Oil firming, A dovish Federal Reserve Board (FRB), and the falling dollar… Is this a recipe for a rally???
Oil prices have been firming since February 11th. Last week they took a step back as inventories and drilling were higher than expected. This is likely a temporary impact as volatility in production is about the only certainty.
The Federal Reserve Board has been sending a mixed message over the last 4 months. We got a rate hike in December, which clearly worked out… not really. Next came the expectation for a hike in March. The meeting came and went without a hike, but also with dovish undertone that weakness in the global economy will be watched in addition to domestic data. This last part is a meaningful deviation from FRB policy last year. Last week there were speeches by 5 FRB governors that referenced Aprils meeting as being a “live” meeting (a rate hike is in play). This caused a strengthening in the $ although a hike is still unlikely.
US Data
Manufacturing PMI missed expectations, but was expansionary at 51.4 for March. Durable goods orders, reflecting production items intended for 3 years of use or longer, fell 2.8% in February. This disappointed after having a strong showing in January at 4.2%. It still remains to be seen, which of these was a fluke or a predominant trend This could give us an abnormally strong GDP reading for the 1st quarter of 2016…. Lastly, final 4th quarter GDP came in at 1.4% up from 1.0%[1].
Housing Data
US data was mixed as existing home sales fell 7.1% in February, while new home sales grew 2.0%. The existing home market makes up approximately 90% of homes sold so the numbers are far more meaningful as units. Existing home sales decreased by 39,000, while new home sales grew by 10,000[2]. One group attributes the fall in existing sales to over extended valuations and low inventory levels[3]. The 10-year Treasury has rebounded to near 2% levels (it has an underling impact on mortgage rates). This is likely to cause an additional drag on the market.
International Data
European PMI data firmed in March as German business expectations and conditions outlook have improved. Terrorist attacks last week increased uncertainty. Concerns have risen around leisure and travel equities for the region due to the quick implementation of the attack and the ease of execution in a heighted alert area.
Japan is reviewing the decision to increase sales taxes by 2% in April. The intention is to help inflation by making items more expensive, as they did 2 years ago. Mathematically, this is accurate, but it does not account for consumer behavior. A hike would reduce consumption and tighten economic production, causing deflation in the long run, with a short term gain. They are weighing the increase in taxes, but also a decrease taxes. The latter should increase consumption and strengthen inflation.
China has committed, verbally, to the conversion to a consumption economy. Take it with a grain of salt, they have also committed to no layoffs in industrial positions. Conversion of jobs to the service sector (if that is the intention) is unlikely. It is more probable they do not intend to convert as indicated.
Brazil continues to show weakness as the rabbit hole gets deeper and deeper… Petrobras, the state owned oil company, recorded its largest losses in the 4th quarter at -$10.19 Billion[4]. Yes, that was a B! The impeachment of President Rousseff will bring hope for reform, however, corruption in Brazilian politics runs deep and a new administration will be challenged in their efforts.
Conclusion
Last week was the first weekly loss on the markets in 6 weeks. It also marked a strengthening $ due to FRB speeches and falling oil prices due to recent inventories. Equity markets could return to form if the 5-week trend of oil prices and FRB in-action persist (which is currently the base scenario for fed funds rates).
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.investing.com – economic calendar
[2] www.investing.com – economic calendar
[3] www.mfs.com – week in review
[4] www.troweprice.com – weekly market wrap ups