Week of October 24, 2016
Investors enjoyed some positive momentum last week after suffering losses the week prior. All broad global benchmarks ended the week up at varying degrees. Internationally, Japan's Nikkei 225 Average was the clear outperformer, closing up 2.45% for the week, while European equities, as measured by the MSCI Europe Index, were up just 0.08%.
Back in the US, the Dow Jones Industrial Average, S&P 500 and the NASDAQ Composite were up 0.04%, 0.38% and 0.83%, respectively. This week, we shift gears and focus on inflation figures both in the UK and here domestically as well as highlight some recent oil price movement. Lastly, we conclude our commentary with a fun story about one very competitive lacrosse game.
Inflation Rising in the UK
The British pound rose 0.4% against the dollar to $1.22 last week, boosted by inflation figures as well as by comments from the UK’s Chancellor, Philip Hammond. UK Consumer Price Index (CPI) inflation, close to a two-year high, came in slightly at 1.0% against the expected 0.9% while the Producer Price Index (PPI) was lower at 0.0% versus the 0.4% forecast. This also implies that, while rising prices were visible in goods such as gas and diesel which is included in CPI calculations, they have yet to show up in the broader PPI inflation calculation. In response, the Bank of England's Governor, Mark Carney, has made it clear that the higher inflation will not trigger a tightening of monetary policy. What also helped the currency, perhaps, is British Chancellor Philip Hammond’s comments suggesting that the issue of immigration in Brexit negotiations may not be the 'red line’ some were worried about, providing a small relief to investors concerned about a 'Hard Brexit'. A 'Hard Brexit' is a situation where Britain exits the European Union without having negotiated proper trade deals. Ultimately, there are too many uncertainties for a well-defined rally but it appears the recent spike in pound exchange rates is more about dollar weakness than any particular positive news for the UK economy.
Turning to the US, September inflation data came in line with forecasts, increasing 0.3% month-over-month or 1.5% year-over-year. However, the core rate which removes food and energy costs, was up a modest 0.1% versus the 0.2% expected, retreating to 2.2% in September from 2.3% in August. Overall, the core inflation rate the Fed actively tracks is at 1.7%, a little shy of the central bank's 2.0% target and this moderation in underlying inflation does not help with the probabilities of December rate hike. Indeed, Fed fund futures now imply around a 65% probability of a December hike down from 70% ahead of the U.S. inflation data. We would be remiss not to note the dovish signals from Fed members, Janet Yellen and Stanley Fischer, in their recent speeches on the possibility for a December rate hike. They hinted that inflation was perhaps not the only point driving the committee’s decision.
Oil prices see-sawed last week but held above a $50 per barrel mark as markets reacted to conflicting news. On the positive side, through October 14, US crude inventories fell by 5.2 million barrels against an expected increase of 2.7 million. Global inventories increased by 17 million barrels to 5.62 billion barrels in the third quarter of this year, the smallest build since the fourth quarter of 2014. Oil prices bounced on news of the slowing inventory build giving hope that the longstanding oversupply may finally be waning. What's more, Russia reiterated its commitment to joining a producers' output freeze, providing further support to oil prices. The World Bank also announced that it would be raising its 2017 forecast for crude oil prices from $53 per barrel to $55. On the other hand, a stronger dollar capped some of the upside as the commodity is priced in US dollars. The greenback surged against the euro after the European Central Bank confirmed it was considering a pullback in its quantitative easing. While the recent focus has been on the supply side of the global oil market, there remains concerns over signs of slowing demand from China.
Fun Story of the Week
When we think of competitive sports, the mental picture of teams playing at their peak, settling matches on a field in hard fought battles with the victor scoring the winning point at the buzzer immediately comes to mind. The same thing happened when the Western Michigan Broncos' lacrosse team travelled to play the Dayton Flyers. However, rather than mix things up on the field, they settled the match with an intense game of rock-paper-scissors. The game was cancelled due to lightning strikes in the area and the teams "had to compete on some level", said Adam Wissman, the Flyers' rock-paper-scissors player. Ultimately, Western Michigan came out on top with a decisive paper over rock in a best-out-of-three match.
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This newsletter was written and prepared by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.
The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index.
The Nikkei 225 Stock Average, the leading and most-respected index of Japanese stocks is a price-weighted index comprised of Japan’s top 225 blue-chip companies traded on the Tokyo Stock Exchange.
MSCI EUROPE INDEX
The MSCI Europe Index captures large- and mid-cap companies across 15 developed markets countries in Europe.
S&P 500 INDEX
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
Financial Times, October 2016. https://www.ft.com/content/7b01e45a-950d-11e6-a1dc-bdf38d484582
Business Insider, October 2016. http://www.businessinsider.in/The-pound-is-gaining-on-the-dollar/articleshow/54912705.cms
CNBC, October 2016. http://www.cnbc.com/2016/10/18/consumer-price-index-up-03-in-september-in-line-with-expectations.html
Nasdaq, October 2016. http://www.nasdaq.com/article/us-inflation-nears-2-year-high-in-september-core-cpi-eases-cm694921
Investing.com, October 2016. http://www.investing.com/analysis/eur-usd-remains-steady-despite-lower-than-expected-us-core-cpi-200159449
Reuters, October 2016. http://www.reuters.com/article/us-usa-economy-inflation-idUSKCN12I1GP
FXStreet, October 2016. https://www.fxstreet.com/analysis/fed-spreads-dovishness-for-december-rate-hike-us-and-uk-inflation-rates-in-focus-201610180812
Seeking Alpha, October 2016. http://seekingalpha.com/article/4013312-presidential-election-takes-focus-u-s-economy-slips
Washington Post, October 2016. https://www.washingtonpost.com/news/early-lead/wp/2016/10/04/college-lacrosse-game-decided-by-rock-paper-scissors/