Market Perspective for January 29, 2016

Central bank activity and a continued rebound in the oil market led to another volatile trading week.

The Fed’s two-day policy meeting temporarily paused Wednesday’s rally with the Open Market Reserve’s 2p.m. statement detailing December’s slower-than-expected growth and the Fed’s reluctance to increase rates in March. Core inflation may underlie the Fed’s wariness to raise rates. Core CPI, which excludes food and energy, is already running at 2 percent, at the bottom end of the Fed’s 2- to 3-percent target range. Core inflation is far stickier than headline inflation, which can bounce with volatile commodity markets. The Fed may have rate reservations with core inflation at 2 percent; if oil prices return to $50 a barrel in the next year, headline inflation could reach 4 percent or higher, pushing core inflation well into the Fed’s range.

Investors and speculators are understandably cautious. Inflation expectations are at their lowest since 2009 and speculators in the interest rate futures market don’t see the odds of a rate hike reaching 50 percent until February 2017. Opinions and data can change rapidly, but in the near term, the Fed’s hawkish stance understandably leads to a decline in asset prices when the market is expecting low inflation and no rate hikes.

Investors didn’t have to wait long for a pick-me-up following the Fed’s report. One week after claiming the Bank of Japan would do nothing at this week’s meeting, BOJ Governor Kuroda announced the bank would cut interest rates to negative 0.10 percent. This immediately sent global stock markets higher and the yen tumbling versus the U.S. dollar.

The stock market (along with high-yield bonds) also benefited from recovering oil prices. Only a week after falling below $27 a barrel, the price for a barrel of the benchmark West Texas Intermediate Crude rose as high as $34.82. Russia helped to propel prices after stating its potential willingness to work with the Organization of Petroleum Exporting Countries (OPEC) in cutting output levels.

Mixed earnings also contributed to the week’s volatility. Facebook (FB) rallied nearly 20 percent in the two days following a strong earnings announcement. This gain offset weakness in Apple (AAPL) and Amazon (AMZN), both of which fell on the week following disappointing earnings reports and guidance. AAPL missed key metrics for sales of iPhones, while AMZN reported poor holiday sales relative to expectations. Oil conglomerate Chevron (CVX) announced its first quarterly loss since 2002, but it wasn’t enough to dent the energy sector’s rally. The pharmaceutical and biotech spaces saw mixed results from Abbot Labs (ABT), Amgen (AMGN), Biogen (BIIB), Celgene (CELG) and Bristol-Myers Squibb (BMY). Some biotechnology funds were hurt by the Massachusetts attorney general, who threatened Gilead (GILD) with a lawsuit if it didn’t cut prices on its hepatitis-C drug. On Friday, Merck (MRK) proved the market has the solution to high prices: competition. The firm launched a price war aimed at Gilead and AbbVie (ABBV), who also produces a drug for hepatitis-C. Merck’s announcement sent shares of its stock higher, helping lift the pharma sector, while Gilead and AbbVie retreated.

Finally, the big economic news of the week came from the Bureau of Economic Analysis. The BEA announced its first estimate of 2015 fourth quarter GDP growth: 0.7 percent. A decline in durable goods orders helped pull the number lower than economists had expected at the start of the quarter. In other economic news, sales of new homes surged 10.8 percent in December, well ahead of expectations. The upturn in housing suggests GDP growth may be revised higher when the BEA announces the second estimate at the end of February.

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