The Week In Review

2/26/16

The stock market ended an upbeat week with a hiccup as the implications of a hotter than expected core PCE reading (0.3%; Briefing.com consensus of 0.1%) augmented concerns regarding a sooner than expected Fed rate hike. Today's trade saw a continuation of oil and equities moving largely in tandem while the heavyweight financial sector (+0.9%) maintained its recent leadership role. The Nasdaq Composite (+0.2%) managed to finish ahead of the S&P 500 (-0.2$) and the Dow Jones Industrial Average (-0.3%).

The major averages slipped from their morning highs shortly after the hotter than expected Personal Income and Spending report was released. The data received a good deal of attention today as the PCE Index is the Fed's preferred inflation gauge, and this reading can be seen as supportive of further rate hikes. As a result, the economically-sensitive financial space (+0.7%) was able to remain ahead of the broader market and only trailed the materials space (+1.3%). Despite today's outperformance, the financial sector still shows the largest monthly loss (-2.1%) out of the ten economic sectors.

The commodity-sensitive materials and energy (+0.4%) groups enjoyed an early rally alongside crude oil this morning. However, that rally lost some momentum as the energy component struggled to maintain the height of its advance ($34.66/bbl). To be fair though, oil has jumped 3.2% since its pit close last Friday. As for today, WTI crude ended higher by 1.1% at $32.75/bbl.

The energy group pared most of its advance after oil slipped from its high, but independent oil and gas names were still able to top the sector. On that note, Apache (APA 39.47, +1.68) and ConocoPhillips (COP 34.12, +1.06) climbed a respective 4.5% and 3.2%. Interesting to note, both companies received downgrades from Moody's on their senior unsecured notes (to Baa3 and Baa2, respectively).

The influential technology sector (-0.3%), ended its day behind the broader market. Underperformance from sector-large caps contributed to the broader weakness as Microsoft (MSFT 51.30, -0.80) and Alphabet (GOOGL 724.86, -4.26) ended lower by 1.5% and 0.6%, respectively.

Meanwhile, health care (-0.2%) abandoned some early strength as large-caps also anchored that group. Conversely, biotechnology demonstrated relative strength with the iShares Nasdaq Biotechnology ETF (IBB 261.49, +2.17) climbing 0.8%. For the week, the ETF climbed 1.1%

Today's trade saw relative weakness among the countercyclical sectors with health care (-0.2%), telecom services (-0.4%), consumer staples (-1.4%), and utilities (-2.7%) all finishing behind the broader market.

The greenback strengthened today, evidenced by the 0.8% gain in the U.S. Dollar Index (98.09, +0.80). The euro/dollar pair finished at 1.0937 (-0.7%) while the dollar/yen rose to 113.94 (+0.9%).

The Treasury complex began its day broadly lower and remained largely range bound throughout the session. The yield on the 10-yr note managed to close off its high (1.78%), but remained up four basis points at 1.76%.

Today's participation was once again beneath the recent average with fewer than 1.005 billion shares changing hands at the NYSE floor.

Today's economic data included the the second estimate of Q4 GDP, PCE Prices for January, and the final reading of the February Michigan Sentiment Index:

The second estimate indicates fourth quarter GDP increased at an annual rate of 1.0% (Briefing.com consensus 0.4%) versus the advance estimate of 0.7%. The GDP Deflator was revised up to 0.9% (Briefing.com consensus 0.8%) from 0.8%.

The good is that fourth quarter GDP was revised up. The bad is that we're still only talking 1.0% growth. The upward revision was basically the result of private inventory investment decreasing less than previously estimated.

With the advance estimate, the change in inventories subtracted 0.45 percentage points from GDP growth, yet the second estimate showed a drag of only 0.14 percentage points.

The drag from net exports was also less as it subtracted 0.25 percentage points from GDP growth versus 0.47 percentage points in the advance estimate.

Personal spending saw a slight downward revision to 2.0% growth with the second estimate versus 2.2% in the advance estimate. That downtick was led by lower spending on durable and nondurable goods.

Final sales of domestic product, which exclude the change in private inventories, were unchanged at 1.2%.

The Personal Income and Spending report for January produced a slate of good economic news. Income increased 0.5% month-over-month (Briefing.com consensus +0.4%), spending increased 0.5% (Briefing.com consensus +0.3%), and the core PCE Price Index, which excludes food and energy, increased 0.3% (Briefing.com consensus +0.1%).

This compendium of data leans in the Fed's favor for rationalizing another rate hike. The pressing question is this: Might it be enough to prompt another rate increase at the March 15-16 FOMC meeting?

Time will tell, yet there was some key support offered for the Fed's inflation view and the notion that the Fed is making progress toward reaching its 2.0% inflation target (remember, progress toward, not actual achievement, is the guiding principle these days for the Fed).

To this end, the PCE Price Index is up 1.3% year-over-year versus 0.7% in December. The core PCE Price Index is now up 1.7% year-over-year versus 1.5% in December.

The January income gain flowed from increases in all income variables, paced by a 0.7% increase in rental income and a 0.6% gain in wages and salaries.

The personal spending gain, in turn, stemmed from increases in spending on both goods (+0.4%) and services (+0.6%). Durable goods spending was up 1.2% while nondurable goods spending was flat.

Real personal spending jumped 0.4%, which will be a positive input for first quarter GDP computations. The personal savings rate held steady at 5.2%.

The final reading for the University of Michigan Consumer Sentiment Index for February checked in at 91.7 (Briefing.com consensus 91.0) above the preliminary reading of 90.7.

The final reading for January was 92.0. The Sentiment Index is 6.5% below its cyclical peak of 98.1 in January 2015, which the report suggests hardly merits a recession warning.

For added perspective, the Sentiment Index hit a cyclical peak of 96.9 in January 2007 and then declined 27% to 70.8 in February 2008.

Relative to the final January reading, the Current Economic Conditions Index improved to 106.8 in February from 106.4. The Index of Consumer Expectations dipped to 81.9 from 82.7.

The release noted that consumers are a little more cautious about year-ahead prospects for the economy, but that the outlook for their personal financial situation has improved to its best level in ten years.

Currently, consumers think the the slowdown in GDP growth will only have a slight negative impact on jobs.

Keep in mind that the G20 Summit is taking place in Shanghai throughout the weekend.

Monday's economic data will include Chicago PMI for February (Briefing.com consensus 52.0) and Pending Home Sales for January (Briefing.com consensus +0.7%), which will be released at 9:45 ET and 10:00 ET, respectively.

Russell 2000 -8.4% YTD

Nasdaq -8.3% YTD

S&P 500 -4.7% YTD

Dow Jones -4.5% YTD

Week in Review: Stocks and Rate Hike Odds on the Rise

The stock market registered its second consecutive weekly advance with the S&P 500 climbing 1.6%. The benchmark index extended its two-week rally to 4.5%, turning its February loss to a 0.4% gain. The Nasdaq outpaced the benchmark index this week (+1.9%), but remains down 0.5% for the month.

To little surprise, this week's rally in equities occurred alongside a bid in the crude oil market, which sent the energy component higher by 3.2% to $32.75/bbl. Interestingly, the energy sector was among the weakest performers, climbing just 0.4% for the week.

Several reports suggested that equity investors were longing for some sort a coordinated intervention being agreed to at the weekend G-20 summit in Shanghai, but U.S. Treasury Secretary Jack Lew cautioned not to expect any sort of a crisis response outside of a commitment to fiscal reforms. On a related note, German Finance Minister Wolfgang Schaeuble said on Friday that the debt-financed growth model has reached its limits and that there is no shortage of policy proposals, but rather a lack of policy implementation.

The rally in equities hit a speed bump on Friday after the second revision to fourth quarter GDP (+1.0%; Briefing.com consensus 0.4%) and January Core PCE Prices (+0.3%; Briefing.com consensus 0.1%) strengthened the case for the Federal Reserve's rate hike argument. The PCE Price Index is the Fed's preferred inflation gauge and it followed hotter than expected January PPI (+0.1%; Briefing.com consensus -0.2%), core PPI (+0.4%; Briefing.com consensus 0.0%), CPI (0.0%; Briefing.com consensus -0.1%), and core CPI (+0.3%; Briefing.com consensus +0.1%) readings. As a result, the fed fund futures market saw a shift in rate hike expectations with the market now pricing in a 53.0% chance of the next hike in December after not expecting another hike until after February of 2017 prior to Friday's session.