- Weekly market focus
- Markets are back to expecting one rate hike by year-end
- Chinese stock market rallies to a 2-month high to help support world stocks as the yuan strengthens
- U.S. Feb existing home sales expected to show a decline but remain near an 8-3/4 year high
Weekly market focus — The markets this week will focus on (1) whether April WTI oil prices can extend the +43% rally seen in the past month that produced a 3-month high on Friday, (2) whether the Chinese stock and currency markets can continue to rally and provide support for the U.S. stock market, (3) whether the dollar index extends its 2-week plunge of -4.1% that has brightened the U.S. export and earnings outlook, (4) this week’s fairly busy holiday-shortened U.S. economic schedule, and (5) a very light earnings week as only three of the SPX companies are scheduled to report. Friday is a market holiday but the U.S. government is open and the U.S. Q4 GDP revision will be released on Friday.
This week’s U.S. economic schedule includes three housing reports, i.e., today’s Feb existing home sales report (expected -2.9% after Jan’s +0.4%), Tuesday’s Jan FHFA house price index (expected +0.5% after Dec’s +0.4%), and Wednesday’s Feb new home sales report (expected +3.2% after Jan’s -9.2%). Manufacturing data this week centers on Thursday’s Feb durable goods report (expected -3.0% and -0.3% ex-transportation after Jan’s +4.7% and +1.7% ex-transportation).
Regional business confidence surveys this week include (1) today’s Feb Chicago Fed national activity index (expected -0.30 to 0.25 after Jan’s +0.62 to 0.28), (2) Tuesday’s March Richmond Fed index (expected +4 to 0 after Feb’s -6 to -4), and (3) Thursday’s March Kansas City Fed manufacturing index (Feb -3 to -12). Regarding national business confidence, Markit’s preliminary-March U.S. manufacturing PMI report on Tuesday is expected to show a +0.6 point increase to 51.9 (after Feb’s -1.1 to 513) and the March U.S. services PMI on Thursday is expected to show a +1.7 point increase to 51.4 (after Feb’s -3.5 to 49.7). The market is expecting Friday’s Q4 U.S. GDP report to be left unrevised at +1.0%.
The Treasury will sell $13 billion of 2-year floating rate notes on Wednesday and on Thursday will announce the details of next week’s package 2-year, 5-year and 7-year T-notes. This will be a fairly busy week for Fedspeak with comments by Richmond Fed President Lacker today, Chicago Fed President Evans and Philadelphia Fed President Harker on Tuesday, and St. Louis Fed President Bullard on Thursday.
Markets are back to expecting one rate hike by year-end — The markets are back to expecting only one Fed rate hike by late this year following last week’s dovish FOMC meeting. The FOMC last week (1) cut its 2016 GDP and inflation forecasts, (2) recognized the negative impact from global risks, (3) left suspended its balance of risk assessment pending more information, and (4) cut the Fed dots forecast to two rate hikes for 2016 from the previous four rate hikes.
Fed Chair Yellen in her post-meeting press conference last week said that a rate hike remains a “live” possibility for the FOMC’s next meeting in five weeks on April 26-27, but the markets are discounting only a 4% chance for a rate hike at that meeting. However, the chances for a rate hike then ramp up to 40% by the June meeting, 52% for the July meeting, 70% for the Sep meeting, 90% for the Nov meeting and 100% for the December meeting.
Chinese stock market rallies to a 2-month high to help support world stocks as the yuan strengthens — The Chinese markets were strong last week, giving the U.S. stock market some underlying confidence and support. The Shanghai Composite index last Friday rallied to a new 2-month high and closed the week sharply higher by +5.15%. The Chinese stock market received a boost from a stronger yuan as USDCNY fell to a 3-month low on Friday and closed the day down -0.35%, bringing the 3-week loss to a total of -1.06%. The yuan is a linchpin of current trading patterns since the Chinese stock market closely follows the yuan and in turn heavily influences the world stock markets.
U.S. Feb existing home sales expected to show a decline but remain near an 8-3/4 year high — The market is expecting today’s Feb existing home sales report to show a -2.9% decline to 5.31 million, falling back after Jan’s +0.4% increase to 5.47 million. However, even if today’s existing home sales report shows a decline, the series will still be in very strong shape just mildly below the 8-3/4 year high of 5.48 million posted in July 2015. The latest report of 5.47 million seen in January nearly matched that 8-3/4 year high.
U.S. home sales remain strong due to low mortgage rates, generally strong consumer confidence, and rising income and wages. However, U.S. home sales are seeing some obstacles from a tighter supply of homes on the market and from price resistance considering that the FHFA U.S. home price index has now risen by +28% from the housing-bust low posted in March 2011.
