Updated: 02-08-2016

Miscellaneous Thoughts on Week
Updated: 05-Feb-16  05:08PM ET
Analyst: David Kelland

This week began with a rejection of last Friday's rally in equities and it ended on a sour note too. There can always be short squeezes, but we are wary of doing long-term buying in stocks because we think they can be had cheaper. Volatility is low, strategists are treating it as a buying opportunity (it is, in the long run), and we are below all of the major moving averages (the 200-day in particuarly)

Again, we have the chart of the S&P 500 and its bull market (2009-2015) uptrend has been broken and tested as resistance (see chart 1). This matters for fixed-income investors because, per comments from PIMCO and Goldman Sachs this week, many investors think that the Treasury market has gotten way ahead of itself. Given the small amount of economic deterioration in the U.S., I tend to agree. But, markets can overshoot and further stress in stocks may erode business confidence further or simply create panic buying in Treasuries. I would still like to see the 10-year move further below its downtrend or get above it (~1.90%) before betting on higher rates (see chart 2).

We also had some FOMC members speak publicly this week. Loretta Mester of the Cleveland Fed and Esther George of the Kansas City Fed both said that their outlooks have changed little following January's financial market stress. They are both inflation hawks and this came as little surprise. Mester, George, and St. Louis Fed President James Bullard make up the hawkish wing of the FOMC and they are unlikely to be swing voters if push comes to shove on a battle over whether to hike rates within the committee. Bullard, striking a more moderate tone, said in January that the 'substantial' decline in oil prices would have implications for Fed policy and cause inflation to take longer to reach the Fed's 2% target.

Vice Fed Chair Stanley Fischer spoke with Bloomberg's Tom Keene this week and said the following:

If [January's financial volatility] leads to a persistent tightening of financial conditions, it could signal a slowing in the global economy that could affect growth and inflation in the United States. But we have seen similar periods of volatility in recent years that have left little permanent imprint on the economy.

In this quote, Fischer sounds confident about the real economy's ability to withstand financial shocks and he is considered to be very close to Fed Chair Yellen. So, the three hawks, plus Fischer and Yellen and one other person would make six and be enough to hike rates. The next marginal voter would likely be Fed Governor Jerome Powell. So these three FOMC members -- Fischer, Yellen, and Powell -- should be watched for their public remarks on the appropriateness of another rate hike. To be clear, markets are not expecting a rate hike any time soon.

New York Fed President Dudley, who tends to be a moderate dove, spoke this week and said that financial conditions had tightened and that additional strength in the U.S. dollar could have 'significant consequences' for the U.S. economy. FX traders rapidly solved that problem and sent the U.S. Dollar Index down 1.5% that day. I think this move in the dollar may have legs because it has broken out from a tight range and sentiment was awfully bullish on the dollar late in 2015, but that remains a guess. The uptrend of the dollar bull market is broken, for now at least, and the index found resistance today at the bottom of the November-January range (chart 3)

  • Chart 1: S&P 500 (Weekly)

 

  • Chart 2: 10-Year Yield (Daily)

 

  • Chart 3: U.S. Dollar Index 

- David Kelland, Briefing.com

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