Stocks rebounded sharply last week following two of their worst weeks in years.
In the U.S, both the Dow and the S&P 500 gained 4.4% while NASDAQ jumped 5.4% despite ending Friday largely unchanged. All three indexes are now back in the green for the year-to-date but remain in the red for the month. Last week’s gains were the Dow’s best since the week before the 2016 presidential election, while the S&P and NASDAQ had their best weeks since 2013 and 2011, respectively. The snapback in stocks was global, although most of the major equity indexes outside the U.S. remain negative for both the year and the month. Hong Kong stocks jumped more than 5% while euro zone stocks gained 3.3%. Volatility also settled down, as the CBOE’s VIX index fell by a third after climbing nearly 70% the previous week.
The equity markets easily passed a big test on Wednesday, when the U.S. consumer price index for January came in much higher than expected, indicating that inflation is heating up. The CPI jumped 0.5% versus the month before and 2.1% compared to a year earlier, while the core rate, excluding food and energy prices, rose 0.3% and 1.8%, respectively. Producer prices, released the next day, showed similar increases, with the core rates up 0.4% and 2.2%. That pushed up interest rates, with the yield on the 10-year Treasury note climbing more than 10 basis points immediately after the CPI release to 2.93%, a four-year high. Yet that had little effect on stock prices, which continued to rise, and by the end of the week bond yields had settled down as well, with the 10-year yield falling back to 2.87% by Friday, just two bps higher than where it started the week. But shorter-term yields were sharply higher, as the two-year note climbed 12 bps on the week to 2.19%. Apparently, investors are realizing that higher inflation and interest rates are simply an inevitable byproduct of stronger economic growth. The bond market may also have gotten a lift from a report showing that China – the biggest non-American holder – increased its holdings of U.S. government bonds by $126.5 billion in December to $1.18 trillion, the most since 2010. Earlier reports – now shown to be overblown – had indicated that the Chinese might be looking to pare back their holdings of U.S. debt, which might have put upward pressure on U.S. rates.
Still, outside of inflation, economic statistics released last week were a mixed bag. Retail sales dropped 0.3% last month, the biggest decline in nearly a year and well below the consensus forecast of a 0.3% increase, while December’s number was revised sharply downward to show no change versus the 0.4% rise originally reported. Industrial production also fell shy of estimates, falling 0.1%; likewise, December’s originally reported 0.9% increase was revised downward to a 0.4% gain. But housing numbers were strong. Housing starts jumped nearly 10% last month to an annual rate of 1.326 million units, well above forecasts. The number was skewed a bit by a 24% rise in multifamily starts, but single-family starts, by far the biggest category, also rose by 3.7%. Permits, a forward indicator, rose 7.4%. The National Association of Home Builders housing market index for February was unchanged at a strong 72.
Reports/dates/facts/links worth paying attention to over the next week:
1. February 19: U.S. financial markets closed for Presidents Day.
2. February 21: Existing home sales for January; the minutes of the Federal Reserve’s January 30-31 meeting are released.
3. February 22: Weekly unemployment claims; leading economic indicators for January.
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