For the week ending February 19, 2016, the stock market finished up as crude oil prices rallied over 10 percent. On Friday, both the Dow and the S&P 500 broke a two-week losing streak by gaining around 2.7 percent. In other news: the Fed (not the market) is right about future economic growth; the CPI shows inflation is rising; and, negative interest rates hurt economic growth while quantitative easing helps. Below is a recap of the markets for each day of the week.
The markets were closed on Monday for Presidents Day.
On Tuesday, the markets rose significantly as deals between Russia and oil producing nations were being formed to freeze production at January levels. Oil rose $0.10 to $29.12. The Dow gained 1.4 percent to 16,194; the S&P 500 gained 1.65 percent to 1,896.
The markets rose again on Wednesday after strong economic data (industrial production, PPI) and a rise in crude oil prices show the economy is moving forward. Oil jumped $2.31 to $31.43. The Dow gained 1.6 percent to 16,453; the S&P 500 gained 1.65 percent to 1,927.
The markets on Thursday dropped modestly on mixed economic data and despite a jump in crude oil prices. Oil gained $1.30 to $32.73. The Dow dropped -0.3 percent to 16,413; the S&P 500 dropped -0.47 percent to 1,918.
The markets Friday ended fractionally lower despite strong economic news. Oil dropped $0.77 to $31.96. The Dow declined fractionally to 16,391; the S&P 500 declined fractionally to 1,918.
The markets rose this week as crude oil rallied. Despite a fractionally lower close on Friday, the Dow gained 2.62 percent (418 points); the S&P 500 gained 2.84 percent (53 points). Crude oil rallied 10.13 percent ($2.94). The CPI indicates that inflation in rising; goods deflation is being offset by services inflation for a net positive. Apparently all the talk on the street regarding a recession is overblown as the economy continues to show solid growth.
The Fed, not the market, has it right about future economic growth. Two major economic indicators that generally correlate, have diverged. The indicator that the Fed relies on, the Atlanta Federal Reserve’s gross domestic product growth projection, now differs from the indicator that market analysts rely on, the 10-year Treasury note. When a divergence like this occurs, only one of the two is accurate; the other is not. In this instance, the 10-year Treasury note is significantly mispriced according to analysts at Deutsche Bank. The Atlanta Fed is broadly viewed as the most accurate predictor of U.S. growth (which employs the GDPNow forecasting model. In addition, economic data such as jobless claims, consumer spending, and industrial production, all show improvement in our economy.
CPI data supports the Fed’s expectation of inflation rising. Fed Chairperson Janet Yellen had testified before Congress that prices would rise over the medium term. CPI prices have jumped closer to the Fed target of 2 percent. The personal consumption expenditure index used by the Fed, a more accurate measure of inflation, has closed the gap with the CPI over the last six months confirming the rise in inflation. Despite this, the Fed is expected to delay interest rate hikes until June based on the statements made in the last FOMC minutes.
Negative interest rates can hurt the equity markets. Approximately one-third of stocks in the global marketplace are from countries where their central banks have a negative interest rate policy (NIRP). The data suggests that NIRP economies are experiencing deflation which goes counter to their intentions of promoting economic growth while quantitative easing helped promote inflation and economic growth. As a result, NIRP seems to be depressing stock prices while quantitative easing helped to lift them. The concern is that interest in NIRP is growing amongst central banks which now numbers Sweden, Switzerland, Denmark, and recently Japan. However, the EU adopted NIRP in mid-2014 and the results seem to be positive. While the main risks of NIRP have not yet been realized, the negative action in the equities market poses a threat to the global economy which could lead to a deeper and more prolonged recession.
The bottom line: highlights from the FOMC minutes underscored the risks of soft global demand and increased volatility. However, a strong employment report in February along with growing inflation could resurrect a rate hike in March. In other words, despite the overall gloom and doom of the pundits, the economy is actually doing quite well.
The focus next week in the U.S. will be the core PCE price index in the personal income and outlays report on Friday. In addition, key data will start with the consumer confidence report Tuesday; Case-Shiller home prices and new home sales on Tuesday; and, FHFA report and durable goods orders on Thursday. Globally, the flash PMIs and the G20 meeting o finance ministers and central bank governors. In addition, the focus will be on the following: UK (GDP); Eurozone (PMI Manufacturing, Services & Composite, M3 Money Supply, Harmonized Index of Consumer Prices, EC Business and Consumer Survey); Germany (PMI Manufacturing, Services & Composite, GDP, Ifo Survey); China (nothing); and Japan (PMI Manufacturing, CPI).
Year-to-date the markets are down: Dow -5.9%; S&P500 -6.2%; Nasdaq -10.0%.
The Markets for the past week were: DJIA up 2.6%; S&P500 up 2.8%; Nasdaq COMP up 3.8%.
Commodities (ETFs) for the past week were: Gold (GLD) down -0.66%; Silver (SLV) down -2.33%; Oil (OIH) up 4.84%; Dollar (UUP) up 0.60%; 30-year Bonds (TYX) remained flat at 2.61%.
The VIX this past week (a measure of market sentiment and volatility) dropped to 20.53%. This reflects the rally in oil prices and strong economic data.
To see what’s on the calendar for next week, go to the Econoday calendar.
The economic calendar for next week is full:
o Monday – PMI Manufacturing Index Flash
o Tuesday – Existing Home Sales
o Wednesday – EIA Petroleum Status Report, New Home Sales
o Thursday – Jobless Claims, Durable Goods Orders
o Friday – GDP, International Trade in Goods, Personal Income and Outlays, Consumer Sentiment
If you’re trading options, it is suggested trading Put Credit spreads for next week at 2.5 standard deviations or greater (or simply stand aside). Expect the price of the SPX to fall within 1812 and 2028 (2 standard deviations).
For more information about options, see the ‘Suggested Links’ below.