MARKET SNAPSHOT: $50 Jump In Oil Prices Could Stall U.S. Economy
By Anora Mahmudova, MarketWatch
NEW YORK (MarketWatch) -- The record levels reached by the stock market this week have been tainted by just how marginal the gains have been. The S&P 500 closed at all-time highs three times in a row this week, gaining just over 1% by Friday.
The weekly gains now resemble daily gains of yesteryear. In fact, the benchmark index has not had a daily move of more than 1% for more than two months. Still, the stock market is on track for solid monthly and quarterly gains barring a catalyst that may result in a long-awaited pullback.
Several such catalysts, such as sectarian war erupting in Iraq and consequently a sharp rise in oil prices, continued tensions between Ukraine and Russia and the Federal Reserve policy meeting were brushed off by investors in equity markets in the past week.
However, if oil prices continue to climb, stock markets will take notice, according to analysts at Morgan Stanley. Also read: U.S. oil hits 9-month high as Iraq worries simmer
Rising oil prices translate to rising gasoline prices, but there is lag of several weeks. Given recent jump in oil prices, gas prices in the U.S., which have remained stable since the beginning of May, are poised to increase in coming weeks. Higher prices at the pump will be taxing for consumers, whose purchasing power is still questionable.
The good news is that a temporary price increase of $10 a barrel will have no impact on the economy a year out, according to Morgan Stanley analysts. That's primarily due to increased efficiency of cars consumers' change of behavior when gas prices rise -- Americans just drive less.
The not so good news is that a permanent rise of a $10 a barrel price increase would knock down real GDP growth by 0.4 percent four quarters out.
"A sustained $50 a barrel jump in oil prices would be enough to stall the U.S. recovery," the Morgan Stanley note said.
If situation in Iraq escalates further, markets will be jittery.
Rising oil prices worry the Fed officials too. Federal Reserve Chairwoman Janet Yellen said escalation of war in Iraq and a jump in oil prices "would be listed as something in the category of risks to the outlook" during her press conference Wednesday following the FOMC meeting .
Rob Haworth, investment strategist at U.S. Bank thinks oil prices would have to hit $120 a barrel for equity markets and bond markets to take some more notice.
"With 10-year Treasury yields higher, the equity market making new highs, we're still looking at this as an economic recovery and we don't have a solid threat yet," he said.
The economy meanwhile continues to grind higher. This week, investors will get more data from Asia and Europe as well as domestically. On the economic calendar, investors will pay attention to global PMI reports, specifically from China and Europe, due on Monday.
Investors will pay close attention to the existing and new home sales figures, due on Monday and Tuesday respectively, for more clues on the health of the housing market. Growth in the housing market has slowed down in recent months, putting a damper on the recovery story.
Durable goods orders, weekly jobless claims and personal income data will provide clues about the health of the U.S. consumer.
The FOMC meeting last week has officially ended the 'quiet period' for Fed officials and they will go on speech tours beginning Tuesday.
Among Fed officials scheduled to speak this week are Philadelphia Fed President Charles Plosser, San Francisco Fed President John Williams, Richmond Fed President Jeffrey Lacker and St. Louis Fed President James Bullard. Apart from Plosser, they are all non voting members of the Fed policy committee.
As companies are readying for earnings releases in July, investors expect some to come out with pre-announcement and warnings.
Among companies reporting earnings are Walgreens Company(WAG) , Barnes & Noble, Inc. ( BKS ) , General Mills, Inc. ( GIS ) , Monsanto Co(MON) , ConAgra Foods Inc. ( CAG ) , Lennar Corp. (LEN) and Nike Inc (NKE) .
Later in the week , Google Inc. ( GOOGL ) will be in focus during its two-day developers conference.
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