Investors across the globe shed stocks for the third consecutive week amidst a high level of volatility as they grapple with the escalating geopolitical tensions in the Middle East and a lackluster labor market in the U.S. Investors will now turn their attention to the Fed meeting this coming week, a meeting which was once viewed as one where the Fed might be able to cut rates to one where the Fed might highlight the potential stickiness of inflation should the recent spike in oil prices last longer than expected.
On the fixed income side, yields moved higher as the potential for interest rates to remain higher for longer grew. We would use this weakness in fixed income to lengthen maturities a bit.
· The U.S. Dollar rose to its highest level this year, as both domestic and foreign investors seek a safe haven amidst this period of global uncertainty. The U.S. dollar, the global reserve currency has historically been attractive during times like these due to the deep pool of liquidity as well as credit worthiness compared to other choices.
· The yield on the 10-year U.S. Treasury Note rose to 4.28% from 4.15% the prior week, as concerns grew that the recent oil driven inflation which has pushed the price of a gallon of gas up by $0.50 to $3.50 is going to hang around. This in turn makes it less likely that, despite the weakness in the labor market, the Fed will cut interest rates.
· The Trump Administration initiated the first drawdown from the recently authorized 172 million barrels from the Strategic Petroleum Reserve. This initial block is expected to begin hitting the market by the end of this coming week, take approximately four months to complete in its entirety and is part of a multi-nation 400-million-barrel depletion. The additional supply is intended to curb the rise in fuel costs as the price of oil has risen more than fifty percent and now hovers around $100 per barrel, this since the start of the War in Iran. (Source; Bloomberg).
· During a press conference in Florida this past week, referring to Cuba, President Trump stated that “it may be a friendly takeover, it may not be a friendly takeover. It wouldn’t matter because they’re really down to, as they say, fumes.” Friday, Cuban President Miguel Diaz-Canel confirmed that their government has entered into talks with the U.S. Government, overseen by Secretary of State Marco Rubio, aimed at resolving “bilateral differences.”
· Despite the downdraft this past week, it is important to maintain your long-term focus, as events such as these tend to cause a high level of anxiety, but historically are short-lived, with limited impact on the market. We believe what will be of impact would be to respond by changing your well-designed asset allocation model substantially. If you must move for peace of mind, do so incrementally.
It’s The Economy…”
· Fourth Quarter Gross Domestic Product (first revision), as reported by the Commerce Department, a tally of the output of all goods and services in the United States, rose at a revised annualized rate of 0.7% (2.1% y/y), one half the initial estimate and a sharp drop from 4.4% recorded during Q3. Real Final Sales to Domestic Purchasers rose at a revised 1.9%, down from an initial estimate of 2.4% and below the pace of 2.8% during the prior quarter. Government Spending (Government Consumption Expenditures and Gross Investment), as a result of the government shutdown, fell 16.7% during Q4, a sharp downward revision from the initial 5.1% drop, after rising 2.2% Q3. The GDP Chain Price Index rose at an annual rate of 3.8% (SAAR), revised up by 0.1%, after rising 3.8% during Q3. The PCE Price Index rose at an unrevised annual rate of 2.9% after climbing 2.8% during Q3. The PCE Price Index Excluding Food and Energy rose at an unrevised SAAR of 2.7% during Q4, a slight improvement from 2.9% during the prior quarter. (Source, U.S. Bureau of Economic Analysis)
· The Bureau of Economic Analysis reported that Personal Income that personal income increased by $113.8 billion, or 0.4 percent during January. This growth was primarily driven by higher compensation, personal dividend income, and Social Security cost-of-living adjustments. Disposable Personal Income saw a more significant rise of 0.9 percent, which translates to a 0.7 percent increase when adjusted for inflation. Consumer spending, or Personal Consumption Expenditures, grew by $81.1 billion. However, this reflected a sharp divide between sectors; while service spending rose by $105.7 billion due to healthcare and housing costs, spending on goods fell by $24.6 billion, largely because of a decrease in motor vehicle purchases. When accounting for price changes, real consumer spending edged up by only 0.1 percent. Inflation remains a key factor, as the PCE Price Index rose 0.3 percent for the month and 2.8 percent year-over-year. The core index, which excludes volatile food and energy costs, showed a 3.1 percent increase from the previous year. Amidst these shifts, the Personal Saving Rate improved to 4.5 percent of disposable income, up from 4.0 percent in December.
· Housing Starts rose 7.2% or by 100,000 to a seasonally adjusted annualized rate (SAAR) of 1,487,000 during January as compared to 1,387,000 in December (9.5% y/y). A study completed by Freddie Mac in 2018 estimates that there must be 1.6 million units build annually to account for household growth and to replace existing stock. During January, Single-family housing starts fell 2.8% or 27,000 to 935,000 from 962,000 (-6.5% y/y). Meanwhile, Multifamily housing starts surged 29.9% to 552,000 in January (54.2% y/y) from 425,000 during January. Building Permits, a key barometer for future starts, fell 81,000 to 1,376,000 in January as compared to 1.455 during December (-5.8% y/y). (Source, U.S. Census Bureau)
· Inflation at the Retail Level as measured by the Consumer Price Index rose 0.3% during February (2.4% y/y), after rising 0 2% during January. The CPI has fallen from a y/y high of 9.1% during June 2022 but remains elevated relative to the Fed’s 2.0% target. Energy prices rose 0.6% during February (0.5% y/y) after falling 1.5% in January. Food at home prices rose 0.4% (2.4% y/y) during February after increasing 0.2% in January. The cost of shelter rose 0.2% during February (3.0% y/y), after rising 0.2% during January. Excluding food and energy, the core CPI rose 0.2%, after rising by 0.3% during January. Over the past year the core CPI has risen 2.5%, well below the September 2022 peak of 6.6%. (Source, U.S. Bureau of Labor Statistics)
Economic Reports scheduled to be released this week, include the following – on Monday, February Industrial Production and Capacity Utilization; on Wednesday, February Wholesale Price Inflation as measured by the Producer Price Index (PPI), January Factory Orders and January Orders for Durable Goods; on Thursday, Initial Claims for Unemployment Benefits, January New Home Sales and January Wholesale Inventories.
Several potentially market moving companies are scheduled to report earnings, to include Dollar Tree (DLTR), lululemon athletica (LULU), Jabil (JBL), Micron Technology (MU), General Mills (GIS), Williams-Sonoma (WSM), Alibaba Group (BABA), Accenture (ACN), FedEx (FDX), Darden Restaurants (DRI) and Carnival Cruise (CCL).
