15% despite no significant announcements. U.S. Shipping Partners L.P. (NYSE:USS) is continuing its slide — down some 14% — after Moody’s lowered its debt ratings on the petroleum and chemicals shipper. After swinging to a Q1 loss, USS is down about 44% since Monday.
