Economic data last week was highlighted by Thursday’s retail sales figures for January, which continued a trend that has persisted for several months of somewhat disappointing data on consumer spending. Despite the recent sluggish results, retail sales ex-gas and vehicles are still up 5.2% year-over-year. In our view, this is indicative of a domestic economy that is still on firm footing, although moderating from the strong growth experienced in the third quarter. Recent evidence that the labor market momentum is still intact, along with the continuing tailwind of low gas prices, should support some improvement in consumer spending in the coming months.
Investors are likely to remain fixated on the drama between Greece and the rest of the Eurozone in the coming weeks. Talks between the new leadership of Greece and Eurozone finance ministers stalled yesterday, temporarily creating volatility in global markets. Negotiations for Greece to receive an extension to its bailout package are expected to continue throughout the week ahead of the expiry of the current bailout loan on February 28.
For the week, the S&P 500 rose +2.02%, the Dow Jones Industrial Average added +1.09%, and the MSCI EAFE (developed international) gained +2.05%.
Here are the 3 stories this week that rose above the noise:
Is a June Rate Hike Coming? Traders Say One Thing, Economists Another
Economists and traders are at odds over the timing of the next Federal Reserve rate hike. Economists generally believe that the Fed will likely raise its key federal funds rate in June, given the strong state of the U.S. economic recovery and the labor market. Traders don’t agree, pointing to current market dynamics such as Fed funds futures, which are implying just a 20 percent chance of a rate hike in June.
Additionally, the markets overall don't seem to be pricing in a great deal of bad news as stocks continue to trade at record highs. All eyes will be on this Wednesday’s Fed release of their last policy meeting minutes, looking for potential hints to a June rate hike. If so, this hint could cause bond prices to get hit hard (rising rates move inversely to bond prices) and in turn have a negative impact on stock prices.
Markets Show Little Panic on Greece
U.S. stocks fluctuated, the euro strengthened and declines in Greek bonds failed to push yields to record highs as markets showed little panic after talks between Greece and its creditors broke down. Moreover, Spanish and Italian 10-year Treasury bond rates remain below U.S. 10-year Treasury bond yields as investors are showing little concern over potential fallout from Greece’s impasse.
Greece has until the end of this week to request an extension of its bailout program. Without a deal, the government could run out of money by March and be forced to choose between breaking election promises or abandoning the euro. For now, the market is clearly betting on a solution being found.
Japan Economy Makes Meek Exit from Recession
Japan was able to escape its recent recession in the final quarter of 2014, but GDP growth was well below expectations. Japan’s economy grew at a 2.2 percent annualized rate vs. the consensus expectation for 3.6 percent growth. The final quarter was disappointing for Japan’s economy, but Japan finally emerged out of its recession and there are signs that consumer sentiment is picking up, which should aid the recovery.
Japan’s economy fell into a six-month contraction following a large sales-tax increase last April. The Bank of Japan (BOJ) implemented a massive quantitative easing program in an attempt to spur growth and inflation following several years of stagnant growth and deflation. However, Japan’s economy continues to stagnate and inflation remains below the BOJ’s 2 percent target.
Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team. First Allied Asset Management provides investment management and advisory services to a number of programs sponsored by First Allied Securities and First Allied Advisory Services. First Allied Asset Management individuals who provide investment management services are not associated persons with any broker-dealer.
International investing involves additional risk, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification.
