The Federal Reserve’s first interest rate increase in a year – and possibly three more next year – took some steam out of the U.S. stock market rally last week while bond yields continued to spike.
As just about everyone expected,the Fed’s monetary policy committee voted last week to raise its target for the federal funds rate by 25 basis points, from 0.5% to 0.75%. The Fed cited stronger economic activity and job growth. But the Fed also forecasted as many as three more rate increases next year, which apparently did take some investors by surprise.The major U.S. equity indexes were narrowly mixed, with the Dow rising 0.5% while the S&P 500 and NASDAQ were essentially flat. Bond yields continued to push higher. The yield on the benchmark 10-year Treasury note jumped another 12 basis points to close the week at 2.59%, its highest level since September 2014 and up 123 bps just since the beginning of July.
But European stocks had another good week after recording their best week of 2016. The Stoxx Europe 600 rose 1.3% after climbing nearly 5% the prior week, bringing its two-week gain to 6%. The hottest equity market continued to be in Italy, where the MIB index gained nearly 4% after rising more than 7% the week before. Since November 28, the index has risen more than 17%. By comparison, the broader Stoxx index is up less than 6%. The country’s sovereign bonds also did well last week, with the yield on the 10-year bond falling 15 basis points to 1.89%; by comparison, the yield on comparable German and Spanish government bonds fell only about five bps.
In Asia, Japanese stocks continued to outperform, rising for the sixth straight week. Since November 9, the day after the U.S. presidential election, when the Nikkei 225 plunged, the index is up more than 19% as the yen has dropped against the dollar. Still, the index is down about 2% this year.
It was a busy week in U.S. economic reports, which came in generally mixed. On the disappointing side, retail sales for November – which included Black Friday and the post-election period – rose a weaker-than-expected 0.1%, well below the 0.4% Street forecast and down from October’s downwardly revised 0.6% increase. Auto sales, which dropped 0.5%, the biggest decline since March, skewed the results downward. Industrial production fell 0.4%, steeper than expected, dragged down by a 4.4% drop in utility production due to warmer weather. In housing – which bears watching more closely as rates rise –starts dropped nearly 19% last month to an annual rate of 1.09 million after jumping by an upwardly revised 27.4% in October. But the National Association of Home Builders’ housing market index, which measures builder confidence, jumped seven points in December to 70, its highest level since July 2005, well before the housing market crash. Two northeastern Fed regional business surveys for December came in way better than expected. The Philadelphia Fed survey jumped to 21.5 from 7.6 the prior month while the Empire State manufacturing survey climbed to 9.0 from 1.5. On the inflation front, consumer prices rose 0.2% while producer prices gained 0.4% in November.
Reports/dates/facts/links worth paying attention to over the next week:
1. December 21: Existing home sales for November.
2. December 22: Weekly unemployment claims; third quarter GDP, second and final revision; durable goods orders for November; Chicago Fed national activity index for November; personal income and outlays for November; leading economic indicators for November.
3. December 23: New home sales for November; University of Michigan consumer sentiment index for December, second reading.