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Market Recap – On the Rise: Jobs, the Dollar and Rates?

Market Digest – Week Ending 2/6

A bounce in oil prices provided confidence to investors that global economic growth may stabilize or accelerate. Crude finished over 6% higher for the week, while the S&P 500 gained 3%. A much stronger than expected US jobs report Friday boosted expectations of Fed rate hikes. The Dollar rose on the news and gold fell. Investments negatively correlated to interest rates, such as REITs and Utilities, also declined.

Weekly Returns:
S&P 500: 2,055 (+3.0%)
FTSE All-World ex-US: (+2.0%)
US 10 Year Treasury Yield: 1.96% (+0.32%)
Gold: $1,283 (-3.9%)
USD/EUR: $1.132 (+0.3%)

Major Events:

  • Monday – Apple issued $6.5 billion of new bonds, including a 10 year bond at 2.5% and a 30 year bond at 3.5%.
  • Monday – President Obama proposed a nearly $4 trillion budget, including increases to military and infrastructure spending and several tax increases focused on wealthy Americans and Financial companies.
  • Monday – Verizon announced it was close to selling $15 billion of assets including cell towers.
  • Wednesday – The ECB announced it would not accept junk Greek government bonds as collateral for banks seeking funding, signaling Europe will not be lenient with the new Greek government’s efforts to restructure its bailout terms.
  • Wednesday– Staples and Office Depot announced they will merge.
  • Thursday – Anthem announced up to 80 million customers information may have been leaked in a hacking effort that some believe originated in China.
  • Thursday – The EU raised its growth forecast for 2015 to 1.3%, driven by lower oil prices, but the outlook does not include potential risks from Greece.
  • Friday – The US economy added 275,000 jobs in December, ahead of expectations. Numbers for November and December were also revised higher. Wage growth was 0.5%, also above expectations. Official unemployment rose to 5.7% as more workers entered the labor force.
  • Friday – Intuit’s Turbo Tax halted e-filing of some state returns due to fraud.

Our take:

Friday’s jobs report was important. First, it showed the US economy continues to strengthen in the face of falling oil prices and a rising dollar. An increase in wages, not just number of jobs, was a welcome sign. Second, it means the Fed is more likely to raise rates sometime this year – perhaps as early as late spring. Interest rate sensitive asset prices moved accordingly.

It feels like the Fed has been “about to raise rates” for as long time now, and we’re as tired as anyone of speculating about it. So far, every time it seemed rates may rise, the Fed has instead found a creative way to be more accommodative instead.

So will it raise rates soon? We don’t know. It feels like there is every reason to expect it except one. The US dollar has risen significantly in the past year. In several developed countries, investors are faced with negative yields – meaning they have to pay just to park their money. This makes dollar based assets more attractive – and all the more so if US rates are higher. But a higher dollar makes US corporations less competitive and ultimately costs the US jobs, which remains the Fed’s number one priority even after this week’s report.

Rates may or may not rise this spring or summer, but if they do, it seems likely any increases would be modest and spaced well apart. Most of those who have been fixated on the Fed’s plans have been wrong and cost themselves money for the last few years. Since the reaction from stocks in the event of a hike is unknown, it’s probably best not to focus on it too much.

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