Oil continued to drive downward Tuesday (August 5) as speculation brought light sweet crude futures to $118 per barrel during the day with a close at $119.17. This was a $2.24 drop in New York trade. Oil has now fallen $28 since its high on July 11, less than one month ago. The record high on the day was $147.27.

The month-long downward price trend in oil has been largely credited to shrinking consumer and business demand based on the weakening economy and dollar. Today’s dip was driven by a report that the services sector activity fell during July. It will certainly be interesting to see if the oil trend continues if the economy and the dollar do pick up momentum as the Fed seems to believe. A rising dollar generally coincides with falling oil, assuming there are no other major market catalysts.

National average retail gas prices have followed right along with the slide in oil. According to AAA and the Energy Information Administration, national prices fell for the 19th consecutive day. The morning survey showed a price of $3.871 for Monday. This is nearly a quarter lower than the record prices at the pump of $4.114 from July 16. Amazingly, the current price is still about $1 higher than the same time last year.

Gold prices also dropped sharply on Tuesday, closing down over $21 to $886 in New York. Gold is down about $140 from its all-time high during the spring. Oil is very much contra the dollar in its movement and the dollar continues to crawl higher. One dollar currently nets about 108.5 yen and a Euro has “slumped” in value to just $1.5472.

It was the Fed that stole the show in the late afternoon on Tuesday, however. The Fed funds rate announcement was the most subtle feature of the policy meeting results as the zero change in rates was widely expected. The two per cent funds rate seems necessary at the moment as time weighs the development in the economy and inflation.

More important to investors, analysts and consumers were the mostly positive remarks on the economy from the Central Bank leaders. Economic growth during the second quarter was highlighted with increased consumer spending and expansion of business exports cited as the biggest contributors to the growth. Last week, the second quarter gross domestic product was estimated at 1.9 per cent. This was below forecasts for 2.3 per cent, but virtually doubled economic growth from the first quarter. It also suggests recession is much less likely than once thought early in 2008.

Although credit and housing are still struggling, most commentary surrounding financials was positive. It was inflation that brought the most negative commentary. Inflation has been high for some time, but the Fed has hesitated to address rising prices in fear of hindering economic growth. The good news is that inflation still seems moderate enough that interest rates do not need to go up to combat rising prices. In fact, the Fed believes inflation could work itself out as the economy expands and the dollar returns to form based on speculative and economic stability.

The combination of falling oil and gas and the sense of relief provided by the Fed drove Wall Street higher Tuesday. The major indices all gained nearly three per cent on the day, with the Dow surging over 331 points.

Market Recap

Stocks opened the week on a down note Monday with the major indices all posting modest losses. The bigger news came Tuesday as stocks soared broadly thanks to falling oil and welcomed relief from the Fed. The Dow gained 331 points on the day as the NASDAQ and S&P were up 64 and 35. In essence, it was just under a 3% boost for the broad equities market. Oil dropped powerfully to a close at $119. However, it was the Fed that fueled the already burning markets. Not surprisingly the Central Bank left the funds rate at 2 per cent. The market was enthused by positive comments that the economy grew in the second quarter thanks to pick ups in consumer spending and exports. The Fed also expects the economy to continue to improve and believes that current inflation problems might recover later this year.

Neil Kokemuller
Tuesday, August 5, 2008
9:35 PM EST

Neil Kokemuller is an Associate Professor of Marketing at Des Moines Area Community College in Des Moines, Iowa, USA. He has a MBA from Iowa State University.

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