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World Week Ahead: Bullishness abounds

Monday 8th January 2018

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Following a strong start to the new year for stocks on both sides of the Atlantic, investors will eye a slew of speeches by Federal Reserve officials as well as reports on US inflation and retail sales. 

Bullishness abounds for Wall Street, at record highs, as well as European equities. 

On Friday, the Dow Jones Industrial Average gained 0.9 percent, the Standard & Poor’s 500 Index rose 0.7 percent, while the Nasdaq Composite Index increased 0.8 percent. The three benchmarks each closed at record highs.

“This doesn’t mean the index will go straight up from here, but the economic fundamentals are strong enough to support the stocks,” Phil Orlando, chief equity strategist at Federated Investors, told Bloomberg. 

“Corporate earnings growth has been solid in the last nine months, we expect another double-digits in the fourth quarter,” Orlando noted. “The party is going to continue.”

For the week, shortened to four days by the New Year's Day holiday on Monday, the S&P 500 rallied 2.6 percent. 

Last Friday a Labor Department report showed the US added a lower-than-expected 148,000 jobs last month, down from a gain of 252,000 in November. The unemployment rate held steady at 4.1 percent.

On the bright side, average hourly earnings rose 0.3 percent in December, following a 0.1 percent increase in November. 

“We do not think that [Friday's] employment report will keep the Federal Reserve from tightening again at the March policy meeting, given other strong recent economic data,” David Berson, chief economist at Nationwide in Columbus, Ohio, told Reuters.

Indeed, San Francisco Fed President John Williams said he thinks three rate rises this year “makes sense” given that the already strong economy will get a boost from tax cuts, and the Fed can tighten more or less aggressively if needed, Reuters reported.

“We’re in a pretty good situation: the economy is doing great, everyone expects us to raise rates gradually ... and if the data change we can respond to that,” Williams told Reuters over lunch during an American Economic Association conference in Philadelphia.

“I‘m not worried about inflation suddenly taking off,” Williams said. “Something like three rate hikes makes sense to me” this year.

Fed officials set to speak in the coming days include Eric Rosengren, Raphael Bostic and John Williams today, Neel Kashkari on Tuesday, Charles Evans and James Bullard on Wednesday, and Willam Dudley on Thursday.

The US economic data slated for release this week include reports on consumer credit, due today; NFIB small business optimism index and JOLTS, due Tuesday; import and export prices, Atlanta Fed business inflation expectations, and wholesale trade, due Wednesday; weekly jobless claims, producer price index, and the Treasury Budget, due Thursday; as well as the consumer price index, retail sales, and business inventories, due Friday.

This week’s data notably those on core consumer prices and retail sales “are likely to strengthen expectations of a March rate hike from the Fed,” Capital Economics economist Andrew Hunter said in a note on Friday. 

In Europe, the Stoxx 600 Index ended Friday with a 0.9 percent advance from the previous day’s close. 

Analysts are bullish on the region’s equities. Strategists at Citigroup are predicting an 18 percent rally in the Stoxx 600 Index this year, forecasting the best annual performance for the gauge since 2009, Bloomberg reported. 

“An improving economy should help boost EPS, and equities look especially cheap against bonds,” Citigroup strategists including Robert Buckland and Jonathan Stubbs wrote in a January 4 note to clients, according to Bloomberg. “Europe is in recovery mode, with the euro area in ‘boom’ territory.”


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