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Global stocks lower Friday, but up strongly over the week.

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Stocks rallied from oversold levels this past week. The Nikkei in Japan jumped 7.3%, stocks in Shanghai added 5.5%, the Euro Stoxx index was up 2.4%, and the S&P 500 gained 2.9% to close Friday at 1918.

With nearly 86% of S&P 500 companies finished reporting Q4-2015 results, the earnings and revenue metrics are disappointing, but not unexpected. Bloomberg notes that 432 companies have reported and earnings are down 4.9% YoY, but up 0.9% ex-Energy. Most analysts still forecast low single digit earnings growth for the full year 2016.

The yield on 10 year Treasuries ended the week about where it began at 1.75%. Agency paper continues to trade tight to Treasuries (in the +10 basis point (bps) range for the 2 year to 5 year maturities).

Lots of new corporate bond deals were issued recently including Home Depot, Starbucks, Kimberly Clark, Apple, and IBM. Spreads have widened out significantly versus Treasuries and corporates are attractive on a relative basis (rates are pretty low). Finance paper (i.e. bonds issued by banks and insurance companies) is easily wider than +100 bps to Treasuries in the short end of the curve. 5 year Apple and 3 year Toyota issuances priced at 105 bps and 80 bps, respectively, above Treasuries.

The minutes from January’s FOMC meeting were released Wednesday revealing that the Fed is concerned about recent volatility, the slowdown in China, and indications of declining inflation expectations. It looks very much like a March rate hike is off the table. Still, I think they want to “normalize” rates and it would not be surprising to see a couple of hikes later in the year if the economy keeps chugging along. That’s our forecast.

OPEC members are trying to persuade Iran to join Saudi Arabia and Russia in a proposed freeze on oil production.  Despite EIA data reporting record inventory levels in the U.S., oil was flat over the week closing at $29.60.

Headline CPI inflation was unchanged in January, but the core CPI (ex-Food and Energy) rose a more-than-expected 0.3%. The YoY gain in the core CPI is 2.2%, up 0.6% in the past year, and the most since August 2011. Clothing and health care prices surprised to the upside in January. Over the last ten months, headline readings of consumer prices have flat-lined at zero while core readings have trended higher. The core number is a better predictor of future inflation.

The Washington Post reports that workers’ bargaining position is improving. They note United Airline maintenance workers rejected an immediate 25% raise and bonus checks averaging $9,000 and have moved to strike. We are starting to see a pickup in wage increases across many industries. This ultimately will boost spending and inflation.

Check out “The Assets” on Netflix. It’s an ABC mini-series (eight 45 minute episodes) that chronicles the search and capture of a mole inside the CIA in the late ‘80s. Aldrich Ames betrayed his country for $2 million, giving the Soviets invaluable information on U.S. informants in Russia during the Cold War. It was riveting. You’ve gotta binge watch it!

The EYE is moving to a new time. Our next publication will be Monday, February 29.

 

Jeff Pantages, CFA®
Chief Investment Officer

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