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Week in Review: Fed Leaves Its Options Open

For the week ended 29 April 2016

  • Fed leaves rates unchanged, notes slowing growth, downgrades global concerns
  • Bank of Japan declines to boost monetary stimulus; yen soars
  • US continues weak Q1 GDP trend
  • Eurozone growth beats expectations but inflation still falling

Global equities fell this week, led by Japanese shares as a soaring yen induced risk aversion. The Chicago Board Options Exchange Volatility Index (VIX) rose on the week from 13.95 to 16.26, while the yield on the 10-year US Treasury note held steady at 1.85%. West Texas Intermediate crude prices rose to $46.22 from $43.39 a week ago, and global Brent crude prices rose to $48.11 from $44.53.

GLOBAL ECONOMIC NEWS

Fed kicks can down road
The US Federal Reserve's Federal Open Market Committee made no move on interest rates this week and sent mixed signals on the timing of its next hike. It removed a reference to global economic and financial developments from the first paragraph of its statement, which some interpreted as a hawkish sign. But the Fed highlighted that while labor markets have continued to improve, economic activity appears to have slowed. There are seven weeks until the next FOMC meeting in June, so the committee will have plenty of data to digest before it meets to set rates again.

Markets disappointed by BOJ inaction
Japanese shares tumbled and the yen soared against major currencies as the Bank of Japan declined to add additional monetary stimulus despite slumping inflation data and a strong yen. The Japanese core consumer price index fell 0.3% in March, the largest decline since the latest easing cycle began three years ago.

Another year, another weak first quarter
US gross domestic product rose just 0.5% in the first quarter, the third consecutive anemic start to a new year. Poor Q1 growth in the prior two years was blamed on severe winter weather but this winter was seasonal across most of the country. Sluggish net exports and weak corporate profits were notable developments this quarter.

Eurozone growth picks up but inflation continues decline
The eurozone economy grew by 1.6% year over year in the first quarter, the same rate of growth as the final quarter of 2015. Inflation failed to keep pace, however, sliding 0.2% year over year while core inflation rose 0.8%. Falling inflation will keep the pressure on the European Central Bank to seek novel ways to spur growth and inflation.

Saudi Arabia unveils plan to lessen reliance on oil exports
A new plan from Saudi Arabia known as Vision 2030 calls for the floatation of a stake in Saudi Aramco, the state oil producer. Proceeds from asset sales, as well as other state-owned assets, will be held in a sovereign wealth fund worth as much as $2 trillion. The plan also calls for the establishment of a domestic defense industry. Saudi Arabia currently procures virtually all of its weaponry from abroad.

UK growth steady but Brexit may prompt near-term dip
GDP growth in the United Kingdom held steady at 2.1% year over year in the first quarter but economists are concerned that growth could slow in the second quarter, ahead of the 23 June Brexit referendum. Any near-term growth slowdown is expected to correct itself in Q3, no matter the outcome of the vote on whether Britain should remain in the European Union.

Spain to go back to polls
After spending five months trying to form a government in the wake of an inconclusive general election last year, Spain will return to the polls in late June. A caretaker government led by Prime Minister Mariano Rajoy has been in place and will continue to govern in the interim. Despite the political vacuum, Spanish growth has continued to rebound, surging at a 3.4% annual rate in the first quarter.

GLOBAL CORPORATE NEWS

And then there were two
Credit rating agency Standard and Poor's stripped Exxon Mobil of its AAA credit rating this week, leaving just two US-based corporations with the agency's highest rating. The last AAA names are Microsoft and Johnson & Johnson. Exxon Mobil is now rated AA+, with a stable outlook.

Unilever gives new meaning to term "zero coupon bond"
Anglo-Dutch consumer products maker Unilever issued €300 million of four-year securities, yielding 0.08%, and won't carry a coupon. European corporate debt has rallied in anticipation of the ECB buying corporate bonds starting in June.

Three pharma deals this week
Three pharmaceutical companies made deals this week totaling a combined $45 billion, including Abbott's $30 billion takeover of St Jude Medical, AbbVie's announced deal to acquire Stemcentrx for $5.8 billion and Sanofi's $9.3 billion bid for Medivation.

Comcast to buy Dreamworks Animation
Dreamworks Animation, which produced Shrek and Kung Fu Panda, will be folded into Comcast's Universal unit. The deal is worth $3.8 billion.

THE WEEK AHEAD

  • Manufacturing purchasing managers' indices are globally released Monday, 2 May
  • Service sector PMIs are released globally on Wednesday, 4 May
  • Eurozone retail sales are reported on Wednesday, 4 May
  • US employment data are released on Friday, 6 May

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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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