Wall Street's outlook remains cautious after a turbulent week as investors confront rising concerns about an economic downturn as welll as resurgent inflation data Even with the Federal Reserve joining forces with central banks around the world to combat a global credit squeeze, investors tensions are still running high.
To make matters worse, data this week showed inflation gaining momentum, making it harder for central banks to cut rates and stimulate growth. Consumer prices rose at the fastest pace in more than two years last month, and wholesale prices posted the biggest gain in more three decades.
The inflation reports "should be a reminder that all the talk regarding the presumed 'expiration' of inflation is nonsense and that the Federal Reserve is, and must be, concerned about accelerating inflation," said Eugenio Aleman, senior economist at Wells Fargo.
"Meanwhile, those that believe the US is going into a recession need to realize that if that is the case, the Fed can't do anything about it right now because if we are going to go into a recession, it will happen during this quarter and/or the first two quarters of next year."
The Dow Jones Industrial Average slipped 2.1 percent in the week to Friday to end the week at 12,339.85. The broad market Standard amp; Poor's 500 shed 2.4 percent to 1,467.95 and the tech-dominated Nasdaq lost 2.6 percent to 2,635.74.
The Fed's widely expected quarter-point interest rate cut in the base federal funds rate to 4.25 percent Tuesday failed to cheer Wall Street, as analysts said the central bank appeared divided and muddled in its outlook. "The Fed continues to undercut its policy easing with 'verbal tightening,'" said economist Ethan Harris at Lehman Brothers.
"This makes the Fed look confused so that it neither gains credence on its anti-inflation resolve - because it always seems to give in and cut rates - nor does it provide any reassurance that it will stop a recession because it is always hinting that it is unwilling to cut further." Meanwhile a massive rescue effort announced Wednesday by the Fed and four other central banks to inject fresh money into the worldwide banking system had only a short-lived impact.
Analysts said confidence in the banking system remains low and that the central banks' move to increase liquidity may do little to help stimulate bank lending, leaving recession risks high.
"Equity investors will most likely continue to focus on the tightness in the credit markets as a harbinger for what might happen to the global economy and 2008 earnings estimates. This tightness most likely will continue to constrain the traditional year-end Santa Claus rally."
Bond prices fell in the past week. The yield on the 10-year Treasury bond rose to 4.232 percent from 4.120 percent a week earlier, and that on the 30-year Treasury climbed to 4.658 percent from 4.585 percent. Bond prices and yields move in opposite directions.
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