What I’m Watching This Week – 16 February 2016

The Markets (as of market close February 12, 2016)

Spurred by a bounce in crude oil prices and banking shares, the stock market rallied last Friday, but not enough to overcome five consecutive trading-day losses. Money continued to move from equities to the safety of bonds and gold, driving the yield on 10-year Treasuries down to 1.74% while driving up the price of gold. Despite Friday’s rally, the Dow lost over 230 points over the prior week, while the S&P 500 and Nasdaq came close to recouping early-week losses, each falling less than 1% compared to their respective prior week’s closing values.

The price of crude oil (WTI) rallied from a low price of $26.05 on February 11, closing the week at $29.02 a barrel, still down $1.98 from the prior week’s closing price. The price of gold (COMEX) increased again, selling at $1,238.20 by late Friday afternoon, up from the prior week’s closing price of $1,174.10. The national average retail regular gasoline price decreased for the sixth week in a row to $1.759 per gallon on February 8, 2016, $0.063 below the prior week’s price and $0.432 under a year ago.

Market/Index 2015 Close Prior Week As of 2/12 Weekly Change YTD Change
DJIA 17425.03 16204.97 15973.84 -1.43% -8.33%
Nasdaq 5007.41 4363.14 4337.51 -0.59% -13.38%
S&P 500 2043.94 1880.05 1864.78 -0.81% -8.77%
Russell 2000 1135.89 985.62 971.99 -1.38% -14.43%
Global Dow 2336.45 2138.80 2070.54 -3.19% -11.38%
Fed. Funds 0.50% 0.50% 0.50% 0 bps 0 bps
10-year Treasuries 2.26% 1.83% 1.74% -9 bps -52 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

  • In testimony before both the House Committee on Financial Services and the Senate Committee on Banking, Housing and Urban Affairs, Federal Reserve Chair Janet Yellen stated that overall economic conditions may not be sufficiently improved to justify a further interest rate hike in March, when the Federal Open Market Committee (FOMC) next convenes. Addressing the FOMC’s objectives of maximum employment and 2.0% inflation, Yellen noted that while there has been progress in the labor market, “there is still room for further sustainable improvement.” Yellen said the committee expects inflation to continue at its slow pace in the near term primarily due to declines in oil prices and weak exports. However, she said inflation is expected to rise to its 2.0% objective over the medium term. The text of the prepared testimony may be found
  • December saw the number of job openings (5.6 million), hires (5.4 million), and total separations (5.1 million) increase over November, according to the latest Job Openings and Labor Turnover Summary (JOLTS) from the Bureau of Labor Statistics. Over the 12 months ended in December 2015, hires totaled 61.4 million and separations totaled 58.8 million, yielding a net employment gain of 2.6 million. Another positive aspect of this report is the increase in the number of quits, which was 3.1 million in December, compared to 2.9 million in November. Generally, an increasing quits rate is indicative of workers moving up to better jobs. Also, layoffs and discharges fell from 1.69 million in November to 1.61 million in December.
  • According to advance estimates, the Census Bureau reported that retail and food services sales for January were $449.9 billion, an increase of 0.2% over the prior month and 3.4% above January 2015. Total sales for the first quarter of fiscal 2016 are up 2.5% from the same period a year ago. Boosted by low gasoline prices and dwindling unemployment, consumers increased retail spending on most items, but particularly on motor vehicles, groceries, and building materials. In fact, excluding gasoline, retail sales in January were up 0.4% from December.
  • The monthly budget statement from the Department of the Treasury revealed a budget surplus of $55 billion for January. Total receipts for the month were $314 billion–$181 billion of which came from individual income taxes. The government spent $258 billion in January, with defense, Social Security, and Medicare comprising about 53% of the total outlays. Four months into the government’s fiscal year, the total budget deficit is $160.4 billion, about 17% lower than the comparable period last year.
  • Not unexpectedly, prices for U.S. imports decreased 1.1% in January for the second consecutive month, the U.S. Bureau of Labor Statistics reported last week. U.S. export prices also fell in January, decreasing 0.8%. The decline followed a 1.1% drop in December. Principally driven by low oil-based goods and a sinking global economy, import prices are down 6.2% year-on-year. Export prices are down 5.7% compared to a year earlier, impacted by receding agricultural products, which are down 12.7% year-on-year.
  • Trade sales and manufacturers’ shipments for December were down 0.6% from November and 2.7% from December 2014, while manufacturers’ inventories were up 0.1% and 1.7%, respectively, for the same periods. The total business inventories to sales ratio for December was 1.39, compared to 1.38 in November and 1.33 in December 2014. With slowing sales, businesses are trying to keep inventories down. Inventories that far exceed sales could negatively impact employment.
  • The University of Michigan’s Index of Consumer Sentiment for February came in at 90.7, down from 92.0 in January and significantly lower than the 95.4 index reading in February 2015. The latest information indicates consumer confidence continues to decline, due to a less favorable economic outlook for the year ahead.
  • For the week ended February 6, there were 269,000 initial claims for unemployment insurance, a decrease of 16,000 from the prior week’s unrevised level of 285,000. For the week ended January 30, the advance number for continuing unemployment insurance claims was 2,239,000, a decrease of 21,000 from the previous week’s revised level. The advance seasonally adjusted insured unemployment rate was 1.6% for the week ended January 30, a decrease of 0.1 percentage point from the previous week’s unrevised rate.

Eye on the Week Ahead

This week’s focus is on inflationary trends with the latest reports on producer prices and the Consumer Price Index. The week also offers the latest information on housing starts, a closely monitored report on the housing sector in particular, and the economy in general. The minutes from the FOMC’s last meeting are released this week, which, when coupled with Chair Janet Yellen’s congressional testimony, could provide insight as to the inclination of the committee relative to raising interest rates at its next meeting in March.