Monday’s market gap underwent a brief bout of selling pressure on Tuesday and early Wednesday, but quickly resumed its upward climb. The S&P 500 Index closed lower on Friday but gained 1.6 percent on the week. An upward revision of fourth quarter GDP to 1.0 percent growth added to the week’s strong data.
The market continues to move in lockstep with energy. The Saudi-Russian deal to freeze production fell apart as expected, sending oil lower, but a draw on oil and gas inventory in the U.S. pushed prices higher, catching short sellers off guard. Oil prices jumped six percent in response and the stock rally resumed. Financials benefited as well, due to increased concerns about the impact of energy loans.
The Bureau of Economic Analysis raised its estimate of fourth quarter GDP growth to 1.0 percent on Friday. Stronger personal consumption, residential construction and government spending lifted the estimate. The BEA also released personal income and outlays for January, which showed inflation heating up. Although headline PCE inflation was only 0.1 percent for the month and 1.3 percent in the past year, core PCE increased 0.3 percent and climbed 1.7 percent in the past year.
Core PCE has fallen short for the Federal Reserve; the target range for the Fed is 2 percent to 3 percent. Last year, core PCE was 0.1 percent on average, an annual run rate of less than 2 percent. At 0.3 percent, prices would be at the upper end of the Fed’s target zone by late 2016, excluding any inflationary boost from energy. This could be an aberration, but core CPI is rising as well, suggesting inflationary pressures may be building. It is too early to say which way the data will move in coming months, but if the economy remains strong and oil prices rebound, this inflation data argues strongly in favor of multiple rate hikes in 2016. The financial sector rebounded as a result, with SPDR Financial (XLF) rising more than 1.1 percent on the news, well ahead of the S&P 500’s gain of about 0.3 percent. The U.S. dollar rallied as well, gaining nearly 1 percent on the euro, while gold dipped as much as $25 an ounce.
In global news, Bank of Finland Governor Erkki Liikanen reiterated that the European Central Bank was ready to enact additional policy measures if necessary to support the eurozone economy. On Wednesday, the president of the Richmond Federal Reserve, Jeffrey Lacker said he saw no signs of an imminent recession in the United States. He also presented a case for the Fed to raise interest rates again in 2016. The day prior, Federal Reserve Vice Chairman Stanley Fischer stated that the Fed had yet to determine what course of action it would take at its next meeting in March. There were also reports that the Bank of Japan would increase its quantitative easing. G20 finance ministers meeting in Shanghai indicated they were prepared to combat slowing growth in China, but there was no consensus on a policy course. The International Monetary Fund called for the G20 to consider a global stimulus package. With the U.S. economy already doing well, any global stimulus effort could accelerate both U.S. growth and inflation.
Aside from GDP and core PCE, there were several other key economic reports this week. On Monday, eurozone PMI came in at 52.7, its lowest reading in over a year. Existing home sales in January rose to six-month highs, but new home sales dropped 9.2 percent. The Richmond Fed manufacturing survey released Tuesday showed slowing growth in the Mid-Atlantic Region. On Thursday, unemployment claims were only slightly higher than last week’s data, which was expected. Durable goods orders jumped 4.9 percent in January, the most in 10 months and significantly higher than the expected 2.5 percent increase.
As for earnings, Europe’s largest banks reported mixed earnings. Shares of HSBC slid 3 percent after news of a surprise fourth quarter loss, Lloyd’s shares rose more than 13 percent after it reported an increase in earnings. In the U.S., retail earnings season was in full swing. Home Depot’s (HD) revenues and earnings per share beat expectations. The company also announced that it would raise its quarterly dividend by 17 percent. Shares climbed about 4 percent on the week. Lowe’s (LOW) also reported better-than-expected quarterly sales and raised its guidance for next quarter as well, though shares only saw a small gain. Target (TGT) reported earnings and sales were below consensus estimates, but strong guidance sent shares higher by 8 percent. Best Buy (BBY) released earnings and sales that were slightly higher than expectations. The company also announced a share buyback plan along with a special one-time dividend, pushing shares up about 9 percent on the week. SPDR Retail (XRT) was sitting on gains of 4 percent for the week in Friday trading. Overall, it was a very encouraging week for companies reporting earnings.