March 03, 2017
Fed Hike Odds Soar
A review of the week's top global economic and corporate news.
For the week ending 3 March 2017
Global equities extended gains this week, and strong global manufacturing data suggested that economic momentum continues to improve. Yields on the 10-year US Treasury note rose strongly — to 2.49% from 2.32% — as investors moved to price in an interest rate increase from the US Federal Reserve. Despite growing economic optimism, oil prices fell this week on increased US inventories. West Texas Intermediate crude fell $1 per barrel to $53.00 this week while global Brent fell to $55.50 from $56.50. Volatility remains subdued, with the Chicago Board Options Exchange Volatility Index at 11.50.
Market prices in March Fed move
The week began with markets pricing in about a 50% chance of a hike in the federal funds rate at the Federal Open Market Committee meeting this month but ended with markets almost fully pricing in a quarter-percent hike. Hawkish comments from the troika of Fed chair Janet Yellen, Vice Chair Stanley Fischer and New York Fed president William Dudley helped seal expectations of a March hike.
Economic optimism continues to build
A sizable uptick in the closely watched ISM manufacturing purchasing managers’ index and a jump to a 15-year high in the Conference Board’s consumer confidence measure were two standout data points in the United States this week, keeping the reflation trade firmly on track. China’s PMI showed strength as well, though the eurozone’s and United Kingdom’s PMIs were less robust. However, economic sentiment in the eurozone reached a six-year high. Also notable in the eurozone this week was an energy-driven rise in inflation to near the European Central Bank’s 2% target. This is the first time consumer price inflation has reached the target in four years.
Fresh records for major indices
More records were broken this week as the reflation rally extended further. The Dow Jones Industrial Average closed above 21,000 for the first time on Wednesday, while the S&P 500 Index brushed 2,400. London’s FTSE 100 also closed at a record high on Wednesday, boosted in part by a weak pound.
Brexit process hits speed bump
Despite suffering a defeat in the House of Lords over the Brexit bill, UK prime minister Theresa May insists her timetable for triggering Article 50 will not be delayed. The Lords voted to amend the Brexit bill in order to force the government to guarantee the rights of citizens of the European Union living in the UK. The bill will now be referred back to the House of Commons, where May is expected push to reject the amendment.
Earnings season draws to a close
With 98% of companies reporting for the fourth quarter of 2016, the earnings growth rate for the S&P 500 is 4.9%. According to FactSet Research, the fourth quarter will mark the first time the index has seen year-over-year growth in earnings for two consecutive quarters since Q4 2014 and Q1 2015. Sales growth for Q4 is running at a 4.9% rate, according to FactSet. The 12-month forward P/E ratio is now 17.9%, which is above the 5- and 10-year average.
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Sources: MFS research; The Wall Street Journal; The Wall Street Journal Online; Bloomberg News; Financial Times; Forbes.com; CNNMoney.com; NBCNews.com.
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