Equity markets rose for the second consecutive week, supported by positive economic data points, signs of stabilization in oil prices, and likely some short squeeze buying activity emanating from the hedge fund arena. Recent equity market gains have put both the DJIA and S&P 500 back above their 50 day moving averages. Interestingly, Chinese stocks sold off 6% mid-week and did not have the same ‘ripple effect’ they have been triggering in U.S. and Europe.
U.S Treasury bond yields also rose for a second consecutive week on the notion that encouraging economic reports seen last week may give the Fed more room to maneuver a rate hike in the coming months. The curve flattened further and TIPS breakevens widened significantly on the strong PCE reading and oil price bounce. Oil rose 3% on the week, following last week’s double digit gain, on continued discussion of potential production freezes (at record high levels) among the world’s two largest oil producers, Saudi Arabia and Russia. This would represent a rare (first time in 15yrs) production agreement between OPEC and non-OPEC producers. Iran and Iraq have adamantly opposed the proposal because they are in stages of post sanction and post war production ramp up.
Positive economic reports included growth of 4.9% in durable goods orders, 0.5% in consumer spending, an upward revision of 4Q GDP to 1%, and core PCE (the Fed’s preferred inflation measure) of 1.7%. A notable Fed report (H-8) last week showed healthy bank credit growth in the U.S. with 3 month annualized growth rates of 10% and 7.8% in C&I and real estate loans respectively. This would suggest that the bank’s view of the economy is much more optimistic than credit spreads, equity markets, and the media have been suggesting.
