What I’m Watching This Week – 22 December 2014

The Markets

Patience is a virtue: The Federal Reserve’s announcement that it would be “patient” with interest rate hikes was Santa’s cue to drop off gifts a little early. Equities regained much of what they had lost the week before. The Dow industrials’ 288-point gain on Wednesday was its best day of 2014–that is, until Thursday’s eye-popping 421-point increase left it in the dust. The Russell 2000 had its best week of the year, and the S&P is less than 5 points from the all-time high set two weeks earlier. Meanwhile, oil prices continued to fall, ending the week at roughly $57 a barrel.

Market/Index 2013 Close Prior Week As of 12/19 Weekly Change YTD Change
DJIA 16576.66 17280.83 17804.80 3.03% 7.41%
Nasdaq 4176.59 4653.60 4765.38 2.40% 14.10%
S&P 500 1848.36 2002.33 2070.65 3.41% 12.03%
Russell 2000 1163.64 1152.45 1195.96 3.78% 2.78%
Global Dow 2484.10 2459.30 2508.43 2.00% .98%
Fed. Funds .25% .25% .25% 0% 0%
10-year Treasuries 3.04% 2.10% 2.17% 7 bps -87 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Headlines

    • The Federal Reserve’s monetary policy committee replaced its promise to wait “a considerable time” before raising interest rates with a promise to be “patient” before doing so. Almost all committee members expect higher rates to hit in 2015, but investors paid more attention to members’ belief that rates may rise more slowly than previously thought. The committee’s median forecast for the fed funds rate at the end of 2015 is now 1.125%, while the median expectation for December 2016 is now 2.5%.
    • The Russian ruble plunged 20% on Tuesday, prompting the country’s Central Bank to hike its key interest rate from 10.5% to 17% to try to support the currency. Concerns about the currency accelerated after bonds issued by Russia’s largest oil company received favorable treatment from the Central Bank; that raised questions about whether the action was essentially a government bailout of the company, which has been hard-hit by both economic sanctions and lower oil prices.
    • Plummeting oil prices were good news for U.S. consumers in November. The 0.3% drop in the Consumer Price Index was fueled largely by the 6.6% decline in gas prices, which the Bureau of Labor Statistics called the sharpest decline since December 2008. Lower energy costs more than offset the 0.2% increase in food and 0.3% rise in housing, and helped cut the inflation rate for the previous 12 months to 1.3% from 1.7% a month earlier. Meanwhile, November’s 0.6% increase in inflation-adjusted hourly wages accounted for almost all of the 0.8% increase in wages over the last 12 months.
    • President Obama announced that the United States will move to re-establish diplomatic relations with Cuba, which were cut off in 1961. However, congressional action would be needed to lift the decades-old trade embargo against Cuba.
    • Both housing starts and building permits slipped in November, by 1.6% and 5.2% respectively. According to the Commerce Department, single-family housing was responsible for most of the decline in housing starts, while multi-unit buildings caused most of the decline in permits.
    • U.S. industrial production rose 1.3% in November, helped by cold weather that pushed up heating demand and thus output from utilities. The Federal Reserve also said that industrial output from June through October was stronger than previously reported, and usage of the nation’s industrial capacity finally reached its long-term average of 80.1%. However, manufacturing growth measured by the Philly Fed survey slipped slightly, while the Empire State survey showed its first negative reading in nearly two years.

Eye on the Week Ahead

With a holiday-shortened week ahead, it might be difficult for equities to match last week’s blockbuster performance. The final Q3 GDP number and data on housing as well as consumer income and spending are on tap.