January 11, 2016
Prior Week Summary
2016 is off to a rocky start after only the first week of trading as global equity and commodity markets struggle to find footing amidst increasing global volatility. China’s Shanghai Composite Index fell 7% on 2 separate occasions last week – leaving the index nearly 15% lower from where it ended the year. Likewise, the financial press is reporting that the stock market in the U.S. began 2016 with its worst ever performance to start a year. Indeed the S&P is down 6% and the Dow Jones is off 6.2% to start the year as concerns over global growth accelerate and investor concerns about a harder landing in China increase. The trend of dollar strength is continuing, with the currency strengthening by approximately 0.5% last week compared to the 10 largest global economies, adding stress to an already beleaguered domestic manufacturing complex. Crude oil continues to fall, despite increasing geopolitical uncertainty relating to Iran, Saudi Arabia, and the Syrian conflict – falling to a 12-year low of $32.50 as of this writing.
Not surprisingly given this backdrop, Treasuries rallied in price meaningfully to start the year with the 5-year note falling in yield by 17 basis points and the 10-year note falling by 12 basis points. The volatility relating to China’s financial markets and the rout in commodities caused investors to take a “risk-off” stance and increase bets that the gradual path of policy firming in the U.S. will follow a more shallow trajectory. The market implied probability, derived from Overnight Indexed Swap Rates, that the Fed will increase the target range for Fed funds at the March meeting has fallen below 50%, to 35% as a consequence. The decline in rates was only marginally impacted by a relatively robust report from the Labor Department on Friday that employers added 292,000 workers, well in excess of the most optimistic forecasts. Additionally, the jobless rate held steady at 5% and average hourly earnings were unchanged on a month over month basis as the labor markets continue to be a bright spot in the economy.
The Look Forward
Earnings season for US equities begins in earnest this week, with JP Morgan, Wells Fargo, and Citigroup on deck to release their results on Thursday and Friday. Later this week we will get updated data on import prices, initial jobless claims, retail sales, PPI, industrial production, and updated readings on consumer sentiment. The Fed’s Lockhart is scheduled to speak in Atlanta on Monday on the economic outlook and President Obama will deliver his last State of the Union Address on Tuesday evening. The government will auction $24B in 3-year notes, $21B in 10-year notes, and $13B in 30-year bonds, throughout the week.