Dashboard update: volatility persists but investor sentiment improved

Macro and Markets Dashboard: United States (January 30, 2016 — PDF)

A busy week for economists, as the Fed met, advance estimate 2015 annual and 2015 Q4 GDP figures were released, and earnings results were announced for hundreds of U.S. companies. Of course, the Fed did not change interest rates, and actually softened their statement language some. The first estimate of 2015 Q4 GDP growth showed a slowdown. Earnings, especially from Facebook, did not disappoint.

Advance estimate GDP data from the BEA showed real GDP growth in 2015 Q4 was lower at 0.7 percent (annualized basis), down from two percent in Q3. Analysts have been expecting a lower rate of growth, so this was not a huge surprise, though it is not great news. The strong dollar has hurt exports, while inventories and savings rates have both increased. The economist offered a nice piece of analysis on the GDP slowdown. As usual, the data will be revised a few times.

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The FOMC meeting during January 26-27 was not stopped by winter storm Jonas, though it seems the policymakers are being slowed by forces much much further away. As noted in the Fed’s statement (PDF):

The Committee is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook.

The FOMC’s additional consideration of volatility abroad is a real wrinkle for monetary policy makers who have an already limited toolkit. Given the potential consequences of highly divergent monetary policy, this additional consideration has become a reality.

Equity market indices were higher on the week. The S&P 500 was up 33 points or 1.7 percent, and the Dow Jones Industrial Average climbed 372 points on the week, 2.3 percent. Much of these gains came from a surge on Friday.

Corporate high yield bond yields fell during the week, but remain in dangerous territory. The yield spread of Merrill Lynch’s index of high-yield corporate bonds over 10 year treasuries remains above 7 percent.

hybonds

The U.S. dollar softened against most major currencies during the week, including by half a percent each against sterling and the Euro. The dollar weakened by 1.39% against the Australian dollar, 1.75% against the Canadian dollar, 2.5% against the South African rand, more than 3.5% against the Malaysian Ringgit, and more than 6% against the Russian Ruble.

The dollar strengthened by more than 1.6% against the yen during the week, as the Bank of Japan announced that it would take its battle against deflation to the next level by adopting a negative key interest rate.

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