Led by the U.S., the rally in stocks showed no sign of cooling off last week, but the bond market hit some turbulence as short-term yields hit their highest levels since the global financial crisis and long-term rates moved to 10-month highs.
In the U.S., the Dow jumped an even 2.0% while the S&P 500 and NASDAQ rose 1.6% and 1.7%, respectively. All three indexes closed at new record highs. There was no particular news driving stock prices higher, mainly a continuation of the general euphoria over the economy and the outlook for equities. Foreign stocks were also higher. In Europe, the Stoxx Europe 600 gained 0.3% despite a 0.6% decline in Germany’s DAX. Likewise, Asian stocks were mostly higher except in Japan, where the Nikkei 225 fell 0.3%. But stocks were up more than 1% in China and India, with Hong Kong gaining close to 2%.
But there was a lot of nervousness in the bond market, where yields rose for the second straight week. First “Bond King” Bill Gross of Janus Henderson tweeted out on Tuesday, “Bond bear market confirmed,” although he did tone that down a bit in his market commentary: “We have begun a bear market although not a dangerous one for bond investors. Annual returns should still likely be positive, although marginally so.” Then another so-called Bond King, Jeffrey Gundlach of DoubleLine Capital, predicted that the rate on the 10-year Treasury note would continue to move higher if it hit 2.63% — which it nearly did last week (see next paragraph). He also predicted that the S&P 500 would end the year with a negative return. Then there were reports that China, the largest foreign holder of U.S. Treasury bonds, and Japan, the second largest, were planning to cut back on their purchases as well as sell off some of their existing holdings. Both reports were later denied or debunked.
True or not, the net effect was higher rates. The yield on the benchmark 10-year note closed at 2.55%, up seven basis points on the week to its highest level since last March after nearly hitting 2.60% on Wednesday. The yield has jumped more than 50 basis points since early September. The two-year note closed the week at 2.00%, the first time it has reached that level since the financial crisis nearly 10 years ago. Oil prices also continued to spike. U.S. crude oil closed above $64 a barrel, up nearly 5% for the week, reaching its highest level since June 2015. Brent crude closed just below $70 a barrel, a level last seen more than three years ago.
Consumer spending and inflation measures led a thin slate of U.S. economic reports. Retail sales rose 0.4% in December, down from November’s 0.9% increase. But sales for the year rose 4.2% over 2016, the strongest annual increase since 2014. Revolving consumer credit outstanding, which mostly consists of credit card debt, hit a record $1.023 trillion in November, eclipsing the mark set back in April 2008, just before the financial crisis began and the housing and credit bubbles collapsed. Non-revolving credit, which includes mostly student and auto loans, rose to $2.8 trillion. On the inflation front, the headline consumer price index rose 0.1% in December and 2.1% for the year, but the core rate – excluding food and energy prices – rose 0.3% for the month, the biggest one-month in nearly a year, and 1.8% compared to a year earlier. The producer price index fell 0.1% in December but climbed 2.6% on a year-on-year basis; the core PPI was also down 0.1% on a monthly basis and 2.3% higher versus a year ago.
Reports/dates/facts/links worth paying attention to over the next week:
1. January 15: U.S. markets closed for Martin Luther King Jr. Day.
2. January 16: Empire State manufacturing survey for January.
3. January 17: Industrial production for December; National Association of Home Builders housing market index for January; Federal Reserve Beige Book.
4. January 18: Weekly unemployment claims; housing starts for December; Philadelphia Fed business outlook survey for January.
5. January 19: University of Michigan consumer sentiment index for January, first reading.