Global stocks had one of their worst weeks in years last week, dragged down by fears of an escalating trade war, higher interest rates, and a big drop in shares of Facebook, one of the tech sector’s highest flyers.
U.S. stocks took the biggest losses, led by NASDAQ, which dropped 6.5%. The index was hauled down by a nearly 14% decline in FB, which came under sharp criticism for its failure to protect its users’ data. That pulled down the entire tech sector, which has been the main engine behind the surge in stock prices for at least the past two years. Info tech stocks in the S&P 500 were down nearly 8% for the week. The Dow fell 5.7% and the S&P 500 lost 6.0%. The VIX volatility index soared more than 57% on the week, with most of the increase occurring on Thursday and Friday. Year to date, the Dow is down 4.8% and the S&P is off 3.2%, while NASDAQ is holding onto a 1.3% gain.
The story in overseas markets was only slightly better. Japan’s Nikkei 225 dropped nearly 5% for the week while Shanghai and Hong Kong were both down more than 3.5% as President Trump escalated his harsh talk on alleged Chinese cheating on trade with the U.S. European stocks weren’t immune from the carnage, with the Stoxx Europe 600 down more than 3% and Germany’s DAX index off more than 4%. Bonds benefited as a safe haven asset, with prices on U.S. Treasury securities rising enough to lower yields about 2-4 basis points across the maturity spectrum.
As expected, the Federal Reserve raised the federal funds rate by a quarter percentage point last week while indicating a more hawkish stance going forward. The rate increase, the sixth one since December 2015, moved the fed funds rate to a range between 1.5% and 1.75%. All eight voting members voted for the increase. At the same time, the materials released after the meeting showed that nearly half of the 15 members of the Fed’s monetary policy committee – only eight of whom have votes – believe the Fed will need to raise rates three more times this year, compared to only a quarter of the participants at its meeting in December. Three more rate hikes are likely next year and two more in 2020, which would boost the fed funds rate to a range of 3.25% to 3.5%. Although the post-meeting statement described U.S. economic activity as “moderate,” versus “solid” at the January meeting, it did say that “the economic outlook has strengthened in recent months.” Despite concerns that higher rates may choke off the recovery, “raising rates too slowly would raise the risk that monetary policy would need to tighten abruptly down the road, which could jeopardize the economic expansion,” Jerome Powell said at his first post-meeting press conference since becoming Fed chair. The Fed raised its forecast for 2018 GDP growth to 2.7% this year, up from its 2.5% forecast in December, and to 2.4% from 2.1% for next year.
Economic reports for February released last week echoed the Fed’s positive outlook. The Conference Board’s index ofleading economic indicators rose 0.6% last month, well above Street expectations, after rising 0.8% in January. The index “points to robust economic growth throughout 2018. Its six-month growth rate has not been this high since the first quarter of 2011,” the firm said. Durable goods orders also outperformed forecasts. The headline number showed a 3.1% increase while orders excluding the volatile transportation sector rose 1.2%. Core capital goods, a proxy for business investment, climbed 1.8%, well ahead of forecasts. In housing, sales of existing homes rebounded 3.0% to an annual rate of 5.54 million after falling in each of the previous two months. Sales of newly-built homes dipped 0.6% to 620,000, slightly below forecasts.
Reports/dates/facts/links worth paying attention to over the next week:
1. March 26: Chicago Fed national activity index for February.
2. March 27: Conference Board consumer confidence index for March; S&P Corelogic Case-Shiller home price indexes for January.
3. March 28: Fourth quarter GDP, final revision; pending home sales for February.
4. March 29: Weekly unemployment claims; personal income and outlays for February; University of Michigan consumer sentiment index for March, second reading.
5. March 30: U.S. financial markets closed for Good Friday.
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