In a four-day week, stocks had their best one of the year.
Last week the Dow gained 2.6%, the S&P 500 was up 2.8%, and the Nasdaq added 3.9%.
And so after what was a rough start to the year, investors looking for signs that things might stop getting worse — let alone improve — last week may have done the trick.
For US companies, earnings season is more or less finished. “With 87% of the companies in the S&P 500 reporting earnings to date for Q4 2015, 68% have reported earnings above the mean estimate and 48% have reported sales above the mean estimate,” writes John Butters at FactSet.
Blended earnings for the S&P 500 (including both reported and expected earnings) were down 3.6% in the fourth quarter, leaving corporate America in an earnings recession.
And while corporate news may be slowing, this week will be a very busy one for the US economy with readings on consumer confidence, the services and manufacturing sectors, and GDP set to cross the tape.
The Fed looks right on inflation. The first part of 2016 has been dominated by discussion about whether the Federal Reserve’s decision to raise rates in December was a mistake, or in Fed speak a “policy error.” But the latest data on inflation received last week makes clear that while financial markets may have growing concerns about the ability for central banks to deal with future economic shocks, the US economy continues to progress towards the Fed’s goals. In January, “core” inflation rose 2.2%, the fastest rate in four years. On a month-on-month basis, this measure’s 0.3% increase was the largest since 2006.
And with the US labour market exhibiting signs of being at full employment — rising wages, rising quits — progress towards the Fed’s 2% inflation goal should be the primary focus of discussions about what the Fed will do next. This past week’s release of the minutes from the Fed’s January 26-27 meeting revealed a focus on financial market developments and the impact volatility in these markets could have on the US economy. But it is worth keeping in mind that Fed Chair Janet Yellen is not trying to trick the markets when she says — as she did in testimony on Capitol Hill earlier this month — that policy is not a pre-set course. It will depend on the data, and with about four weeks left until the Fed’s March meeting, which markets have long since crossed off as a possible date for another interest rate hike, the data bears very close watching.
It was a brutal week for US retailers. Walmart forecast effectively no sales growth for this year and struggles at the country’s largest retailer make one thing plain to see: retailers simply don’t matter as much. Commentary out of Nordstrom this week also highlighted two problematic trends for the industry: consumers aren’t buying clothes and when they are, they buy online. And so while struggles in the retail industry have long been used as broader signals about the health of the US economy, the last few years have represented a sea-change in the industry rather than a signal about the health of US consumers.
Retailers are now competing against online outlets like Amazon and Zappos, both of which have developed extremely flexible return policies, delivery networks, and warehousing procedures. And all of these are stressing the already-challenged bottom line of entrenched retail powers like Nordstrom. Nordstrom CFO Michael Koppel this week said the company’s online sales now account for about 20% of sales, up from 8% just five years earlier. This might seem like the company making inroads to online shopping habits, though this shift seems mostly like a curse, with Koppel telling analysts: “This business model has a high variable cost structure driven by fulfillment and marketing costs in addition to ongoing technology investments. With our increased investments to gain market share along with the changing business model, expenses in recent years have grown faster than sales.”
- Markit Flash Manufacturing PMI (Mon.): Expectations are for Markit Economics’ preliminary report on manufacturing activity in the US to show an expansion in February. Markit’s preliminary reading is expected to come in at 52.5, up slightly from the 52.4 reading seen at the end of January. In that final January report, Chris Williamson at Markit said, “Despite picking up slightly, the January PMI reading is one of the worst seen over the past two years, highlighting the ongoing plight of the manufacturing sector. One bright light appeared, in that order book growth picked up, led by an upturn in domestic demand.” We’ll see if this continued.
- Case-Shiller Home Prices (Tues.): The December reading on home prices from the Case-Shiller survey is expected to show an increasing appreciation in prices across the US. Compared to the prior month, the Case-Shiller measure is set to show a 0.9% increase in home prices with prices rising 5.8% over the prior year.
- Conference Board Consumer Confidence (Tues.): The Conference Board’s reading on consumer confidence in February is expected to come in at 97.3, down slightly from January’s 98.1 reading. Consumer confidence measures are being closely watched by markets and economists as consumer spending, particularly in the US, has been a major driver of economic growth over the last year. January’s reading from the Conference Board indicated that consumers hadn’t changed their outlook on their economic prospects due to volatility in global financial markets, and so we’ll see if that holds true for a second month.
- Richmond Fed Manufacturing (Tues.): Economists expect the latest reading on manufacturing activity in the Mid-Atlantic region to hold steady at 2, indicating an increase in activity.
- Existing Home Sales (Tues.): The January report on existing home sales is expected to show a 2.2% month-on-month decline after December’s 14.7% increase marked the largest-ever monthly increase for the series. Economists at BNP Paribas expect Tuesday’s reading to bring the pace of existing home sales back in line with the prevailing trend after December’s big swing.
- Markit Flash Services PMI (Weds.): Markit Economics’ preliminary reading on activity in the US services sector is expected to show a continued expansion in February. Markit’s reading is set to come in at 53.5, an improvement over January’s final reading of 53.2, which was the lowest level in 27 months. The services sector, which accounts for over three-quarters of US GDP, has been closely watched in recent months as distressing signals from the manufacturing sector haven’t yet pressured the far larger services sector, though increased signs of spillover would likely reignite fears about the US economy’s overall health.
- New Home Sales (Weds.): The January report on new home sales is set to show a 4.4% decline after December’s massive 10.8% increase. This should bring the pace of new home sales to an annualized rate of 520,000. 2015 marked the strongest year for new home sales since 2007.
- Initial Jobless Claims (Thurs.): Initial claims for unemployment insurance are expected to total 270,000, higher than last week’s 262,000 but still indicating broad strength in the US labour market. This series has been closely watched in recent weeks as an increase to start the year stoked fears the labour market, by far the strongest part of the US economy over the last couple years, could be softening. Recent data have settled many of these fears.
- Durable Goods Orders (Thurs.): The January report on durable goods orders is expected to show a 2.5% increase over the prior month. Excluding aircraft and defence orders, capital goods orders should rise 1%.
- FHFA Home Price Index (Thurs.): The December reading on home prices from the Federal Housing Finance Authority is expected to show a 0.5% increase in prices over the prior month. This would mark the third straight month home prices increased 0.5%.
- Fourth Quarter GDP, Second Estimate (Fri.): The second estimate of fourth quarter GDP is expected to show an even more disappointing end to 2015 for the US economy. Expectations are for fourth quarter GDP growth to hit 0.4%, down from the 0.7% first reported last month. Personal consumption is expected to remain steady at an annualized pace of 2.2% in the fourth quarter. “The most current data available suggest that economic growth came to a near standstill at the end of last year, at least in the aggregate,” writes economists at Credit Suisse. “We estimate that the BEA will restate annualized Q4 real GDP growth as +0.2%, below the ‘advance’ estimate of +0.7%. The sensitivity of investors to such an outcome likely will depend on the behaviour of the financial markets in the days leading up to the GDP release. A near-zero reading on Q4 GDP will not be taken well in an environment marked by renewed risk aversion and panic, but it may be excused as old news against a calmer backdrop.”
- Personal Income and Spending (Fri.): The January report on personal income and spending is expected to show a 0.4% increase in incomes and a 0.3% increase in spending. Inflation-adjusted personal spending is also expected to increase 0.3% in January. This report will also give us the latest data on the personal savings rate, which hit 5.5% in December and has been ticking up over the last several months as consumers have appeared to show a preference to save, rather than spend, their initial energy-related savings. Additionally, this report will give us the latest reading on “core” PCE — the Federal Reserve’s preferred reading on inflation — which is expected to increase 1.5% over the prior year in January, less than the Fed’s 2% target. “Core” CPI, a more widely-cited measure of inflation, indicated prices rose 2.2% over last year in January, the largest increase in over four years.
- University of Michigan Consumer Confidence (Fri.): The final reading on consumer confidence in January from the University of Michigan is set to come in at 91.0, up slightly from the 90.7 preliminary reading seen earlier this month. In the preliminary report, consumer expectations for inflation hit the lowest-ever for the series, and while this may be of concern to policymakers, it did lead to a more favourable view among consumers of their personal financial situations.
Is that it?
Last week US stocks had their best week of the year, and in a Friday note to clients, Kit Juckes at Societe Generale said that the feeling in markets was that, for at least the time being, the worst of the market volatility we’ve seen to start the year appears over.
“Another winter storm has passed,” Juckes wrote. “But spring isn’t here yet, and there will doubtless be more storms in the coming months. For now, there’s enough two-way action in crude oil prices to suggest that we may be forming a messy base, replacing a downtrend with range-trading at least. Three days of rising US equity indices don’t make for spring, let alone summer, but a period of calm looks to be arriving. Last but not least, Chinese policymakers’ attempts to calm the yuan are, for now, working.”
However, Peter Tchir, a strategist at Brean Capital, wrote in a note over the weekend that while the surface-reading on markets — stock prices, credit spreads, currency moves — may indicate that things are “fine” again, something just doesn’t seem right.
“I think there is something troubling about the current state of markets,” Tchir wrote. “This isn’t about valuation or levels necessarily, though that is part of it, it is more about how markets are trading and what direction we are being pushed to.”
For Tchir, unease about the markets comes down to how we answer a few questions:
- Are we responding too much to daily — often spurious — correlations?
- If corporate bonds are so illiquid, why can we bring billions of new issues?
- In a healthy market, should “free money” exist?
- Are the rating agencies trying to catch up?
- Why are regulators talking about “too big to fail” as an issue while implementing rule after rule that entrenches “too big to fail”?
Tchir adds: “I believe that once we look at these questions, we will be better prepared to invest in, and to trade these markets.”
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