Weekly Market Update: Inflation, Crude Surprises Herald an Early Spring for Markets
The heightened volatility of early February gave way to slightly calmer global markets this week. The biggest story was the joint effort between Venezuela, Saudi Arabia and Russia to freeze crude production levels and put a floor under the market. A provisional agreement was reached on Tuesday, although without much buy-in from Iran. China returned from the week-long Lunar New Year holiday without any major market upsets and guided the Yuan notably higher, and a handful of more positive inflation and loan data helped calm nerves. More monetary easing looks to be on tap in both Japan and the euro zone next month. Meanwhile in the US, January PPI and CPI inflation readings came in hotter, further complicating the outlook for the FOMC on rates. The week saw the first 3 day rally for US indices this year while Treasury markets largely consolidated last week's move higher keeping the benchmark 10-year yield pegged near 1.75%. WTI can't get much if any traction above $30 and natural gas is fallen back towards the Dec low to trade at $1.80. For the week, the DJIA gained 2.6%, the S&P rose 2.8%, and the Nasdaq added 3.8%.
There were no big surprises in the minutes from the January FOMC meeting. As expected, the committee expressed deepening concerns that the ongoing decline in commodity prices and the rout in financial markets posed more risks to the US economic outlook. However, the members "judged that the overall implications of these developments for the outlook for domestic economic activity were unclear." Markets took the minutes overall to indicate officials are increasingly reluctant to raise rates in March and possibly the first half of 2016. This week Fed fund futures were pricing less than a 50% chance of any further rate hikes this year.
In a bid to stabilize an oversupplied market, Russia and OPEC members Saudi Arabia, Venezuela and Qatar reached a preliminary deal on Tuesday to freeze production at January levels, provided that other major producers followed suit. Iran reacted tepidly to the deal, issuing non-committal statements of support for the agreement while still insisting they would continue to target returning to the pre-sanction level of oil production. Iraq also said it "supported" the effort, but said it would not formally commit to the production freeze until other major producers did. As reports on the negotiations emerged, crude prices had momentary gains - Brent lunged for $36 a few times and WTI almost broke above $32 - however prices closed out Friday flat on the week, without sustaining any of these short-lived gains.
In Japan, the week kicked off with a very weak GDP figure and a huge gain for equities. Fourth-quarter GDP saw its biggest drop in 12 months, as the headline q/q figure hit -0.4% and the y/y measure was -1.4%. The bad news further strengthened expectations that the Bank of Japan would be forced to offer more stimulus, driving the Nikkei up 7.2% on Monday, its biggest one-day gain in three years. PM Abe's advisor Honda addressed the terrible GDP print later in the week, noting that in addition to possibility of more BoJ policy easing, he would also recommend a fiscal stimulus package of around ¥5T and also the postponement of the second round of sales tax increase until April 2019. Subsequent press reports indicated that Abe was not keen on more government stimulus or delaying the tax increase. USD/JPY had lifted off the 15-month lows around 111 last week, weakening to 114.8 early this week, then strengthened back to around 112.50 by Friday.
The Shanghai Composite played catch-up with last week's global volatility as it reopened for trading after a week-long break for the Lunar New Year holiday, falling more than 2% on Monday. However, some less bad economic data through the week helped lift the index and dispel some anxiety about China's economic prospects. January new loans hit a record high level and the January M2 money supply hit a 19-month high, although analysts rightly point out that this came as the PBoC pumped record amounts of liquidity into the system ahead of the holidays, fearing an epic cash crunch. Moreover, many expect these positive reports will not likely diminish the chance of another RRR cut sometime in the first quarter. January CPI rose at a healthy +1.8% y/y rate, a five-month high, driven mainly by higher food prices. The data hinted that persistent disinflationary forces may be waning, but many analysts said much of the better data could be ascribed to seasonal holiday factors.
It is looking more and more likely that the ECB will ease monetary policy again at its March meeting. Multiple ECB speakers addressed the issue in speeches this week. Draghi reiterated that the subject would be under consideration at the meeting, and added that Europe is facing significant challenges and increasing concerns about the global economy. ECB Vice President Constancio said action would be taken if it was determined that conditions have delayed the expected rise in inflation later this year, warning there could be another bout of disinflation in the first half of 2016. The Bank of Italy's Visco had the strongest take, calling on the ECB to act pre-emptively before a dramatic fall in inflation expectations took hold.
The European Union's negotiations with the UK crept closer to a deal to keep Britain in the union. UK PM Cameron held all-night negotiations on Thursday with top EU officials and a handful of leaders with specific objections to the draft text, mostly concerning welfare payments to immigrants. By late Friday, reports indicated a tentative deal had been reached. The UK referendum on EU membership will likely take place in mid-June, and a TNS poll out on Friday showed 36% of respondents said they would vote to leave the EU while only 34% said they would vote to remain in the union. Separately, Greece and its European creditors continued negotiations over bailout compliance, and managed not to produce any more of the market-moving headlines seen last week.
Mexico's central bank took action to shore up the peso, delivering a surprise rate hike on Wednesday. Banxico raised its overnight rate by 50 bps to 3.75% at an intra-meeting decision and said that peso weakness was threatening inflation expectations, forcing action. Recall that Banxico raised rates at a scheduled meeting back in December for the same reason. USD/MXN has plunged about 9% this year and more than 30% over the past year and a half to record lows, the biggest losses against the dollar among leading emerging market currencies in the current cycle. As a major oil producer, Mexico has been battered by falling oil prices, which Banxico Governor Carstens also discussed in justifying the move. USD/MXN gained 4% in the wake of the decision. Separately, the Bank of Korea held rates steady at its scheduled meeting, but the bank issued a statement warning that recent won currency weakness was "excessive" and warned against intensifying "herd behavior."
Earnings season is slowly drawing to a close, with the major retailers among the last to discloses quarterly results. Shares of Walmart closed out the week down 2.5% after it disclosed y/y declines in earnings and revenue, and a FY outlook that was weaker than the qualitative view offered at the annual investor day last fall. Sales comps were lower than expected.
In a long-expected development, Yahoo's board has formed a committee to explore strategic alternatives. The company has hired advisors, and said one focus will be the Alibaba sale via a reverse spinoff. Recall that earlier this month, the company launched a fresh round of restructuring, including a plan to lay off 15% of the workforce. Reports have indicated that close to two dozen public and private firms have expressed interest in various Yahoo assets and on Friday the board is said to have started returning some of their calls.
In M&A news, home security firm ADT agreed to be acquired by Apollo Global Management for nearly $7 billion, or $42/share in cash, a 56% premium the prior closing price. Apollo intends to merge ADT with another home security firm it owns, Protection 1. Chinese aviation and shipping conglomerate HNA Group reached a deal to buy electronics distributor Ingram Micro for about $6 billion, or $38.90/share in cash. This is the latest in a string of overseas buys by Chinese companies, which have been aggressively splurging on foreign acquisitions to sidestep slowing domestic growth.
Closing Market Summary: Indices End Up Week on a Mixed NoteThe major averages ended an up week on a mixed note as investors deliberated the effect of hotter than expected CPI data on future fed funds rate hikes. Meanwhile, a fresh dose of weakness from the oil patch and some disappointing earnings results and guidance added fodder to today's early selling. The major averages were able to recover from their lows and end with the Nasdaq Composite (+0.4%) leading both the S&P 500 (UNCH) and the Dow Jones Industrial Average (-0.1%). The indices managed respective weekly gains of 3.9%, 2.8%, and 2.6%.
Prior to the opening bell, market participants received hotter than expected CPI data that showed a flat reading for total CPI in January (consensus -0.1%) and a 0.3% month-over-month increase in core CPI (consensus +0.1%). While the Fed favors the PCE Price Index when discerning inflation trends, it will certainly view this CPI data as a marker of progress toward achieving its inflation target. That understanding raised some doubts about the Fed holding off on another rate hike this year. Currently, the fed funds futures market estimates the likelihood of a rate increase through 2017 as below 50.0%.
A broad-based decline followed this uncertainty as sectors trimmed their gains from earlier in the week. Four sectors were able to remain in positive territory for the day with consumer discretionary (+0.3%), technology (+0.2%), consumer staples (+0.2%), and financials (+0.1%) ending above their flat lines. Meanwhile, commodity-sensitive materials (-1.1%) and telecom services (-0.7%) settled with the largest losses.
A decline in crude oil pushed the energy sector to the bottom of the leaderboard for most of the day, as the energy-component slipped 3.5% to $31.74/bbl to end its week. In the energy space, independent oil and gas companies posted some of the largest losses. On that note, Anadarko Petroleum (APC 35.35, -1.68) plunged 4.5% after the company had its senior debt downgraded to Ba1 from Baa2 by Moody's.
In the heavyweight technology space, the high-beta chipmakers demonstrated relative strength with component Applied Materials (AMAT 18.38, +1.21) leading the PHLX Semiconductor Index (+0.5%). Applied Materials rallied 7.1% after reporting bottom-line results above analyst expectations while issuing better than expected earnings guidance for the second quarter.
Industrial component Deere (DE 76.96, -3.35) surrendered 4.2% after lowering its full year 2016 revenue estimates by 10.0%. This tumble also followed an earnings beat on lighter than expected revenue. Dow component Caterpillar (CAT 65.41, -0.71) demonstrated relative weakness as it traded lower in sympathy with the broader industrial sector (-0.2%).
Retailers and apparel names underperformed in the consumer discretionary space (+0.3%) after V.F. Corp. (VFC 58.55, -2.70) and Nordstrom (JWN 49.17, -3.55) both missed bottom line results and issued below consensus guidance. The discretionary sector was the top performer of the week, spiking 4.3%.
The Treasury complex ended the day slightly lower after retracing the bulk of its early losses. The yield on the 10-yr note ended higher by one basis point at 1.75%.
On the currency front, the U.S. Dollar Index (96.63, -0.32) ended its day lower as pressure from the strengthening yen weighed. The dollar/yen pair slipped 0.6% to 112.64.
Today's participation was comparable to the recent average with more than 1.13 billion shares changing hands at the NYSE floor.
Taking another look at the January CPI Report:
- In January total CPI was unchanged (consensus -0.1%) as a 2.8% drop in the energy index was offset by increases across-the-board for all items less food and energy.
- That would be core CPI and it increased 0.3% month-over-month (consensus +0.1%).
- With the January readings, total CPI is up 1.4% year-over-year on an unadjusted basis while core CPI is up 2.2%. In fact, that is the highest 12-month change in core CPI since June 2012 and it exceeds the 1.9% average annualized increase over the last 10 years.
- The Fed favors the PCE Price Index when discerning inflation trends, yet it will certainly view the CPI data as a marker of progress toward achieving its inflation target.
- The largest price increases contributing to core inflation in January were seen in the price indexes for apparel (+0.6%) and medical care services (+0.5%), yet a 0.3% increase for the shelter index certainly carried some influential weight in pushing up core inflation. These are trends that consumers might not like to see, yet they are precisely what the Fed is hoping to see.
There is no economic data of note set to be released on Monday.
- Russell 2000 -11.1% YTD
- Nasdaq -10.0% YTD
- S&P 500 -6.2% YTD
- Dow Jones -5.9% YTD
Gapping down
In reaction to disappointing earnings/guidance: TRUE -22%, TRN -17.1%,AFOP -14.1%, IMH -10.2%, VFC -7.8%, JWN -7.6%, AEG -5.4%, FLR -5.3%,SAM -5.1%, AEE -4.3%, CRMT -3.8%, FLS -3.6%, EQIX -3.2%, DE -3%, UAN-2.2%, CENX -1.9%, MDRX -1.6%, ARII -1.6%, ED -1.3%, MDCA -1.1%, KEYS-0.9%, XBKS -0.7%, .
M&A news: LXK -1.2% (gives update on search for strategic alternatives)
Select metals/mining stocks trading lower: MTL -6.6%, AU -3.5%, HMY-3.4%, GFI -2.5%, RIO -1.9%, FCX -1.8%, ABX -0.9%
Select oil/gas related names showing early weakness: LXK -1.2% (gives update on search for strategic alternatives)
Other news: GBX -9.4% (on TRN earnings), SXC -7.4% (ticks lower after confirming previously announced plan to suspend common stock dividend ),TRXC -3.8% (cont volatiliity pre-mkt ATW -2.9% ( cancels quarterly dividend ), NOK -1.3% (Shares have been issued in exchange for Alcatel-Lucent (ALU) shares in a private transaction), VOD -1.3% (places £2.88 bln of mandatory convertible bonds; issued in two tranches), TWTR -1.2% (still checking),CAT -0.9% (in symp with DE earnings), OLLI -0.9% (upsizes and prices 7,873,063 shares of common stock by certain selling stockholders at $19.75 per share)
Analyst comments: VRX -3.5% (initiated with a Underperform at Wells Fargo), SUNE -3.3% (downgraded to Neutral from Outperform at Credit Suisse).
In reaction to disappointing earnings/guidance: TRUE -22%, TRN -17.1%,AFOP -14.1%, IMH -10.2%, VFC -7.8%, JWN -7.6%, AEG -5.4%, FLR -5.3%,SAM -5.1%, AEE -4.3%, CRMT -3.8%, FLS -3.6%, EQIX -3.2%, DE -3%, UAN-2.2%, CENX -1.9%, MDRX -1.6%, ARII -1.6%, ED -1.3%, MDCA -1.1%, KEYS-0.9%, XBKS -0.7%, .
M&A news: LXK -1.2% (gives update on search for strategic alternatives)
Select metals/mining stocks trading lower: MTL -6.6%, AU -3.5%, HMY-3.4%, GFI -2.5%, RIO -1.9%, FCX -1.8%, ABX -0.9%
Select oil/gas related names showing early weakness: LXK -1.2% (gives update on search for strategic alternatives)
Other news: GBX -9.4% (on TRN earnings), SXC -7.4% (ticks lower after confirming previously announced plan to suspend common stock dividend ),TRXC -3.8% (cont volatiliity pre-mkt ATW -2.9% ( cancels quarterly dividend ), NOK -1.3% (Shares have been issued in exchange for Alcatel-Lucent (ALU) shares in a private transaction), VOD -1.3% (places £2.88 bln of mandatory convertible bonds; issued in two tranches), TWTR -1.2% (still checking),CAT -0.9% (in symp with DE earnings), OLLI -0.9% (upsizes and prices 7,873,063 shares of common stock by certain selling stockholders at $19.75 per share)
Analyst comments: VRX -3.5% (initiated with a Underperform at Wells Fargo), SUNE -3.3% (downgraded to Neutral from Outperform at Credit Suisse).
Gapping up
In reaction to strong earnings/guidance: SRT +15.7%, AMAT +8.6%, ICON+8.1%, AHS +7%, ANET +6.6%, HRTX +6.4%, AMBC +4.1%, INWK +4.1%, STS+4%, (thinly traded), BJRI +3.4%, BJRI +3.4%, COMM +2.5%, EPE +1.5%,AUY +1.5%, PEG +0.7%, .
M&A news: YHOO +2.8% (announces formed a Strategic Review Committee of independent directors to lead this effort, with the assistance and support of management)
Other news: NEOT +20.7% ( CEO and Chairman George Mahaffey resigns, effective immediately; also announced it is evaluating a path forward with a modified formulation of its lead asset LIPO-202), NVLS +3.3% ( announces FDA fast track designation for N91115 in patients with cystic fibrosis), ASML+1.5% (may be in symp with QCOM), QCOM +1.1% (Co and Lenovo (LNVGY) sign 3G/4G China patent license agreement), ARMH +0.9% (may be in symp with QCOM), .
Analyst comments: CTRP +1.3% (upgraded to Buy from Underperform at Credit Agricole)
In reaction to strong earnings/guidance: SRT +15.7%, AMAT +8.6%, ICON+8.1%, AHS +7%, ANET +6.6%, HRTX +6.4%, AMBC +4.1%, INWK +4.1%, STS+4%, (thinly traded), BJRI +3.4%, BJRI +3.4%, COMM +2.5%, EPE +1.5%,AUY +1.5%, PEG +0.7%, .
M&A news: YHOO +2.8% (announces formed a Strategic Review Committee of independent directors to lead this effort, with the assistance and support of management)
Other news: NEOT +20.7% ( CEO and Chairman George Mahaffey resigns, effective immediately; also announced it is evaluating a path forward with a modified formulation of its lead asset LIPO-202), NVLS +3.3% ( announces FDA fast track designation for N91115 in patients with cystic fibrosis), ASML+1.5% (may be in symp with QCOM), QCOM +1.1% (Co and Lenovo (LNVGY) sign 3G/4G China patent license agreement), ARMH +0.9% (may be in symp with QCOM), .
Analyst comments: CTRP +1.3% (upgraded to Buy from Underperform at Credit Agricole)