What I’m watching This week – 21 December 2015

The Markets (as of market close December 18, 2015)

Not entirely unexpected, the Federal Open Market Committee announced the first interest-rate increase since 2006. In support of its decision, the committee expressed cautious optimism that economic conditions will continue to strengthen. However, the committee’s sentiments weren’t enough to keep the markets from ending a volatile week on the downside. The Dow dropped over 136 points to its lowest close since October, while the S&P 500 fell 0.34%, falling further behind its 2014 year-end close. Both the Nasdaq and Russell 2000 also posted losses, sliding 0.21% and 0.23% respectively. The only positive mover of the indexes listed here was the Global Dow, which closed 0.06% ahead of the prior week.

The price of gold (COMEX) fell once again, selling at $1,065.60 by late Friday afternoon compared to $1,073.70 a week earlier. Crude oil (WTI) prices fell again, selling at $34.55 per barrel by week’s end. The national average retail regular gasoline price decreased for the fifth week in a row to $2.037 per gallon on December 14, 2015, $0.016 below the previous week’s price and $0.517 under a year ago.

Market/Index 2014 Close Prior Week As of 12/18 Weekly Change YTD Change
DJIA 17823.07 17265.21 17128.55 -0.79% -3.90%
Nasdaq 4736.05 4933.47 4923.08 -0.21% 3.95%
S&P 500 2058.90 2012.37 2005.55 -0.34% -2.59%
Russell 2000 1204.70 1123.61 1121.02 -0.23% -6.95%
Global Dow 2501.66 2297.74 2299.02 0.06% -8.10%
Fed. Funds 0.25% 0.25% 0.50% 0.25% 0.25%
10-year Treasuries 2.17% 2.12% 2.21% 9 bps 4 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

  • Citing its statutory mandate of seeking to foster maximum employment and price stability, the Federal Reserve decided to raise the target range for the federal funds rate by 0.25%, bringing it from 0.25% to 0.5%. Future increases will be gradual and dependent on the economic outlook. In support of its decision, the Fed noted that economic activity generally has been expanding at a moderate pace, and it’s confident that the economy will continue to strengthen. Despite inflation continuing to run below the committee’s target 2.0% rate, soft exports, and declines in energy and import prices, the committee expects these sectors to strengthen over time, promoting further economic growth.
  • Consumer price inflation remained low as the Consumer Price Index for November was unchanged from the prior month. Keeping prices down were energy prices, where the index fell 1.3% due in part to a decline in gasoline prices, and the food index, which dropped 0.1%. Nevertheless, over the last 12 months, the all items index increased 0.5%, while the core index (excluding energy and food) rose 0.2% in Novmeber–the same increases as in the previous 2 months.
  • The National Association of Home Builders preliminary housing market index for December showed a slight fall in builder confidence compared to November. The index, which is based on a survey of association members, fell from 62 in November to 61 for December. However, a reading of 50 or better indicates respondents consider the single-family housing market to be favorable. In any case, enthusiasm is beginning to wane a bit as the index has fallen from 65 in October, which was the high mark for the year.
  • While builder confidence may be down, it isn’t reflected in the new home market. The Census Bureau reported that building permits for privately owned housing units increased 11.0% in November compared to October, which is 19.5% above the November 2014 figure for permits. Privately owned housing starts (marked by the beginning of construction) in November were 10.5% above the revised October estimate and 16.5% above the November 2014 rate. The only negative in the housing market is in housing completions, which were down 3.2% compared to October, largely due to a slowdown in completion of structures with five units or more, which fell 10.0%. Completion of single-family units was actually up 0.3% in November.
  • Industrial production continues to lag. According to the Federal Reserve, industrial production declined 0.6% in November after decreasing 0.4% in October. In November, manufacturing production was unchanged from October. At 106.5% of its 2012 average, total industrial production in November was 1.2% below its year-earlier level. Capacity utilization for the industrial sector declined 0.5 percentage points in November to 77.0%–a rate that is 3.1 percentage points below its long-run (1972-2014) average.
  • In line with the Federal Reserve’s industrial production report, the Markit Flash U.S. Manufacturing Purchasing Managers’ Index™ for December fell to 51.3 from November’s 52.8. Although still above the neutral 50.0 threshold indicating growth, the latest reading pointed to the slowest improvement in manufacturing business conditions since October 2012.
  • For the week ended December 12, there were 271,000 initial claims for unemployment insurance, a decrease of 11,000 from the prior week’s total. For the week ended December 5, the advance number for continuing unemployment insurance claims was 2,238,000, a decrease of 7,000 from the previous week’s revised level. The advance seasonally adjusted insured unemployment rate remained at 1.7% for the week ended December 5.

Eye on the Week Ahead

Following the Fed’s decision to raise interest rates based on the expectation of continued economic growth, several key economic reports during the Christmas week may shed some light on the direction of the economy moving forward.