Stocks had their worst week in years as interest rates surged to their highest levels in four years.
The Dow and S&P 500 lost about 4% on the week while NASDAQ dropped 3.5%, with about half of the loss coming on Friday, when the Dow plunged 666 points, or more than 2.5%. But the rout wasn’t confined to the U.S. European stocks fell more than 3% while Chinese stocks lost nearly that much. Hong Kong and Japanese stocks were down more than 1.5%.
Friday’s better-than-expected January jobs report may have actually contributed to the equity sell-off, as it pushed bond yields higher and thus stock prices lower. Nonfarm payrolls increased by a better-than-expected 200,000 in January and well ahead of December’s upwardly revised total of 160,000. The unemployment rate held steady at an 18-year low of 4.1%. Most importantly, perhaps, wage growth rose 0.3% for the month and 2.9% compared to a year earlier, the strongest year-over-year gain since June 2009.
While that’s certainly good news, it triggered more selling in the bond market on fears of higher inflation. The yield on the bellwether 10-year Treasury note ended the week at 2.84%, up 18 basis points on the week to its highest level since the beginning of 2014.The yield has climbed more than 40 bps so far this year. The 30-year bond closed at 3.09%, its highest level since last March. Rates have been rising as the economy strengthens. Last week the Atlanta Federal Reserve Bank’s GDPNow forecaster pegged the first quarter’s annualized growth rate at 5.4%, which would be the strongest pace since 2003 and double the previous quarter’s.
Yet the Federal Reserve left interest rates alone at last week’s monetary policy meeting, Janet Yellen’s last as Fed chair. “The labor market has continued to strengthen and economic activity has been rising at a solid rate,” the post-meeting announcement said. “Gains in employment, household spending, and business fixed investment have been solid, and the unemployment rate has stayed low. The Committee expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate.” Most observers take that to mean the Fed will raise rates at its next meeting in March, with two or possibly three more rate hikes to follow later this year.
The January jobs report was one of many economic indicators released last week. Personal-consumption expenditures rose 0.4% in December, as did personal income. The core PCE index, the Fed’s main inflation indicator, rose 0.2% for the month and 1.7% for the full year, still below the Fed’s 2% target rate. The Conference Board’s consumer confidence index began the new year at 125.4, up more than two points from its December reading of 123.1, which was revised upward by a full point. Likewise, the University of Michigan’s consumer sentiment index ended January at 95.7, up more than a point from the mid-month reading. January auto sales disappointed, rising 1% to 1.2 million for the month while the annual pace fell to 17.1 million from 17.4 million a year earlier. The Institute for Supply Management’s manufacturing index was basically unchanged last month at a strong 59.1, while the government said December factory orders rose 1.7% for the second straight month. Pending home sales for December rose 0.5% compared to both a month and a year earlier.
Reports/dates/facts/links worth paying attention to over the next week:
1. February 5: Institute for Supply Management non-manufacturing index for January.
2. February 7: Consumer credit for December.
3. February 8: Weekly unemployment claims.