More fall in prices expected in February

PRICES of just about everything, including US stocks, fell in January, and February could bring more of the same unless US economic data picks up.

Last Friday's trading on the stock market was in line with that for January: stocks lurched violently up and down and finished with a substantial loss. The broad Standard & Poor's 500 declined 3.1 per cent for the month, the biggest monthly loss since its similarly unimpressive start to last year.

There were much bigger declines in the value of oil, copper, iron ore, the euro and emerging-market stocks and bonds. The only assets that gained in value were safe havens like gold and Treasuries.

The commodities bust and the rise in the US dollar could push prices down further. For corporate and economic growth in the US, muted inflation could be a good thing but outright deflation would be ruinous. Investors are currently sifting through earnings reports and data to calculate whether the US recovery can survive the scare on commodity and foreign- exchange markets or whether it portends a spiral of falling prices.

This earnings season, companies from software maker Microsoft to consumer goods manufacturer Procter & Gamble and drug giant Pfizer all blamed the US dollar's appreciation for a deceleration of earnings growth. For companies that generate a substantial portion of their revenue overseas, a stronger US dollar effectively means this revenue is worth less. The refrain is likely to be repeated this week as Walt Disney and other global powerhouses report earnings.

Oil's retreat has tripped up not only drillers such as Royal Dutch Shell but also makers of the ancillary equipment and trucks that filled the oilfields of the American Midwest, including Caterpillar.

Oil futures rebounded on Friday but only after Baker Hughes' tally of operating rigs in the US showed its biggest decline since the oil bust of the 1980s. The Saudi gambit of flooding the market with oil to force North American shale fields to rein in production appears to be working.

There were some doubts over who would blink first, but the costs of production on shale fields are so much higher that the American producers could not compete against the Saudis for long at US$50 a barrel.

Harold Hamm, chief executive of Continental Resources, one of the biggest shale producers, conceded to The Wall Street Journal that the onus for production cuts was now on US companies. Shell, Chevron and ConocoPhillips all warned that they were pulling back from North American oilfields, effectively putting an end to a decade of rapid expansion.

The biggest US oil producer, Exxon Mobil, will likely confirm the death of the shale boom in its quarterly report on Monday.

One of the weights on the market on Friday was the fourth-quarter gross domestic product report, which showed below-par 2.6 per cent growth, revealing how crucial the oil boom was to the US recovery. The growth rate for the current economic recovery peaked alongside oil prices in the second and third quarters when growth was at more than 5 per cent.

The negative effect of oil could be temporary, however, as other industries such as airlines and retail could flourish. One positive implication of falling oil prices, of course, is the padding effect on consumers' wallets.

Amazon.com was one of the few major corporations to post earnings far in excess of analyst expectations, suggesting that some of the money saved on fuel is being spent on the Internet.

Meanwhile, the consumer confidence survey conducted by the University of Michigan and Thomson Reuters showed appetite for spending at a more than 10-year high. Shake Shack, a small burger chain with big expansion plans, saw one of the largest gains for a US stockmarket debutant in recent years when it launched on Friday.

A strong US dollar is, in part, a reflection of a strong US jobs market. Economists expect to find that employers added more than 200,000 jobs, continuing a long streak of above-average growth.

But it's also a reflection of the eurozone's troubles, which could worsen if Greece's anti-austerity party Syriza breaks with the austerity policies of Brussels. By some reckoning, Europe's economy is already trapped in a spiral of falling prices.

Analysts at brokerage Barclays said they are watching the behaviour of consumer-discretionary stocks and the stocks of companies carrying large debt loads to see if oil and the dollar are harbingers of the US following its trading partner into that spiral. Falling prices would hurt those companies the most.

For now, however, only a positive surprise in jobs or earnings reports - or on the oil market - will shake the fear of deflation out of the market.