Monday 5th February 2018
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Following a sharp drop on Wall Street and a surge in bond yields on heightened concern about the outlook for inflation and interest rates, investors will eye speeches from a slew of Federal Reserve officials for fresh clues.
Earnings season, which so far has offered a more upbeat outlook than expected, continues with companies including Sysco, Bristol-Myers Squibb, Walt Disney, Yum Brands, Nvidia, and Kellogg scheduled to release their latest results.
Markets sank on Friday after the latest US jobs and wages data fuelled concern that inflation will accelerate faster than expected. The US dollar rose.
A Labor Department report showed US employers added 200,000 jobs in January, while the jobless rate held at a 17-year low, and average hourly earnings increased 2.9 percent from a year earlier, the biggest gain since June 2009 and exceeding economists’ expectations.
“The gain in wages will add to concerns that inflationary pressures are building in the economy,” Michael Feroli, chief US economist at JPMorgan Chase, told Bloomberg. “It solidifies expectations that the Fed will hike in March. The question is, what will they signal for hikes after that?”
On Friday, the yield on the 10-year Treasury note climbed above 2.85 percent for the first time in four years. The ascent in yields sent Wall Street lower — the Dow Jones Industrial Average slid 2.5 percent, the Standard & Poor’s 500 Index dropped 2.1 percent, while the Nasdaq Composite Index retreated 2 percent.
“One of the key mantras of the bull market has been stocks are inexpensive relative to bonds, and bonds are getting cheaper, especially at these highs,” Michael O‘Rourke, chief market strategist at JonesTrading in Greenwich, Connecticut, told Reuters. “So people are taking profits and they probably should be.”
For the week, the Dow sank 4.1 percent, the S&P 500 dropped 3.9 percent, while the Nasdaq shed 3.5 percent.
“It’s the turning point of volatility,” Jeffrey Schulze, chief investment strategist at Clearbridge Investments, which manages US$137 billion, told Bloomberg. “There’s a number of different dynamics this year that will make volatility more part of the equation than it has been in quite some time.”
“But it’s definitely not the end of the bull market,” Schulze noted. “In order to see the end of the bull market, you need to see the US go into a recession. We have an economic dashboard at Clearbridge, 12 variables that have done a very good job of foreshadowing an economic downturn. Out of the 12 variables, only one of them is flashing any type of caution.”
Fed officials slated to speak this week include James Bullard on Tuesday, William Dudley, Charles Evans and John Williams on Wednesday, as well as Robert Kaplan, Neel Kashkari and Esther George on Thursday.
The latest reports on the US economy will arrive in the form of the PMI services index and ISM non-manufacturing index, due today; international trade and JOLTS, due Tuesday; consumer credit, due Wednesday; weekly jobless claims, due Thursday; and wholesale trade, due Friday.
In Europe, the Stoxx 600 Index ended Friday with a 1.4 percent slide from the previous day’s close.
Investors will eye the Bank of England which is set to deliver a policy decision on Thursday.
“While we expect a May hike, it is likely too early for the Monetary Policy Committee to shift their message beyond neutral,” TD Securities said in a note. “New forecasts likely show stronger near-term growth and inflation, but longer-term forecasts risk downgrades as lower potential estimates drag on GDP while GBP weighs on 2019-20 inflation.”
Central bank policy makers in Australia and New Zealand are also set to gather this week, with decisions announced on Tuesday and Thursday respectively. No rate changes are expected.
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