After snapping a streak of six consecutive weekly gains, the stock market returned to its winning ways. The S&P 500 added 0.2% for the week, but did not overtake its record high from the start of March, which may count as a loss for investors starved for more. The tech-heavy Nasdaq (+0.7%) outperformed, climbing near its early-March high to flirt with another record close. The index is now up 9.6% for the year while the S&P 500 has climbed 6.2%.
The first two days of the trading week were highlighted by reduced trading volume as the East Coast braced for a winter storm. In addition, the looming FOMC rate decision contributed to reduced activity. Although overall trading volume on Monday and Tuesday was down about 15% from average, activity on the M&A front was alive and well, as Intel (INTC) agreed to acquire Mobileye(MBLY) for $15.30 billion in cash, paying a 34.0% premium to Mobileye’s share price from the previous session.
On Wednesday, the Federal Open Market Committee raised the federal funds target range by 25 basis points to 0.75%-1.00%. This move was widely-expected going into the day of the announcement, but investors were somewhat surprised to see the Fed maintain its measured outlook. The central bank nudged up its median target rate for the end of 2019 to 3.0% from 2.9%, but left its long-run target unchanged at 3.0%.
It is worth noting that the Fed tightened policy at a time when growth forecasts have shifted lower. The Federal Reserve Bank of Atlanta now expects that first quarter GDP will be up only 0.9% after calling for growth of more than 3.0% at the start of February. To be fair, first quarter GDP readings have a known tendency to underperform the remaining three quarters. For her part, Fed Chair Janet Yellen said, “GDP is a pretty noisy indicator”, adding that the central bank expects growth to average 2.0% over the course of 2017.
With the March hike in the books, the market’s expectations are now in line with FOMC projections for two more hikes before the end of the year. The fed funds futures market sees almost no chance of a hike in May (6.4%), but is starting to price in a rate raise for June (58.3%). Looking at the remainder of the year, the fed funds futures market sees a pause into the second half, currently expected to conclude in December when the range should be boosted to 1.25%-1.50%.
On Friday, defying the spirit of St. Patrick’s Day, the major averages failed to turn shamrock green, closing just a ‘wee bit’ below their flat lines. The Nasdaq finished flat while the S&P 500 and the Dow closed with losses of 0.1% apiece.
- Dow Jones Industrial Average +5.8% YTD
- Nasdaq Composite +9.6% YTD
- S&P 500 +6.2% YTD
- Russell 2000 +2.5% YTD
(Excerpts from Briefing.com)
Friday saw a handful of economic reports, including February Industrial Production, February Leading Indicators, and the University of Michigan Consumer Sentiment Index for March, but their influence was minimal:
- Industrial Production held steady in February (consensus 0.2%) while Capacity Utilization declined to 75.4% (Briefing.com consensus 75.4%) from a revised reading of 75.5% (from 75.3%) in January.
- The key takeaway from the report is that it is not as disappointing as the headline suggests. Nevertheless, total industrial production is still weak, up just 0.3% year-over-year. The overall capacity utilization rate of 75.4% is 4.5 percentage points below its long-run average, which suggests there is ample overhead space still until production bottlenecks occur.
- The Conference Board’s Leading Indicators report for February ticked up 0.6% (consensus 0.5%) after a 0.6% increase in January.
- The key takeaway from the report is that the index is at its highest level in over a decade after six consecutive monthly gains, fueling the underlying belief that economic growth in 2017 should be improving.
- The preliminary reading of the University of Michigan Consumer Sentiment Index for March rose to 97.6 (consensus 96.8) from 96.3 in the prior month’s reading.
- The key takeaway from the report is that consumers are feeling better about their current personal finances; however, there appears to be a sharp divide about the outlook that cuts sharply across political partisan lines.
Investors will not receive any economic data on Monday.
Bonds yields fell for the week with the belly of the curve taking most of the decline. Yields still remain higher for the month and higher YTD as well.
- 2-yr: 1.36% to 1.33%, down 3bps from previous week’s close
- 5-yr: 2.10% to 2.03%, down 7bps
- 10-yr: 2.58% to 2.50%, down 8bps
- 30-yr: 3.17% to 3.11%, down 6bps
Treasuries Rally to Close Week on Strong Note
- U.S. Treasuries gained significant ground today as industrial production data for February came out mostly in line with estimates. The Briefing.com consensus was for 0.2% growth (0.0% actual) but the miss was weather-related and January’s growth was revised up by two-tenths of a percentage point. The Michigan consumer survey showed that long-term inflation expectations fell to an all-time low of 2.2% in March and that could eventually concern Fed policymakers. The headline index of sentiment, however, improved more than expected. Minneapolis Fed President Kashkari (FOMC voter) wrote a blog post explaining his dissent in favor of a hold in Wednesday’s FOMC decision. He said that the Fed’s 2% inflation target is symmetric and that he didn’t see the advantage to hiking gradually now just to preclude the need to hike rapidly later.
Commodities saw Energy and Metal prices close higher while Agri mostly closed lower for the week.
- April WTI crude closed higher at $48.79/barrel from $48.49/barrel the previous week
- April gold finished the week higher at $1,229.3/troy oz from $1201.10/oz the previous week
- May silver closed 11 cents lower at $16.92/oz from $17.73/oz the previous week
- May copper ended 10 cents higher at $2.69/lb from $2.59/lb the previous week
Agriculture Closing Prices
- May corn closed at $3.68/bushel, up 3 cents from last week’s close at $3.65/bushel
- May wheat closed at $4.36/bushel, down 5 cents from last week’s close at $4.41/bushel
- May soybeans closed at $10.00/bushel, down 7 cents from last week’s close at $10.07/bushel
THE WEEK AHEAD
Monday 20 to Friday 24 March (Week 12)
- The second half of March is historically weak
- The fourth week starts rather bearishly but ends mildly bullish
- The week after Expiration Friday has been down on the DOW 19 of the last 29 and down 4 of the last 5
The twelfth week of 2017 (wk12) is mixed for the DIA and SPY with varied averages over all three time averages (5, 10 and 15 years) but does have a slightly bearish bias over recent years.
The 2017 Stock Trader’s Almanac’s averages the DOW and S&P500:
Key Economic Dates
Mon 20 Mar
- Australia Monetary Policy Meeting Minutes
- US Chicago Fed President Evans (FOMC voter) (13:10 ET)
Tue 21 Mar
- EU French/German/Euro Flash Manufacturing PMI, French/German/Euro Flash Services PMI
- UK CPI y/y, PPI Input m/m, RPI y/y
- US Current Account, Kansas City Fed President George (non-FOMC voter) (12:00 ET), Cleveland Fed President Mester (non-FOMC voter) (18:00 ET)
Wed 22 Mar
- US Existing Home Sales
Thu 23 Mar
- UK Retail Sales m/m
- EU, Long Term Refinancing Operation
- US Initial Claims, New Home Sales, Fed Chair Yellen (FOMC voter) (08:00 ET), Minneapolis Fed President Kashkari (FOMC voter) (12:00 ET)
Fri 24 Mar
- US Durable and Core Durable Goods Orders m/m, Chicago Fed President Evans (FOMC voter) (08:00 ET); St. Louis Fed President Bullard (non-FOMC voter) (08:05 ET), San Francisco Fed President Williams (non-FOMC voter) (08:30 ET)
SINGAPORE: Jobless Rate Confirmed At 6-Year High In Q4
Singapore’s seasonally adjusted unemployment rate rose to 2.2 percent in the fourth quarter of 2016 from 2.1 percent in the previous two quarters and in line with preliminary estimates. It was the highest jobless rate since the December quarter 2010, as more people entered the labour force while layoff went up the most since the June quarter 2009.
In the three months to December, the jobless rate for residents were up to 3.2 percent (from 2.9 percent in the third quarter) and the rate for citizens also increased to 3.5 percent (from 3.0 percent). Some 5,440 workers were laid off, up from 4,220 workers in the September quarter and was the highest since Q2 2009 (5,980).
The rate of re-entry among residents made redundant rose for the second straight quarter. About 52 percent of residents made redundant in the third quarter of 2016 secured employment by December 2016, up from 49 percent from the previous quarter.Job vacancies decreased to 44,500 (from 53,800 in the September quarter) and was also lower compared to the same period a year earlier (50,600). Reflecting seasonal hiring for year-end festivities, total employment grew in the fourth quarter of 2016 (2,300), compared to a contraction in the prior quarter (-2,700), but growth was lower than the fourth quarter 2015 (16,100).
For full 2016, the annual average unemployment rate increased to 2.1 percent from 1.9 percent in 2015. It was the highest annual jobless rate since 2010. Unemployment among resident went up to 3.0 percent (from 2.8 percent in 2015) while those among citizens went up to 3.1 percent (from 2.9 percent). The increase was broad based across most age and education groups.
Total employment in 2016 increased by 8,600, the lowest growth since 2003 (-11,700).
Source: Ministry of Manpower
Through 2016 and going back to end 2014, I mentioned in my posts and public talks that I expected a long-term slow-down in the coming years as opposed to a market crash. I didn’t expected major gyrations in the markets but I did expect economic numbers to decline and contract at a gradual pace.
This meant that any sort of recession or slow down was going to hit the economy more than the market and that the general population would hurt more than those in the markets. Crash-type recessions tend to hurt the market players more than the general population (in most cases).
My greatest fear at that time regarding long-term slowdowns was that the majority of the working population were not aware of the significance or threats of such slow economic climates as the last one was in the 70’s through to the early 80’s. Since then, every recession has been a quick crash-styled downturn that came back relatively quickly. On the Little Red Dot, the three-year Dot.com decline between 2000 and 2003 and the full effects of the Sub-Prime in the U.S. were hardly felt at all. This only served to put us deeper in denial of what a real slow down means.
As of writing this, I am vindicated. But it doesn’t please me to be.
These days, slowly but surely, more and more are starting to realise what this all means. The malls continue to empty out, big name retailers/restaurants are cutting back on their branches and lowering inventories, Consumer Spending slowed over the past year and Households Debt rose to an all time high of 62.10% of GDP in the third quarter of 2016. The luxury cars have been accumulating at the second-hand lots as many begin to default on their payments. Property prices had fallen for 13 straight quarters and it remains to be seen if this one-month rise in real estate prices has a rebounding effect.
The frightening fact is that the pain may not yet be fully manifested as people flocked to buy properties upon the easing of some measures and snapped up cars as soon as COEs made a modest dip. Landlords also remain stubborn to their high yield demands, preferring to keep their properties vacant than yield less.
Such behaviour is not that of an economy in full recession yet. It could be because some have made a wealthy harvest over the last seven years and are good for it … for now. However, the rate of borrowing, spending and savings amongst the general population of the Little Red Dot are not in-line with the behaviour of a truly healthy economy.
I reckon that we’re looking good on the surface but deep down inside, we’re hurting but we’re not going to let the other guy know about our pain. For some, that pain is already obvious and showing clearly. Until that pain surfaces so clearly that the government acknowledges it, we’re going to drag this slow-down out for a long time more.