Stocks ripped higher on Friday to close off a positive week for the markets.
January, however, was still rough, as stocks had one of their worst months in years to start 2016.
First, the scoreboard:
- Dow: 16,466, +377, (+2.4%)
- S&P 500: 1,938, +45, (+2.4%)
- Nasdaq: 4,610, +103, (+2.3%)
- WTI crude oil: $33.60 (+1.2%)
The Bank of Japan has joined the negative interest-rates party.
Overnight, the BoJ introduced a -0.10% interest rate on excess reserves parked at the bank by financial institutions. Now, it’s not quite as simple as “banks are now being charged money to keep it at the Bank of Japan,” because this rate is really only — going to be — being applied to balances above what is required by regulation and any reserves created by a bank’s sale of government bonds to the BoJ as part of its quantitative-easing program.
There’s a chart sort of explaining it:
Analysts at Barclays noted that almost no money currently on hand at the BoJ is eligible for this charge, and the amount of money that does eventually become available is likely to be small. But the exciting thing — or scary thing, depending on how you see the world — for the market is that negative interest rates continue to be a bigger part of the global monetary-policy discussion after having, for a long time, been a sort of theoretical exercise.
The US economy
The US economy grew at a pace of 0.7% in the fourth quarter, according to the first estimate of GDP growth released on Friday morning. This was slightly less than forecast by Wall Street analysts and a slowdown from the pace of growth seen during the third quarter.
Overall, the economy appears to have grown at a 2.4% pace in 2015 — this number is still subject to revision — matching the pace of growth seen in 2014 and affirming the steady, if somewhat underwhelming, growth trajectory seen in the US since the financial crisis.
The headline figure on growth can prompt declarations of an “anemic” or “sluggish” economy, which we wouldn’t really feel compelled to argue with, but with recent discussions around the economy focusing on the chances for a recession in recent weeks, signs that we’re at an inflection point where the US consumer — which really drives the economy — is beginning to roll over are still elusive.
Consumption rose at a 2.2% pace during the fourth quarter, beating estimates, and in 2015 consumption rose 3.1%, the most in a decade.
Economists at Barclays, who forecast a Q4 GDP print showing just 0.5% growth, said this beat relative to their expectations was “driven primarily by consumption and residential investment, which we take as a positive signal for the strength of US households and the broader business cycle.”
Friday was a busy day in the economy, with data on wages, manufacturing in the Midwest, and consumer confidence also crossing the tape.
The latest employment-cost index rose 0.6% in the fourth quarter, in line with estimates. Over the last year this series, which reports a more comprehensive figure measuring wages and salaries paid as well as benefits, rose 2%. Deutsche Bank’s Joe LaVorgna said on Friday that this shows wage growth still isn’t rocketing higher.
Meanwhile, the latest Chicago PMI report came in way better than expected, rising to a reading of 55.6 from 42.9 last month, indicating expansion in manufacturing activity in the Midwest after several months of contraction. Not everyone was convinced this report mattered, however, with Pantheon Macro’s Ian Shepherdson taking to Twitter on Friday to say, “Think of a number, anything you like. There you go: you’ve just generated the Chicago PMI, congratulations.”
In more trusted data, the final reading on consumer confidence in January from the University of Michigan came in at a reading of 92.0, showing confidence tempered somewhat from earlier this month but still indicating that consumers feel about as good as they have during the post-crisis expansion.
According to Richard Curtin, chief economist for the survey:
To be sure, the overall level of confidence is below last January’s peak, but thus far, the decline amounts to just 6.2%, indicating slower growth, not a recession in 2016. Consumers anticipate that the growth slowdown will be accompanied by smaller wage gains and slight increases in unemployment by the end of 2016.
So we know that oil is the world’s big geopolitical focus right now, but a team of analysts at Barclays took a look at the risks that a “Brexit” pose for Europe and global markets going forward and argued that, basically, people are being too complacent right now.
“First, the referendum is generally seen as a ‘UK’ or ‘GBP’ issue, when it is better seen as a European issue,” the firm argues. “Second, it has largely been viewed as an economic issue, but should best be analysed through the lens of political economy.”
As it currently stands, it looks like there will be a vote on whether the UK wants to remain an EU member or leave by the end of next year. But as Barclays sees it, again, this vote will in a weird way almost matter less to the UK than to the rest of Europe. The basic argument is that if a “Brexit” does come to pass, it allows future EU members to essentially just throw a temper tantrum and threaten to do the same unless they get what they want. We know it’s been a while since we’ve heard from Greece, but there is always the risk of another Greek debt crisis lurking somewhere. On the markets side of things, you’d of course be looking at a sharp loss of confidence in the euro as a currency project, more or less.
The focus of the oil world seems to be turning steadily toward Moscow as headlines continue to swirl regarding a meeting between OPEC heavyweights and other international producers as the price of crude languishes near a 12-year low. As Elena Holodny reported on Friday, there are more indications that Russian President Vladimir Putin and his Saudi counterparts could negotiate a cut in oil production in an effort to balance market supply and stabilise prices.
Meanwhile, OPEC production jumped to its highest level in recent history in January as Iran increased sales after sanctions were lifted, while Saudi Arabia and Iraq also boosted output. This report, of course, cuts right to the heart of what’s been the problem all along: You don’t want to be the oil producer that “blinks” first and cuts production, which has in turn led to increases in production to protect market share and take whatever money is available.
And so prices fall.
Readers of this newsletter know that we are quite interested in what is happening at Amazon. (Disclosure: Jeff Bezos invests in Business Insider through his personal investment company, Bezos Expeditions.)
On Thursday, the company reported profit that missed expectations, and on Friday the stock got hammered, losing 8%. After-hours on Thursday, the stock was off about 12%. Before the earnings report on Thursday, however, Amazon shares gained about 9%, so really the stock has been flat since Wednesday. The most closely watched part of the earnings report, however, was results out of Amazon Web Services, the company’s cloud-based business-services arm. AWS revenue increased to nearly $8 billion in 2015, a 70% increase over the prior year. Margins in this business, importantly — for the bulls, that is — continued to expand.
But as our Jillian D’Onfro caught in the company’s latest 10-K, Amazon now calls itself a “transportation service provider,” which is exciting.
Eugene Kim noted that on the company’s earnings conference call, CFO Brian Olsavsky sort of reassured Amazon’s shipping partners, like FedEx and UPS, that, no, they aren’t trying to put them out of business. Which is, of course, exactly what you’d say to a trucking company shortly after you bought a bunch of your own trucks.
But with each passing holiday season, it becomes more clear that Amazon pushes the delivery networks of companies like FedEx and UPS to the brink and, as a result, is taking matters into their own hands. This makes sense; it is also expensive. Amazon, however, has built its reputation on being able to give customers what they want, when they want it, at prices that beat basically every other retailer. For a while, this was great for shipping partners. But as things like Amazon Prime get more popular, a larger percentage of Amazon’s customers are going to be guaranteed — by Amazon, not UPS, mind you — that they will get their stuff in two days.
In cities like New York, this delivery time is now down to just hours.
And so you can see where this is headed. Amazon is just going to do the delivering itself. There will, of course, be partnerships with UPS and others, and you’re not going to suddenly one day see all Amazon packages delivered only by Amazon planes and trucks and so on — if that happens, it would take years, obviously. But Amazon is building out a delivery infrastructure that will probably one day not just deliver its own packages but, like UPS and FedEx, serve as the delivery network for another retailer.
That’s the future.
This year’s Sundance Film festival was a game-changer. “‘We’re shooting bullets, but they’re using machine guns!’ Netflix and Amazon outspent everyone at Sundance
” reads Jason Guerrasio’s headline rounding up the movies streaming players bought up at the prestigious film event held each year in Park City, Utah. This is real disruption.
More breastfeeding could save the world economy $300 billion a year, apparently.
Earlier this week, it seemed that Apple was going to set off a round of bearish commentary about the world economy from tech giants set to report earnings. In the end, only Apple was complaining.
Theranos, the much-celebrated-but-now-reviled healthcare startup lost another partner, which leads us to the best hypothetical in markets right now: If Theranos were public, where would its stock be trading?
Hedge fund managers apparently used chat rooms inside “Call of Duty” to discuss material, nonpublic information. They were caught, it seems, but that is a great effort.
The US oil-rig count declined again.
Facebook shares hit an all-time high.
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