A dovish tone from the Fed and encouraging economic data helped push risk markets (stocks, high yield bonds, oil) higher last week. U.S. equities pulled themselves into the black for the first time in 2016, oil touched $40, and U.S. Treasury yields climbed across the curve. Large cap U.S. stocks were helped by continued weakness in the USD which fell 1.13%, primarily on the FOMC suggestions that it would raise rates twice in 2016, rather than the previously expected four times. The USD’s decline has been rather pronounced and is evident versus most global currencies, including emerging market currencies. High yield and CDS spreads have declined in lockstep with other risk assets. In fact, two large high yield ETFs (HYG, JNK) had the second largest one-month inflows of all time recently and are near record cumulative inflows as well.
Another anticipated central bank meeting last week (Bank of Japan) produced no meaningful changes while the prior week’s ECB policy announcements further solidified the overall dovish tone of global central banks. Accommodative central banks and a softening U.S. dollar haven’t been as supportive to U.S. small cap and European stocks which have not bucked their down trend nearly as well as their U.S. large cap piers.
The Fed has seemingly put a stake in the ground that they are not overly concerned with an accelerating core PCE (1.67%) or CPI (1.0%) at this time, despite robust employment, improved manufacturing readings, and rebounding commodity prices. Accordingly, inflation breakevens and a steepening yield curve are suggesting higher future levels of inflation as a most likely scenario. The rebound in oil prices of over 50% off the February low of $26.21 has been driven by undeniable declines in U.S. production. The Baker-Hughes rig count (387) stands just above the all-time rig low of 386. However, shale properties are generally able to come back ‘on-line’ much more quickly than traditional wells, so a ramp up response to increased oil prices would likely keep a lid on significant oil price increases.
