5 weeks of gains on the oil and stock markets put us into positive territory for the year on equity markets; while oil cross into the $40 range.
February 11th marked the market lows. Since that point markets have rattled off 5 weeks in a row of gains. Fears of a recession have receded and the Federal Open Market Committee (FOMC) has expressed concerns over the global economy. Those concerns have backed the FOMC off the stance of 4 rate hikes, which this past week was revised to likely 2 hikes in 2016[1]. Dovish statements by the FOMC has a positive impact on investor expectations.
This has been a great ride over the last 5 weeks! The risk lies in the fact that the rally has been largely tied to oil price activity. The volatility of oil prices needs to give way to solid economic data. This would prevent this 5-week rally from fading.
US Data
Consumer Price Index (CPI) data gave concerns leading up to the FOMC meeting as it came in at -0.2% annualized. The concern typically associated with a negative inflation reading would be that we were moving into a deflationary status. The reality is that the volatility in fuel prices has pushed that negative and is viewed as temporary. The real concern lies in Core CPI, which removes fuel and food expenses, due to their volatile nature. Core CPI came in at 2.3% annualized[2]; causing many investors to be concerned that the FOMC may break with expectations and hike rates last week. To the contrary, Janet Yellen made indication that the 2% mandate will be viewed as a range effectively 1-3% without causing panic.
Housing Data
Data was mixed as building permits were -3.1% for February. To the contrary, housing starts in February expanded better than expected. New starts came in at 1.178 million, beating expectations by 28K[3]. Mortgage rates as of late have supported housing starts; however, as the rally in the equity markets persists, mortgage rates should firm. This would remove buyers. It is quite likely that the timing will work out well as the spring purchase season will be underway. This will bring enough buyers to the market to replace the impact of slightly elevated mortgage rates.
International Data
The Bank of Japan (BOJ) left rates unchanged this last week. This was expected, however the BOJ chair is notorious for doing the unexpected in order to stimulate their economy. It appears that they may be examining the backfire of negative rate decisions last month.
Industrial production in January firmed to 2.1% in the Eurozone. Core CPI firmed to 0.8% while headline CPI came in at -0.2% annualized[4]. The Eurozone is not in risk of inflation at this point, but it does appear that central bank efforts have yielded mixed results.
For more information:
If you would like to receive this weekly article and other timely information follow us, here.
Always remember that while this is a week in review, this does not trigger or relate to trading activity on your account with Financial Future Services. Broad diversification across several asset classes with a long term holding strategy is the best strategy in any market environment.
Any and all third-party posts or responses to this blog do not reflect the views of the firm and have not been reviewed by the firm for completeness or accuracy.
[1] www.mfs.com – week in review
[2] www.investing.com – economic calendar
[3] www.investing.com – economic calendar
[4] www.investing.com – economic calendar