Week in Review March 17, 2017
The Federal Reserve’s second interest rate increase in the past four months, well-telegraphed as it was, had little impact on stock and bond prices last week.
To few people’s surprise, the Fed raised short-term interest rates by a quarter percentage point last week and indicated that at least two more were possible later this year. But the Fed had laid the groundwork that a rate rise was coming, so when the announcement actually came on Wednesday afternoon it was almost academic. For the week, both the Dow and the S&P 500 recorded modest gains while NASDAQ rose 0.7%. Bond prices rose after the Fed announcement, lowering yields for the week. The yield on the benchmark 10-year Treasury note, for example, which climbed to a three-year high of 2.62% on Tuesday, dropped back to 2.50% by Friday, down eight basis points on the week.
The Fed’s monetary policy committee raised its benchmark federal funds rate to a range between 0.75% and 1%, its second such increase since December. There was only one dissension, by Minneapolis Fed President Neel Kashkari, who wanted to leave rates unchanged. The Fed also released updated interest rate forecasts, which project short-term rates between 2.0% and 2.25% at the end of 2018, implying three more quarter-point increases next year. “The simple message is the economy’s doing well,” Fed Chair Janet Yellen said at a press conference following the meeting. “We have confidence in the robustness of the economy and its resilience to shocks.”
Indeed, the economic reports released last week mostly corroborated that assessment. The headline number for industrial production was unchanged in February, below expectations of a 0.2% increase, but that was largely because of another big drop in utility production due to unseasonably warm weather. Otherwise, the manufacturing component rose 0.5% for the second straight month, the best back-to-back performance since July 2015. Leading economic indicators rose 0.6% for the second consecutive month. Retail sales, though, disappointed, rising just 0.1%, the weakest gain since August, after climbing an upwardly revised 0.6% in January. But housing sector figures were robust. Housing starts for February rose 3% to an annual rate of 1.288 million, thanks to warmer weather, although permits fell more than 6% to 1.213 million. The National Association of Home Builders’ housing market index jumped five points to 71 in March, its highest reading since June 2005. On the inflation front, the consumer price index rose 0.1% in February and up 2.7% versus a year earlier, while producer prices rose 0.3% and 2.2% year-on-year, the highest YOY rate in nearly five years.
Foreign stocks and bonds were also mostly higher for the week. European stocks were up about 1% or more, while Hong Kong stocks gained more than 3%. Both the People’s Bank of China and the Hong Kong Monetary Authority both raised interest rates after the Fed did, although the central banks of England and Japan left theirs unchanged. Still, it appears that the eight-year era of monetary policy easing is coming to an end.
Reports/dates/facts/links worth paying attention to over the next week:
1. March 20: Chicago Fed national activity index for February.
2. March 22: Existing home sales for February.
3. March 23: Weekly unemployment claims; new home sales for February.
4. March 24: Durable goods orders for February.