U.S. stocks closed mixed last week after falling slightly on Friday after Federal Reserve Chair Janet Yellen said it “will be appropriate” to start raising interest rates later this year, assuming the economy cooperates.
The S&P 500 returned 0.2% for the week while the Dow Jones Industrial Average lost 0.1%. Tech and small-cap stocks did better, as they have so far this year, with NASDAQ gaining 0.9% and the Russell 2000 rising 0.7%. Bond prices were lower for the week, with yields on the long end rising 5-6 basis points.
The Fed indicated that it won’t start raising interest rates at its next meeting in June, but an increase before the end of the year is looking more likely. On Wednesday, the minutes of the Fed’s April 28-29 monetary policy meeting revealed that while the Fed “did not rule” out the possibility of raising rates at its June 16-17 meeting, it was “unlikely” that economic data “would provide sufficient confirmation” to justify doing so by then. Then, in a speech on Friday, Yellen said, “If the economy continues to improve as I expect, I think it will be appropriate at some point this year to take the initial step to raise the federal funds rate,” adding that “the pace of normalization is likely to be gradual.”
Last week’s U.S. economic reports didn’t provide much evidence to justify Yellen’s expectations. The Conference Board’s index of leading economic indicators rose an unexpectedly strong 0.7% in April, the biggest increase in nine months, while March was revised upward to 0.4%. But that was offset by another negative reading in the Chicago Fed’s national activity index, which came in at -0.15, although slightly better than March’s -0.36 reading; the index has been in minus territory every month this year. Housing industry indicators were likewise mixed. Housing starts jumped more than 20% in April to an annual rate of 1.135 million units, the highest level since November 2007, while permits climbed 10% to 1.43 million, the most since June 2008. But existing home sales fell 3.3% to just over five million annual units, missing estimates.
European stocks closed modestly lower on Friday but up strongly for the week, while yields on German bunds fell for the first time in over a month. The broad-based Stoxx Europe 600 rose 2.9% for the week while Germany’s DAX index gained over 3%. The yield on the benchmark German 10-year government bund fell two basis points to 0.61%. Euro zone markets got a boost last Tuesday after a member of the European Central Bank’s executive board said the bank would increase purchases of sovereign bonds under its quantitative-easing program this month and next in anticipation of less market liquidity in the summer. That also drove down the value of the euro, which fell 4% against the dollar last week to end the week at about $1.10, its lowest level since the end of April.
After gaining nearly 3% last Friday, China’s Shanghai composite index ended the week more than 8% higher last week, closing at a new seven-year high. The index is now up more than 44% so far this year and 138% over the past 52 weeks. On Thursday the HSBC/Markit manufacturing sector PMI fell for the third straight month, remaining well below expansion territory, which sparked renewed optimism that the government will add more stimulus measures. During the week the country’s state-planning agency did approve a nearly $40 billion rail project. Japanese stocks also did well last week, as the Nikkei 225 gained 2.7% to raise its year-to-date increase to 17% in local currency. Japan’s GDP grew at an annualized rate of 2.4% in the first quarter, the steepest increase in a year and well above expectations. In addition, the Bank of Japan voted to continue its asset purchase program. Indian stocks were also higher for the week, rising 2.3%, while Hong Kong stocks rose modestly.
Reports/dates/facts/links worth paying attention to over the next week:
- May 26: Durable goods orders for April; new home sales for April; S&P/Case-Shiller home price indexes for March; Conference Board consumer confidence index for May.
- May 28: Weekly unemployment claims; pending home sales for April.
- May 29: First quarter GDP, first revision; University of Michigan consumer sentiment index for May; Chicago PMI for May.
Copyright © 2015 by Wright Investors’ Service, Inc. The views expressed in this blog reflect those of Wright Investors’ Service, Inc. and are subject to change. Statements and opinions therein are based on sources of information believed to be accurate and reliable, but Wright Investors’ Service, Inc. makes no representations or guarantees as to the accuracy or completeness thereof. These views should not be relied upon as investment advice.