Miscellaneous Thoughts on Week
Updated: 2016-02-08, 08:56:15 ET
Analyst: David Kelland
This week began with a rejection of last Friday's rally inequities and it ended on a sour note too. There can always be short squeezes, butwe are wary of doing long-term buying in stocks because we think they can behad cheaper. Volatility is low, strategists are treating it as a buying opportunity (it is, in the long run), and we are below all of the major moving averages (the 200-day in particuarly)
Again, we have the chart of the S&P 500 and its bull market(2009-2015) uptrend has been broken and tested as resistance (see chart 1).This matters for fixed-income investors because, per comments from PIMCO andGoldman Sachs this week, many investors think that the Treasury market hasgotten way ahead of itself. Given the small amount of economic deterioration inthe U.S., I tend to agree. But, markets can overshoot and further stress instocks may erode business confidence further or simply create panic buying inTreasuries. I would still like to seethe 10-year move further below its downtrend or get above it (~1.90%) beforebetting on higher rates (see chart 2).
We also had some FOMC members speak publicly this week. LorettaMester of the Cleveland Fed and Esther George of the Kansas City Fed both saidthat their outlooks have changed little following January's financial marketstress. They are both inflation hawks and this came as little surprise. Mester,George, and St. Louis Fed President James Bullard make up the hawkish wing ofthe FOMC and they are unlikely to be swing voters if push comes to shove on a battleover whether to hike rates within the committee. Bullard, striking a moremoderate tone, said in January that the 'substantial' decline in oil priceswould have implications for Fed policy and cause inflation to take longer toreach the Fed's 2% target.
Vice Fed Chair Stanley Fischer spoke with Bloomberg's Tom Keenethis week and said the following:
If [January's financial volatility] leads to a persistent tightening of financial conditions, it could signal a slowing in the global economy that could affect growth andinflation in the United States. But we have seen similar periods of volatilityin recent years that have left little permanent imprint on the economy.
In this quote, Fischer sounds confident about the realeconomy's ability to withstand financial shocks and he is considered to be veryclose to Fed Chair Yellen. So, the three hawks, plus Fischer and Yellen and oneother person would make six and be enough to hike rates. The next marginalvoter would likely be Fed Governor Jerome Powell. So these three FOMC members -- Fischer, Yellen, and Powell -- should be watched for their public remarks on the appropriateness of anotherrate hike. To be clear, markets are not expecting a rate hike any time soon.
New York Fed President Dudley, who tends to be a moderatedove, spoke this week and said that financial conditions had tightened and thatadditional strength in the U.S. dollar could have 'significant consequences'for the U.S. economy. FX traders rapidly solved that problem and sent the U.S.Dollar Index down 1.5% that day. I think this move in the dollar may have legsbecause it has broken out from a tight range and sentiment was awfully bullishon the dollar late in 2015, but that remains a guess. The uptrend of the dollarbull market is broken, for now at least, and the index found resistance todayat the bottom of the November-January range (chart 3)
- Chart 1: S&P 500 (Weekly)
- Chart 2: 10-Year Yield (Daily)
- Chart 3: U.S. Dollar Index
- David Kelland, Briefing.com