Last week, markets endured another bout of volatility as the global oil glut and whispers of U.S. recession collided with strong labor markets and encouraging retail sales. The perceived safety of gold and U.S. Treasury bonds were sought after while global equities and riskier bonds again lost ground.
The U.S. yield curve moved to its narrowest spread in eight years, indicating the slower growth consensus looking forward. Recession was a major topic as financial markets seem to be indicating nearly a 50% likelihood of an economic contraction, while macroeconomic models, such as Cornerstone Research and the U.S. Federal Reserve, are forecasting much lower probabilities of 28% and 5% respectively. Oil touched a 12.5 year low mid-week only to post its sharpest one day gain since 2009 on Friday, rallying 12%, on rumors of OPEC discussions addressing possible production cuts among cartel members.
Fed Chairman Yellen was questioned by lawmakers last week and she kept additional rate hikes on the table citing sound labor markets, wage gains, and the corresponding improved outlook for and economic rebound and consumer spending. A strong retail sales report released on Friday supported her comments as January marked a fourth consecutive monthly increase of 0.2% which translated to year over year gains of 4.5% excluding gasoline sales. Earnings season is nearly 75% of the way through and results are less bad than expected, declining 3.7% from a year ago versus expected declines of 4.7%. Banks and energy stocks have been punished most this year, expressing concern of the oil bear market and potential ripple effects.
