Lot’s to talk about and I am a bit short on time this week, so the Eye is going to run a little longer than normal!
U.S. stocks pulled back from record highs this week, partly on concern about rising rates. The S&P 500 lost -1.5% over the week to close at 2,071. The Dow, which will now include Apple (replacing AT&T – symbolic – right?) traded off as well, down -1.5% to close at 17,857.
Interest rates at the long end of the curve jumped 25 basis points over the week, with the 10 year treasury yielding 2.24% at the close Friday. The catalyst was strong payroll employment growth (+295,000 in February) and the decline of the unemployment rate in the U.S. to 5.5%, a level that often foreshadows rising wage inflation.
The WSJ reported on Wednesday that according to the Federal Reserve’s Beige Book “The U.S. economy continued to expand across most of the country at the start of the year amid broad-based hiring and rising consumer spending, though bad weather in the Northeast, lower oil prices and a West Coast port dispute hurt some parts of the country.” Apparently these one-offs didn’t affect the employment numbers!
The WSJ had an interesting article on the markets expectations for rate hikes versus what the Fed is thinking. The table below shows how the Fed expects rates to be higher than what is now being forecast (and priced in) by the markets.
According to the WSJ, Federal Reserve Vice-Chairman Stanley Fischer noting the discrepancy said that market expectations might move – perhaps abruptly – closer to the Fed’s when the central bank starts lifting rates. A first increase “will add to the credibility of what we’re saying,” he said in a not-so-subtle warning to investors who doubt the Fed’s plans.
The Fed meets March 18 and there is some thought that they may remove the reference to “being patient” paving the way for a June rate hike. It’s hard to know, but recent market action suggests that investors may begin to get in sync with the Fed’s forecast.
The euro dropped from $1.12 to $1.08 over the week on anticipation of ECB bond buying (the €1.1 trillion program to buy sovereign debt of Eurozone countries will begin this Monday) and expectations that the Federal Reserve might tighten sooner given the strong jobs numbers on Friday. Recall the euro reached $1.45 against the dollar just last year. It’s at an 11 year low against the buck. Vacations in Paris, Berlin, and Rome have gotten quite a bit cheaper!
ISI notes that gasoline futures have now surged to $1.91, suggesting that within 6-8 weeks retail gas prices will be $2.60 a gallon, a $0.55 increase from their recent lows. That surge will lift inflation.
The OECD said that y/y inflation for the group’s 34 member countries eased to 0.5% in January from 1.1% in December. That marked its lowest level since October 2009. It’s all oil related but still…
Bloomberg: The Federal Reserve’s stress tests found that all 31 of the largest banks in the U.S. have the capital needed to weather an economic crisis where unemployment surges (to 10%), stocks (-50%) and housing prices (-25%) decline significantly and the corporate debt markets crumble.
Jason Roth, APCM SVP wasn’t surprised with the result given the level of ‘prodding’ by the Fed to have the banks build their capital levels and reduce their risk profile. Jason says the results from the second round of tests, which will be released next Wednesday, may be more interesting as they will determine if any of the banks face restrictions in buying back stock and paying dividends.
Investors are still skeptical of the equity bull market. So far year to date they have put $43 billion into bond funds and taken out $16 billion from equity funds.
Brent crude has bounced off a bottom. It is at $61 versus a low on January 13 of $47. Saudi Arabia raised their prices by $1 on Tuesday suggesting they think the market has firmed. In the U.S., the rig count is down 39% from last year’s peak. At the same time oil storage tanks in Cushing, OK are filled to the brim, with nowhere to put “excess” production. Hard to know where we go from here on WTI.
Enjoy following the Iditarod which starts this Monday in Fairbanks. The ceremonial start is still this Saturday in Anchorage. The Miners & Trappers Ball is this Saturday at the Egan Center. Sounds like fun.
I’ll be speaking at the UAA bookstore on The Financial Crisis and Panic of 2008 on Wednesday March 25 from 5-7. All are welcome to attend.
Jeff Pantages, CFA®
Chief Investment Officer