World Week Ahead: Investors seek new inputs

Monday 25th May 2015

As earnings season fades and data continues to disappoint, investors are searching for fresh reasons to extend their equities bets after global markets mostly extended their bull-market rallies last week in lighter than usual volume.

Both the Dow Jones Industrial Average and the Standard & Poor's 500 Index touched record highs last week, though they eased ahead of the weekend. On Friday Federal Reserve chair Janet Yellen confirmed in a speech that the central bank remains intent on lifting its benchmark interest rate at some point this year. But she was cautious about what lies ahead too.

“If the economy continues to improve as I expect, I think it will be appropriate at some point this year to take the initial step to raise the federal funds rate target and begin the process of normalising monetary policy,” Yellen said on Friday.

“To support taking this step, however, I will need to see continued improvement in labour market conditions, and I will need to be reasonably confident that inflation will move back to 2 percent over the medium term,” Yellen added. “After we begin raising the federal funds rate, I anticipate that the pace of normalisation is likely to be gradual.”

Inflation is gathering steam. A Labor Department report on Friday showed the so-called core consumer price index, which excludes food and energy, rose a higher-than-expected 0.3 percent in April.

Last week, the S&P 500 rose 0.2 percent, while the Nasdaq Composite Index added 0.8 percent. The Dow slipped 0.2 percent. Today, US markets are closed for the Memorial Day holiday.

US Treasuries fell, sending yields on 10-year notes seven basis points higher last week to 2.21 percent, according to Bloomberg.

"This is probably the most telegraphed Fed lift-off in some time," Bruce Zaro, chief technical strategist at Bolton Global Asset Management, told Reuters. "I think they're concerned about the market's reaction—they don't want to have a period of volatility that causes the market to react in a crash-type form.”

The futures contracts show that traders see a 61 percent chance that the first Fed rate hike will come this December, based on CME FedWatch, which tracks rate expectations using its Fed funds futures contracts, according to Reuters.

“It gives the Fed more ammunition in terms of when they want to hike,” Aaron Kohli, US interest-rate strategist in New York with BNP Paribas SA, one of 22 primary dealers that trade with the Fed, told Bloomberg. “After this, I can see the Fed being more aggressive.”

Not everyone agrees.

"We are of the camp that this rate cycle will be low and slow," Collin Martin, director of fixed income at Schwab Center for Financial Research in New York, told Reuters. “The remarks from Yellen confirmed that.

”For any further clues on the timing of an increase investors will eye Fed officials speaking this week. They include Cleveland Fed President Loretta Mester in Iceland, and Fed Vice Chair Stanley Fischer, in Israel today; Richmond Fed President Jeffrey Lacker, on Tuesday; as well as San Francisco Fed President John Williams in Singapore, and Minneapolis Fed President Narayana Kocherlakota, on Thursday.

Yellen on Friday also noted that the US housing market still lacks lustre, despite improvements in home prices and home sales. In the coming days fresh clues will arrive in the form of the FHFA house price index, S&P Case-Shiller home price index, and new home sales on Tuesday, and the pending home sales index, on Thursday.“Activity in the housing sector is likely to improve only gradually,” Yellen said.

Other economic data scheduled for release this week include durable goods orders, PMI services, consumer confidence, Richmond Fed manufacturing index, and the Dallas Fed manufacturing survey, due Tuesday; weekly jobless claims, due Thursday; GDP, Chicago PMI, and consumer sentiment, due Friday.

In Europe, the Stoxx 600 Index climbed 2.9 percent last week.

Today UK, German and Swiss markets are closed for public holidays.

Here, reports slated for release in the coming days include German consumer sentiment on Wednesday, and euro-zone confidence on Thursday.

In Athens on Saturday, Prime Minister Alexis Tsipras said progress is being made on a new financial accord with the nation's creditors though some work remains.

BusinessDesk.co.nz

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