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Troubles in the subprime mortgage sector could put Wall Street on edge this week just as investors look for key economic data, including the Consumer Price Index, to shore up the market's nascent recovery after its recent plunge.
Fanning concerns about the sector that lends to home buyers with poor credit is this past week's precipitous slide in the stock of New Century Financial Corp amid fears that the lender could file for bankruptcy protection.
The subprime lender said on Thursday it had stopped accepting new loans. Even after saying it had lined up US$265 million ($383.3 million) in funding, New Century disclosed it was negotiating for further relief.
Investors worry that fallout from rising loan defaults in the subprime market could hurt consumer confidence as lenders tighten credit amid the housing slowdown.
Wall Street keeps a close watch on the moods and habits of consumers because their spending is a key driver of US economic growth and corporate profitability.
"The worst thing that could happen to any economy is the loss of confidence," said Med Yones, president of the International Institute of Management, an economic research and forecasting group in Las Vegas.
He said the bursting of the real estate bubble and high consumer debt were a major worry and "if people started to think there may be a lot of bankruptcies [in the subprime lending market], then you're going to see the stock market sell off".
This week could give Wall Street more insight into the extent of the subprime lending woes as Goldman Sachs Group, Lehman Brothers Holdings and Bear Stearns are due to kick off the quarterly earnings reporting season for big investment banks.
Wall Street's big banks buy mortgages from lenders and package them into mortgage-backed bonds.
"The possibility of [New Century] declaring bankruptcy is certainly raised by what they said" this past week, said Michael James, senior trader of regional investment bank Wedbush Morgan in Los Angeles.
"I think the potential fallout from what might happen with New Century over the weekend and its effect on the fixed-income market are certainly part of the [worry]", James added.
On Friday, stocks finished mixed as concerns about the subprime mortgage market took a toll and offset some of the optimism created by data showing the US economy added 97,000 jobs in February.
For the week, all three US stock indexes rose, with the Dow Jones industrial average up 1.34 per cent, the Standard & Poor's 500 up 1.13 per cent and the Nasdaq Composite Index up 0.83 per cent. With these gains, both the Dow and the S&P 500 broke a two-week losing streak.
But besides fretting about housing woes, investors will brace themselves for a barrage of economic data that could yield crucial clues about the health of the US economy and the future direction of US interest rates.
The week's most closely watched data is likely to be the Consumer Price Index for February, due on Friday. Economists polled by Reuters have forecast an increase of 0.3 per cent in February's overall CPI, after January's 0.2 per cent gain. Excluding volatile food and energy prices, February's core CPI is seen up 0.2 per cent. In January, it rose 0.3 per cent.
- REUTERS
