Market Comment: Waiting on the Fed

Investors are on tenterhooks waiting to see what the Federal Reserve will do, or more pertinently say, when it meets this week. As a consequence, the stock market had a wild week of ups and downs. The Dow, for instance, traveled 905.01 points one way or another over the five days, though it finished only 0.6 percent lower for the week. For the record, it was six years ago this month that stocks hit their post-recession lows with the S&P bottoming out at 676.53 (it closed at 2,053.40 on Friday), while the Dow dropped all the way to 6,443.27 (it’s now at 17,749.31).

The Fed, seen as the architect of that post-recession stock surge, will meet on Tuesday and Wednesday, after which Chairwoman Yellen will conduct a press conference. Since the Fed isn’t expected to raise its benchmark rate from the record low level it’s been at since December 2009, the focus will be on whether or not the committee continues to use one word – “patient” – in its statement. The consensus is that once the Fed drops the word “patient,” it could be gearing up for a rate hike as soon as June, but if it continues to use it, the first hike might not come until September, especially given the sluggish rate of inflation. The fact remains that, at this point, no one knows for sure when the Fed will act, or how fast it will raise the rate once it begins to do so, so expect more stock-market jitters leading up to Fed meetings in April and June.

On Friday, as the major stock indexes had their worst day in more than a month, there was a release likely to give the Fed pause, when the Producer Price Index (PPI), used to gauge inflation, slowed again, off 0.5 percent in February. It was the fourth straight drop for the PPI, and year to year, it was down 0.6 percent, the first decline since 2009. Core PPI, less food and oil, also fell 0.5 percent.

The dollar and gas do their part

In reality, fear of the Fed wasn’t the only factor behind last week’s volatility, as investors were also unnerved by two trends that would historically be good news: a stronger dollar and cheaper gas. The problem is that the surging dollar shows no sign of leveling off anytime soon. It reached a 12-year high against the euro on Friday, so American exports are less competitive and overseas profits less lucrative. As for the low price of crude, the International Energy Agency (IEA) had forecast that the price of a barrel would begin to rise later this year, especially with the shutdown of wells in the United States — the rig count is down an unprecedented 43 percent since October. But last week the IEA backtracked, saying that production in the U.S. “continues to defy expectations,” and over the course of the week, the price of U.S. crude tumbled 10 percent to $44.84 a barrel.

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Around the eurozone

The European Central Bank began buying bonds on Monday, the first step in its €1.1 trillion plan to stimulate economic growth and halt deflation. Meanwhile, as Greece and its creditors continue to negotiate the terms of the bailout payment it needs to remain solvent, Prime Minister Alexis Tsipras tweaked the Germans yet again by demanding World War II reparations. Tsipras said that Greece was owed as much as €30 billion ($32 billion) and that it might seize German assets in Greece if the reparations weren’t paid. Earlier in the week, Finance Minister Yanis Varoufakis was in the headlines yet again after saying that Greece might have a referendum on its membership in the European Union if the debt negotiations remained stalled. And Germany’s Commerzbank was fined $1.5 billion by the U.S. government for sending “tainted money” into the American financial system, including funds from blacklisted countries such as Iran.

China’s slowdown continues

China recently announced that it had lowered its forecast for GDP in 2015 to 7 percent, and this past week, the figure for the first two months of the year came in under that mark at 6.28 percent, the weakest start since 2009. At the same time, China’s exports surged more than 48 percent in February, though the number was seen as skewed by distortions caused by the Lunar New Year holiday.

Britain goes its own way

Speaking of China, Britain went down a road President Obama has been trying to prevent it from taking, saying it would become a founding member of the new, China-led Infrastructure Investment Bank, which the Chinese see as a rival to the World Bank. Ever since plans for the bank were announced in late 2013, there has been jockeying between the U.S. and China over membership, but with Britain now on board, other allies such as Australia and South Korea are expected to follow suit.

Retail sales snowed out

With bad weather being blamed, retail sales were off 0.6 percent in February as car sales had their biggest month-to-month dip in more than a year – sales less autos were down just 0.1 percent. Still, retail sales were up 1.4 percent from last February. In other news, business inventories were unchanged in February, while wholesale inventories improved 0.3 percent. First-time jobless claims fell 30,000 to 289,000, and the four-week average shed 3,750 to 302,250. The University of Michigan said its preliminary consumer confidence index was off 4.2 points in March to 91.2. And the National Federation of Independent Businesses Small Business Optimism Survey for February increased 0.1 points to 98.0.

A look ahead

This week, there will be the Fed’s two-day session and then everything else, which will include the latest on industrial production and capacity utilization, housing starts, building permits and the leading index.

This commentary was prepared specifically for your wealth management advisor by Northwestern Mutual Wealth Management Company.

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