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Week in Review: Markets react to central bank actions, US job gains

For the week ended 6 March 2015

  • US adds 295,000 jobs, unemployment rate falls to 5.5%
  • US economic measures mixed
  • Asian, European central banks add stimulus
  • China lowers growth forecast to 7%
  • UK, Canadian economies pick up

Central bank action punctuated volatile markets this week. European stocks were pushed higher when the European Central Bank (ECB) confirmed that it would begin a €1 trillion program of quantitative easing next Monday. Rate cuts in India and China showed the determination of these policymakers to revive their economies.

A surprisingly strong February US employment report, including a drop in the jobless rate to 5.5%, was seen as increasing the chance that the US Federal Reserve would begin to raise interest rates in June. US stocks retreated on the news.

The US dollar strengthened to an 11-year high against major currencies. Oil price volatility continued as US crude oil supplies grew to a record. The yield on 10-year US Treasury notes closed around 2.25% on Friday after starting the week at 2.0%.

US and global economic news

US payrolls add 295,000 and jobless rate falls to 5.5%
The US economy added 295,000 jobs in February, the 12th month of payroll gains above 200,000, for the longest stretch in 20 years. Economists had forecast an increase of 240,000. The unemployment rate fell to 5.5%, a 6½-year low, from 5.7% in January. However, wage growth was negligible, with average hourly earnings up only three cents.

US economic gauges mixed

  • Markit’s US manufacturing purchasing managers’ index (PMI) rose to a 4-month high in February, while the Institute for Supply Management’s index fell to a 13-month low.
  • The ISM services index rose slightly to 56.9 in February from 56.7 in January.
  • Productivity fell at a 2.2% annual rate in the fourth quarter while labor costs rose at a 4.1% rate. Analysts considered these changes to be temporary and not indicative of inflationary trends.
  • US auto sales fell in February, as frigid weather dissuaded shoppers. Sales of SUVs and trucks rose broadly, however, fueled by lower gasoline prices and easier access to credit.
  • The US trade deficit narrowed to $41.75 billion in January as the value of crude oil imports fell. Exports decreased 2.9% from December, and imports fell 3.9%.

US jobless claims rise to 320,000
Initial claims for US unemployment benefits rose 7,000 to 320,000 for the week ended 28 February. The four-week moving average climbed 10,250 to 304,750. Continuing claims for unemployment benefits increased by 17,000 to 2.42 million for the week ended 21 February.

Central banks take action
China’s central bank lowered its one-year interest rates by 0.25 percentage point to 5.35% for loans and 2.5% for deposits, citing the deflationary pressures of lower commodity prices. In a surprise move, India’s central bank cut its key lending rate for banks. The ECB provided details of its government bond-buying program of €60 billion per month beginning on 9 March.

China lowers growth target to 7%
China announced a growth target around 7% for 2015, down from 7.5% last year and the lowest in 25 years. Acknowledging the pressures faced by the world’s second-largest economy, the government plans this year’s budget deficit to be its biggest since the global financial crisis.

China’s new-home prices fall, manufacturing rises
China’s new-home prices fell 0.2% in February, reversing January’s rise. The Lunar New Year holiday is typically a period of slow demand for homes. Average new-home prices were 3.8% lower for the year. The HSBC China manufacturing PMI rose to 50.7 in February from 49.7 in January, though export demand remained weak.

Eurozone economic activity improves
The eurozone economy expanded 0.3% in the fourth quarter and 0.9% from a year ago. The ECB revised its forecast for GDP growth to 1.5% this year, 1.9% in 2016 and 2.1% in 2017. The eurozone composite PMI rose to a seven-month high of 53.3 in February, the 20th month above the threshold of 50 that indicates expansion.

UK manufacturing expands
UK manufacturing activity increased more than expected in February to its highest level in seven months. Domestic strength offset weakness in the United Kingdom’s key export markets.

Canada’s economy grows 2.4%
Canada’s economy expanded at a 2.4% annualized pace in the fourth quarter, faster than the forecast 2.0%. An inventory buildup contributed to the gain.

US and global corporate news

AbbVie to buy Pharmacyclics for $21 billion
Pharmaceutical firm AbbVie said it will buy cancer-fighting biotechnology company Pharmacyclics for $21 billion to diversify its business and lessen its heavy reliance on Humira, a blockbuster drug for rheumatoid arthritis. AbbVie’s attempted acquisition of Irish drug company Shire PLC was called off last year after the US government deterred such tax-lowering deals.

Best Buy buys back shares
Big box electronics retail chain Best Buy announced a share buyback — the first since 2012 — and a 21% increase to its quarterly dividend, as well as a special dividend after better-than-expected fourth-quarter profit. US online sales soared 9.7%, and same-store sales were up 2.8% in the United States, but down 4.2% internationally.

The week ahead

  • China’s consumer and producer price indices are reported on Monday, 9 March.
  • Japan’s producer price index and machine orders are released on Tuesday, 10 March.
  • China’s industrial production and retail sales are reported on Wednesday, 11 March.
  • US retail sales are released on Thursday, 12 March.
  • US consumer sentiment is reported on Friday, 13 March.

Stay focused and diversified
In any market environment, we strongly believe that investors should stay diversified across a variety of asset classes. By working closely with your financial advisor, you can help ensure that your portfolio is properly diversified and that your financial plan supports your long-term goals, time horizon and tolerance for risk. Diversification does not guarantee a profit or protect against loss.

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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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