- Stocks rise, bonds drop as ECB holds steady. (10:21am ET) Major U.S. indexes are mixed this morning while European equities moved decisively higher in afternoon trading following the European Central Bank’s (ECB) decision to leave interest rates and its quantitative easing policy unchanged. The S&P finished the prior session with a 0.2% gain on the back of financials (+0.8%); telecom (-0.8%) and energy (-0.3%) underperformed as rates rose and oil fell. Overseas, Asian markets were mixed as the Nikkei gained 0.9% but the Shanghai Composite lost 0.4%. Elsewhere, WTI crude oil ($52.45/barrel) is rebounding from yesterday’s 2.6% selloff, COMEX gold has pulled back close to $1200/oz. as the dollar regains some ground, and the yield on the 10-year Treasury is up 5 basis points (0.05%) to 2.47%, adding to yesterday’s gains.
- Fed remains on track for at least two hikes in 2017. The Federal Reserve Bank’s (Fed) Beige Book, released Wednesday, suggested that the Fed’s plan for three rate hikes remains intact, although we continue to believe two is as likely as three. Several factors support 2-3 hikes this year, including: the recent pickup in reported inflation, the Fed’s acknowledgment that pricing pressures have intensified, the Fed’s (reiterated) expectation-consistent with our view-that labor markets will tighten and push wages higher, and the increasing number of mentions of the word inflation in the Beige Book. Chair Yellen’s comments yesterday were also consistent with this view and suggested a pace of three hikes per year for several years, contributing to the upward pressure on Treasury yields yesterday.
- Claims dipped last week, reversing the prior week’s increase. Initial claims for unemployment insurance fell 13,000 to 234,000 in the week ending January 14, 2017. The dip may have been distorted by Midwest ice storms and a reversal of annual mid-December auto plant shutdowns. Claims remain near the lowest level in more than 40 years and will likely remain subject to year-end, quarter-end, and holiday distortions for another week or so. This does not change the fact that the data continues to suggest the labor market is tightening and that the Fed remains on track to do two to three rate hikes in 2017.
- Housing starts rise but remain volatile. Housing starts for December hit the economic data trifecta of accelerating from the prior month, topping expectations, and seeing an upward revision to the prior month. Recent volatility in data has been impacted by large swings in multifamily starts, which provided a boost to December’s data. The overall trend for starts continues to climb but still remains below typical expansion levels. New permits, which tend to be a leading indicator, were flat and modestly missed consensus expectations. Years of underbuilding and demographic forces are likely to help housing, but rising rates may act as a headwind.
- As expected, the European Central Bank made no changes to either its interest rate or bond buying policies. Inflation across the Eurozone had increased to 1.1%, still well below the ECB’s 2% inflation target. Some politicians, especially in Germany, are worried that inflation has been accelerating too quickly and argue that the ECB should take action now to prevent unacceptable price increases in the future. In his press conference, ECB President Mario Draghi acknowledged these concerns, but defended the current policies. The euro declined modestly after the announcement.
- Philadelphia Fed Index (Jan)
- Yellen* (Dove)
- Eurozone: European Central Bank Meeting (No Change Expected)
- China: GDP (Q4)
- China: Industrial Production (Dec)
- China: Retail Sales (Dec)
- China: Fixed Asset Investment (Dec)
- Inauguration Day
- Harker* (Hawk)
- U.K.: Retail Sales (Dec)
Past performance is no guarantee of future results.
The economic forecasts set forth in the presentation may not develop as predicted.
The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
Stock investing involves risk including loss of principal.
A money market investment is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although money markets have traditionally sought to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund.
Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, political risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.
Treasury Inflation-Protected Securities (TIPS) are subject to interest rate risk and opportunity risk. If interest rates rise, the value of your bond on the secondary market will likely fall. In periods of no or low inflation, other investments, including other Treasury bonds, may perform better.
Bank loans are loans issued by below investment-grade companies for short-term funding purposes with higher yield than short-term debt and involve risk.
Because of its narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.
Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, disease, and regulatory developments.
Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.
Investing in foreign and emerging markets debt securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical and regulatory risk, and risk associated with varying settlement standards.
High-yield/junk bonds are not investment-grade securities, involve substantial risks, and generally should be part of the diversified portfolio of sophisticated investors.
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