March 11, 2016

After falling flat in yesterday’s session, the major stock market indices surged at the open today (Dow +214 pts; SPX 1.3%; Nasdaq 1.4%). Seven of the ten market sectors are up at least 1% in early trading, led by financials and materials. The dollar is weaker against a basket of foreign currencies, extending the trend we’ve seen in March. That’s giving a lift to commodities; the Bloomberg Commodity Index is up about 5% this month. WTI crude oil is up 1.8% to $38.50/barrel whereas Brent crude is holding steady at $40/barrel. Bonds are selling off; yields are up. The 5-year and 10-year Treasury yields are trading at 1.49% and 1.98%, respectively. The 2-year Treasury yield, which plunged in the first six weeks of the year to .65%, has skyrocketed back to .96%, suggesting a higher probability that the Federal Reserve will resume rate hikes later this year. We like to talk about the bond market as being smarter than the stock market in that it has a more sober, considered outlook for the economy. But judging by this huge reversal in rates, bond traders were completely caught off-guard by recent improvement in economic data.

The Int’l Energy Agency (IEA) says the oil market may have bottomed. The organization estimates that non-OPEC oil production will likely fall by 750,000 barrels per day this year. And while there is still a large amount of crude sitting in storage, by the end of the year the daily amount added to storage will have fallen to a very low level.

There is a lot of chatter in the financial news media about negative rates and extreme monetary stimulus around the world. Japan and Europe are involved in a competitive devaluation of their currencies to fight deflation. And it is true, of course, that inflation is rather low in most developed parts of the world. Consumer price inflation is expected to be a mere .4% in Japan & the Eurozone this year (according to the Economist). The European Central Bank (ECB) yesterday confirmed it is locked into monetary easing for at least the next four years. China’s central bank also recently announced further stimulus measures. These moves are helping boost financial markets today. Asia closed in the green overnight and European markets just close up by 3-4%.

Inflation expectations are a bit more healthy for the US (at about 1.4%). Today, we learned that US import prices sank 6.1% y/y in February. Most of that deflation is due to falling commodity prices (esp. oil) and a stronger dollar. But it looks like those trends could be largely played out: oil looks to have bottomed and the dollar is lower than it was a year ago. Import prices were falling at a 10% y/y pace through most of 2015, so more recent data is improved.



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