Inflation worries creep in

2/26/2008 11:05 AM ET

Producer prices rise in January. Home Depot reports a drop in profit and misses Wall Street's estimate. Mortgage foreclosures soar. MBIA lowers its dividend.

Higher energy and food prices sent producer prices surging in January.

The Producer Price Index jumped 1% in January, the Labor Department reported this morning, much higher than the 0.4% increase economists had expected. The PPI had fallen 0.3% in December.

Core PPI, which excludes volatile food and energy prices, rose 0.4% last month, 0.1% higher than the consensus estimate.

Year-over-year, the PPI is up 7.4%.

Stocks turned around by midmorning, adding to Monday's strong rally. At 11:05 a.m. ET, the Dow Jones Industrial Average was up 45 points to 12,614 after soaring 189 points Monday. This morning, the Nasdaq Composite Index had added 4 points to 2,360, and the Standard & Poor's 500 Index was up 1 point to 1,373.

Light, sweet crude oil was down 33 cents to $98.90 a barrel this morning.

Companies from Kellogg to Hershey have been forced to raise prices on their products because of surging costs for commodities like wheat and cocoa.

The Federal Reserve has been struggling to monitor inflation growth while keeping the economy on track, but some critics worry that the Fed has cut rates too much and too quickly, and "stagflation" has returned to the economic vocabulary.

Still, former Treasury Secretary Larry Summers said worries about stagflation, when inflation rises and economic growth slows, are not a huge concern.

"I just don't see (stagflation) as anywhere near around the corner right now in the U.S. I think you have inflation expectations pretty securely anchored in the 2-plus-percent range. If you think back to the 1970s, where people were thinking they were going to lose half the value of their money in a year, I don't think we're anywhere near that kind of thing," Summers, now managing director of D.E. Shaw Group, said on CNBC this morning.

Ahead of the Bell: Home Price Index

The Associated Press February 26, 2008, 6:23AM ET

Two readings of U.S. home prices to be released Tuesday will give investors and homeowners a sense of how far the housing market slipped at the end of 2007.

The Standard & Poor's/Case-Shiller monthly report on home prices for December is due at 9 a.m. EST. The Office of Federal Housing Enterprise Oversight releases its fourth-quarter 2007 report at 10 a.m. EST.

The indexes offer different pictures of the housing market. The Case-Shiller index, which focuses on major U.S. cities, has shown falling prices for months, while the government's year-over-year index has yet to slip into negative territory.

The government's index is calculated using loans of $417,000 or less that are bought or backed by government-sponsored Fannie Mae and Freddie Mac. It does not include properties bought with some of the riskier varieties of home loans that have gone sour over the past year.

Since peaking in mid-2005, the rate of home price appreciation in the government index has dropped off sharply to an increase of 1.8 percent in the third quarter of 2007, the smallest increase since 1995. It close to flat in parts of 1990 and 1991, but index has never dropped compared with a year earlier.

Both indexes examines price changes for the same properties over time instead of calculating a median price for houses sold during a particular month or quarter. Doing so prevents the data from being skewed by changes in the mix of houses sold. For example, sales of more expensive homes in any particular month or quarter would push median prices upward.

Home prices as measured by the 10-city Case-Shiller index fell in November for the 11th-straight month, dropping a record 8.4 percent. A broader reading measuring 20 metropolitan areas fell 7.7 percent in November.

Monday brought more bad housing market news, as the National Association of Realtors reported that sales of existing homes fell to the lowest level in nearly a decade in January while the median price for a home dropped for the fifth straight month. The median price of a U.S. home sold in January slid to $201,100, a drop of 4.6 percent from a year ago, according to the Realtors group.

Forex - Euro surges after forecast-busting Ifo

02.26.08, 4:30 AM ET

LONDON (Thomson Financial) - The euro surged higher after a closely-watched survey into German business sentiment came in above market expectations, further reinforcing expectations that the European Central Bank will not be cutting rates any time soon.

Earlier in the session, the euro had come under pressure on talk the Ifo would disappoint to the downside.

In the event, the research institute revealed that its headline business climate index rose to 104.1 in February from 103.4 the previous month. Analysts polled by Thomson Financial News were expected the index to drop to 102.7.

The talk in the market before the release was that it would fall to 101.0 and that pushed the euro down to 1.4777 usd from 1.4839 usd.

'Offers into the 1.4830/40 usd area will now come into view as the pair looks to regain the losses out through amid the early weak headline speculation,' said Thomson IFR Markets analyst Matthew Foster Smith.

The IFO is likely to stoke talk that the European Central Bank's next forecasts in early March will be relatively buoyant, thereby fuelling talk that the central bank will keep borrowing costs on hold for a while longer.

The ECB has kept its key refi rate unchanged at 4.00 pct for eight months, unlike the US Federal Reserve and the Bank of England, both of whom are cutting rates, though at far different tempos. This has helped underpin the euro.

'The Fed's contrasting tone with that of the ECB and investors' search for higher returns should keep the euro supported for now even though we retain our medium to long term bearish view on the currency,' said Ian Stannard, currency strategist at BNP Paribas .

With most ECB watchers expecting the central bank to stay pat until June, the rhetoric of policy-makers will be closely monitored. A speech today from Axel Weber, the president of the Bundesbank, could well be important in this regard.

'Any sense that this typically hawkish policymaker is more nervous about growth could provide the excuse for the euro to push lower once again, and we continue to target 1.4450 usd,' said Daragh Maher, senior FX strategist at Calyon.

Citi's Hits: 15 Times $100 Million

Citigroup Inc. disclosed that traders in its investment bank piled up daily losses of more than $100 million on 15 separate occasions last year.

Those 15 financially disastrous days, which Citigroup disclosed in its annual report filed late Friday but declined yesterday to describe in detail, added to worries the New York bank's problems are deeper than those that led to about $20 billion in mortgage-related write-downs last year, the ouster of its chief executive and a sinking stock price.