Written by: Ryan Bouchey
Welcome to the second installment of “Financial Markets Recap”. If you want to take a look at some of the highlights going back to last week and what they mean to the markets, look here. There was no shortage of news items from this past week so let’s dive in!
A Dovish Fed?
Janet Yellen spent part of the week speaking with the Senate Banking Committee. She stated that there would be no rate hike for the next couple of Fed meetings causing a short-term bump in the markets and leading many to speculate that rates won’t move until the end of 2015 or possibly even into 2016. Two areas holding the Fed back from raising rates are: 1) Inflation is still well below the level which would warrant a raise in rates from the Fed and 2) Labor market is improving but still has room to grow. We continue to tell investors that any rise in interest rates shouldn’t be looked at as a negative for the markets. If there is a rate hike it means the economy is improving and historical data has shown that a rise in rates from this level actually works in the markets favor.
Consumer Price Index Drop
The Consumer Price Index (CPI) faced its biggest fall since 2008, falling by .7% in January. The main culprit in the recent drop in CPI has been the price of oil. If you removed oil and food from the reading, the CPI actually rose by .2%. The important thing here is that this shouldn’t raise any concerns about a deflation/stagnation environment. We’ve seen a black swan-type event the past 8 months with the fall in the price of oil which has had a dramatic impact on inflation. This may impact when the Fed decides to raise rates, as discussed above. We’re still confident that the U.S. economy is on solid footing and in a separate report released on Thursday, American wages posted their largest gains in more than six years which is a great sign to go along with the drop in the unemployment rate.
U.S crude prices were sharply down on Thursday behind a growing supply of U.S. inventories. Right now we’re looking at this mostly as a supply side issue, although global demand has been tempered. We are still of the belief that even if we haven’t hit the bottom price of oil, we aren’t too far off. At some point production will fall to a level that supports demand (U.S. production has already fallen by 25% since last July) and we will see the supply/demand equilibrium help support a higher price in oil.
Shortly after we put out last week’s Market Recap, Greece reach an agreement to extend their bailout for four months. Although they were able to come to a short term resolution it still feels like a “kicking the can” type of scenario. This has helped propel, not hurt, European equities the past week but we are certainly looking for a more meaningful resolution between Greece and the EU in the coming four months.