What I’m Watching This Week – 22 February 2016

The Markets (as of market close February 19, 2016)

The major indexes listed here posted gains by the end of last week, marking the best overall week of performance in the new year. Both the Dow and the S&P 500 posted end-of-week gains of 2.62% and 2.84%, respectively. The Nasdaq and Russell 2000 recouped some of their early-year losses with gains close to 4.0%. Even the Global Dow gained 3.80% over the prior week’s close.

The price of crude oil (WTI) increased, closing the week at $29.83 a barrel, $0.81 ahead of the prior week’s closing price. The price of gold (COMEX), possibly feeling the effects of money moving back into equities, fell by last week’s end selling at $1,228 by late Friday afternoon, down from the prior week’s closing price of $1,238.20. The national average retail regular gasoline price decreased for the seventh week in a row to $1.724 per gallon on February 15, 2016, $0.035 below the prior week’s price and $0.550 under a year ago.

Market/Index 2015 Close Prior Week As of 2/19 Weekly Change YTD Change
DJIA 17425.03 15973.84 16391.99 2.62% -5.93%
Nasdaq 5007.41 4337.51 4504.43 3.85% -10.04%
S&P 500 2043.94 1864.78 1917.78 2.84% -6.17%
Russell 2000 1135.89 971.99 1010.01 3.91% -11.08%
Global Dow 2336.45 2070.54 2149.19 3.80% -8.01%
Fed. Funds rate target 0.25%-0.50% 0.25%-0.50% 0.25%-0.50% 0 bps 0 bps
10-year Treasuries 2.26% 1.74% 1.75% 1 bps -51 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 minutes from January’s Federal Open Market Committee meeting highlight a mixed bag of economic indicators. While the Committee noted improving labor market conditions, increased household and business spending, and an improving housing sector, these positive trends were somewhat offset by slowing economic growth, inflation running below the Committee’s target rate of 2.0%, soft exports, and declining inventory investment. As to whether and when target rates will be increased, the Committee emphasized that it will continue to assess realized and expected economic conditions relative to the Committee’s objectives of maximum employment and 2% inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. At present, due to the apparent uncertainty of inflationary trends and economic growth, the Committee maintains its intent to gradually increase the federal funds rate, which will likely remain, for some time, below levels that are expected to prevail in the longer run.
  • The Housing Market Index (HMI), based on a monthly survey of members of the National Association of Home Builders, is designed to reflect the pulse of the single-family housing market. According to the latest survey, builder confidence is dropping as evidenced by February’s HMI reading of 58, which is 3 points lower than January’s reading and the lowest reading since May 2015. Builders noted high land costs, the lack of available land, and the scarcity of labor as primary reasons for the slowdown in the single-family housing market. On the plus side, respondents did feel the prospective sales market would pick up over the next six months. Also, it’s important to note that these are preliminary readings that will likely be revised later.
  • Housing starts and building permits for privately owned housing units were both down in January from the prior month. Applications for building permits for new home construction were at an annual rate of 1,202,000–0.2% below the revised December rate, but 13.5% above the January 2015 estimate. Privately owned housing starts for January were at an annual rate of 1,099,000, which is 3.8% below December’s rate, but 1.8% above the rate from a year earlier. On the other hand, completions were up in January, 2.0% ahead of December’s revised rate and 8.4% above the rate for January 2015. Nevertheless, the start of the new year finds the housing market slowing down, particularly considering that the number of building permits, indicative of future construction, has fallen the past two months.
  • The prices producers receive for goods and services, as measured by the Producer Price Index (PPI), advanced 0.1% in January, following a 0.2% decrease in December. As reported by the Bureau of Labor Statistics, the increase in producer prices is attributable to a 0.5% advance in prices for services, which offset a 0.7% drop in the prices for goods. Looking at trends in this segment of the economy, producer prices are down 0.2% compared to January 2015, marking the 12th straight year-over-year decline. As an indicator of inflationary trends, downward movement in producer prices may lead the Federal Open Market Committee to hold off on further interest rate increases for the time being.
  • Impacted by falling energy prices, consumer prices for goods and services remained relatively flat in January, according to the latest Consumer Price Index. On a more positive note, the CPI increased 1.4% over the last 12 months, and the index, less food and energy, is up 0.3% for the month. The increase (less food and energy) was broad-based, with most of the major components rising, but increases in the indexes for shelter and medical care were the largest contributors. This report may imply that inflation is trending upward, but the strong dollar and declining energy prices have kept inflation in check. The CPI, coupled with the PPI, is keeping inflation below the Fed’s target rate of 2.0%, lending credence to the view that interest rates will remain the same for the near term.
  • The Federal Reserve puts out a monthly index of industrial production, which attempts to demonstrate the overall production of factories, mines, and utilities. For January, industrial production increased 0.9%, following a 0.7% drop in December. The index for utilities jumped 5.4%, while demand for heating moved up markedly after having been suppressed by unseasonably warm weather in December. Manufacturing output increased 0.5% in January and was 1.2% above its year-earlier level. Mining production was unchanged following four months of declines that averaged about 1.5% per month. In addition, capacity utilization for the industrial sector increased 0.7 percentage points in January to 77.1%, a rate that, while improving, is still 2.9 percentage points below its long-run (1972 to 2015) average.
  • The Conference Board Leading Economic Index® for the U.S. declined 0.2% in January following a 0.3% decrease in December. According to the report, January’s decline was driven primarily by large declines in stock prices and further weakness in initial claims for unemployment insurance. However, the report further states that despite back-to-back monthly declines, the index doesn’t signal a significant increase in the risk of recession, and its six-month growth rate remains consistent with a modest economic expansion through early 2016.
  • For the week ended February 13, there were 262,000 initial claims for unemployment insurance, a decrease of 7,000 from the prior week’s unrevised level of 269,000. For the week ended February 6, the advance number for continuing unemployment insurance claims was 2,273,000, an increase of 30,000 from the previous week’s revised level. The advance seasonally adjusted insured unemployment rate was 1.7% for the week ended February 6, an increase of 0.1 percentage point from the previous week’s unrevised rate.

Eye on the Week Ahead

Several important reports that provide a fairly significant gauge of the economy are highlighted this week, including information on new and existing home sales, orders for durable goods, consumer spending, and the latest GDP figures.