Stock and bond prices fell last week in anticipation of another interest rate increase by the Federal Reserve this week.
The three major U.S. indexes marked the eighth anniversary of the start of the current bull market by falling together for the first time since the week of January 20. Both the Dow and the S&P 500 lost about 0.5% while NASDAQ shed 0.1%. Small cap stocks fell about 2%. In the government bond market, yields rose by double digits for the second straight week as a rate increase at this week’s Fed meeting seems almost a foregone conclusion. Yields at the long end rose by about 10 basis points, with the yield on the benchmark 10-year Treasury note ending the week at 2.57%, a day after topping 2.60%, its highest level since September 2014. Oil prices dropped below $50 a barrel for the first time since late November.
The likelihood of a rate increase at this week’s Fed meeting was solidified even further by another strong jobs report on Friday. The Labor Department reported that nonfarm payrolls rose by 235,000 last month, well above the consensus forecast of 200,000 and at the high end of individual estimates. It also upwardly revised January’s figure to 238,000, making it the best back-to-back performance since last July. The unemployment rate fell to 4.7% while the labor participation rate rose another tick to an even 63%. Wages grew 2.8% compared to a year earlier. The report was the second strong jobs report of the week. ADP said private sector payrolls jumped by 298,000 in February, blowing away the Street forecast by more than 100,000. January’s gain was also revised upward to 261,000. Gains in construction and manufacturing were the primary drivers in both the Labor and ADP reports.
In Europe, stock prices were down modestly but bond yields rose sharply as European Central Bank President Mario Draghi sounded a more optimistic tone about the future. The ECB left interest rates and its bond purchasing plans unchanged, but at his regular post-meeting press conference Draghi said, “There is no longer that sense of urgency in taking further actions. That urgency that was prompted by the risks of deflation isn’t there.” That could signal a possible end to bond buying in the not-too-distant future. The yield on the benchmark 10-year German bund jumped 14 basis points to 0.49% to end the week, its highest level in over a year, while yields on comparable Spanish and Italian bonds climbed more than 25 bps to their highest levels since November 2015. In stocks, both the Stoxx Europe 600 and Germany’s DAX index fell 0.5% for the week.
Asian stocks were slightly higher last week although Shanghai was down marginally as China recorded its first monthly trade deficit in three years and the government toned down its growth forecast for this year. In dollar terms, the country ran a $9.15 billion trade deficit as imports jumped 38% compared to a year earlier while exports fell 1.3%. That was the country’s first deficit since February 2014, when it ran a $23 billion gap. At the same time, Premier Li Keqiang said the government will aim for a growth target of "around 6.5%, or higher if possible’’ this year as China faces "many salient challenges and problems.” Growth rates of 7% or more used to be the norm. The Shanghai composite index was down 0.2% for the week while Japan’s Nikkei 225 rose 0.7%, its third straight weekly increase.
Reports/dates/facts/links worth paying attention to over the next week:
1. March 14: Producer price index for February; Federal Open Market Committee meeting opens in Washington, D.C.
2. March 15: Consumer price index for February; retail sales for February; National Association of Home Builders housing market index for March; Empire State manufacturing survey for March; FOMC meeting ends, followed by announcement, updated Fed economic forecasts and Janet Yellen press conference at 2 P.M.
3. March 16: Weekly unemployment claims; housing starts for February; Philadelphia Fed business outlook survey for March.
4. March 17: Industrial production for February; leading economic indicators for February; University of Michigan consumer sentiment index for March, first reading.