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Oil, CPI could spell rough ride for stocks

Oil, CPI could spell rough ride for stocks

Wall Street could be in for a rocky ride next week as investors lick their wounds from yesterday's triple threat - oil's jump to a record above US$139 a barrel, a troubling unemployment report and the stock market's 3 percent drop - and await Consumer Price Index data.
The CPI report, which tracks inflation at the consumer price level, is set for release on Friday.
Stocks had been headed for a weekly gain after Thursday's rally, the strongest in over a month. But optimism evaporated early Friday when the government's nonfarm payrolls report for May showed the unemployment rate spiked the most in 22 years.
For the week, the Dow Jones industrial average fell 3.4 percent and the Standard and Poor's 500 index lost 2.8 percent. The Nasdaq dropped 1.9 percent.
On Friday afternoon, stocks fell fast and furiously when oil soared past $139 a barrel. The Dow closed down almost 400 points. The skyrocketing oil prices and the stock market's sharp sell-off triggered memories of 1970s-style stagflation, when prices soared but economic growth was almost nil and the stock market was practically dormant.
"Stagflation is really a nasty word," said Victor Pugliese, director of listed equity trading at Broadpoint Securities in San Francisco. "The last time we had it, we had a terrible market."
Stocks went almost nowhere in the 1970s when oil prices surged due to the Yom Kippur War and the Arab oil embargo in October 1973, and at the decade's end, with the U.S. hostage crisis in Iran that began in early November 1979.
In early 1973, the Dow broke the psychologically important mark of 1,000 - only to end the year at 850.86. The Dow rose above the 1,000 milestone again in 1976 and managed to close out the year at 1,004.65. It would take the Dow more than four years, until sometime in 1981, to poke its head above 1,000 again. The market's stumbling block: Runaway oil prices and inflation took a bite out of the U.S. economy with banks' prime interest rate hitting 21.5 percent in December 1980.
"There is a lot of concern over how high the oil price can go," said John Praveen, chief investment strategist at Prudential International Investments Advisers LLC in Newark, New Jersey. "Stagflation clearly is the biggest fear with a negative impact on economic growth and the consumer."
Oil shock, jobs and CPI
Oil roared to an all-time high Friday on the weaker dollar, tensions between Israel and Iran, and a Morgan Stanley forecast that falling U.S. crude stockpiles could push oil to US$150 a barrel by July 4.
During the New York Mercantile Exchange's regular session, U.S. crude oil for July delivery climbed to an intraday record of US$139.01 - overtaking the previous record of US$135.09 set on May 22. NYMEX July crude also settled at a record US$138.54 a barrel, up US$10.75, or 8.41 percent for the day. And that surge followed Thursday's gain of US$5.49.
In Friday's post-settlement trading, NYMEX July crude shot even higher - to a record US$139.12.
The jump in the U.S. unemployment rate to 5.5 percent in May from 5.0 percent in April and Friday's spike in oil prices to a record were certain to dominate the front-page headlines of the weekend newspapers.


Updated : 2021-08-01 09:50 GMT+08:00