Fed clues spark markets
May 31, 2016
On Dec. 16 of last year, the Federal Reserve raised its benchmark rate for the first time since 2006. Since then investors have been waiting for the next rate hike and trying to figure out what the end of the "easy money" era would mean for stocks.
Now, finally, it appears likely that the Fed is going to pull the trigger over the next few months. Investors responded enthusiastically, sending the S&P 500 up 2.3 percent to its best week since the beginning of March, and the Nasdaq up 3.4 percent for its strongest weekly showing since February. The yield on the 10-year Treasury, meanwhile, was all but unchanged last week, closing at 1.85 percent.
On Friday, the Fed's Chairwoman Janet Yellen was at Harvard to receive an award. While fielding some questions she said, "Growth looks to be picking up from the various data that we monitor," and that she expected rates to rise "in the coming months." Yellen, a longtime advocate of Fed transparency, also reiterated that when the Fed does act, it will raise its rate "gradually and cautiously." In addition, Eric Rosengren, the president of the Federal Reserve Bank of Boston and a Federal Reserve Open Market Committee voting member who's been a voice of restraint when it comes to raising the rate, said last week that he was ready to discuss a hike in June. As a result, the possibility of the Fed raising its rate in June, which had been put at 0 percent not long ago, neared the 50 percent mark. It seemed likely that the Fed would act, if not in June, at its meeting in July or September. One reason June remains less likely is that Great Britain will vote on the Brexit a week after the meeting, and the Fed may want to wait on the outcome. Investors, as noted, decided to accentuate the positive and celebrate the fact that Yellen saw the American economy on the upswing. Bank stocks, in particular, jumped last week as banks stand to profit from higher interest rates.
Signs of growth
Some evidence of that economic upswing came when the government revised its estimate for first-quarter gross domestic product from 0.5 percent to 0.8 percent. This is still subpar, but estimates for second-quarter growth were put at a solid 2.5 percent, indicating that, in a pattern that has become the norm during the post-recession recovery, a weak first quarter would be followed by an improved second one.
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Banking wasn't the only sector to pick up the stock market last week; energy companies also got a boost as oil prices hit their highest level since October and both U.S. and Brent crude passed the $50-a-barrel mark on Thursday before dipping slightly to finish the week at $49.33 and $49.32, respectively. The price of oil has gone up for a number of reasons, including the recent fires in Canada that hampered production, attacks in Nigeria by rebels that did the same and efforts by oil companies to reduce output. On Sunday, Russia's Energy Minister Alexander Novak said that he expects global oil supplies to drop year over year for each of the next three quarters. The gradual rebound was evident in the price of a gallon of gas in the U.S. which, while at its lowest point in more than a decade on Memorial Day, nonetheless inched above $2 a gallon in all 50 states for the first time since August.
Greece gets its money
After Greece passed the latest round of austerity measures on May 23, its creditors agreed last week to release a €10.3 billion ($11.5 billion) bailout payment that the nation needs to meet a July debt deadline. More importantly, an agreement was worked out between the International Monetary Fund, which has been insisting on debt relief for Greece, and Germany, which has resisted. The agreement will extend the repayment period and cap interest rates in 2018.
The latest on the Brexit
In an indication of the growing concern over Great Britain leaving the European Union (EU), now seen as a 50/50 prospect, a survey of more than 30 asset managers found that a Brexit is now a bigger concern than China's economic slowdown or increased trade protection.
New home sales soar
In other news, the U.S. Department of Commerce said that sales of new single family homes jumped to an eight-year high in April at a seasonally adjusted annual rate of 619,000, up 16.5 percent from March and up 23.8 percent from April 2015. First-time jobless claims fell 10,000 to 268,000 for the week ending May 21; the four-week moving average for the week ending May 14 was up 2,750 to 278,500. In addition, the University of Michigan's Consumer Sentiment Index rose to 94.7 in May from 89.0 in April; the current conditions reading was 109.9, its highest point since January 2007.
More merger news
Germany's Bayer made a $62 billion takeover bid to buy Monsanto and combine their agricultural businesses into a new $67 billion concern; Monsanto rejected the offer but indicated it was open to discussion. Meanwhile, the EU signed off on the $100 billion merger between Anheuser-Busch InBev and SABMiller, the two largest brewers in Europe, but only after they agreed to sell off some brands and operations to address antitrust issues. The combined company will account for 30 percent of global beer sales.
A look ahead
With the market closed Monday for Memorial Day, this will be a short week. However, it will be packed with economic updates, including the latest on personal income and spending, the S&P/Case-Shiller Home Price Index, the Institute for Supply Management's Manufacturing and Non-Manufacturing Indexes, the Fed's Beige Book, construction spending, vehicle sales, factory orders and orders for durable and capital goods. On Friday, the U.S. Department of Labor will announce the unemployment rate for June, forecast to drop from 5 percent to 4.9 percent with an expected 160,000 new jobs added.
This commentary was prepared specifically for local wealth management advisors by Northwestern Mutual Wealth Management Company.
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