April 8, 2016

The major stock market averages are rebounding from yesterday’s rout (Dow +88 pts; SPX +.58%). European markets are one reason; they are poised to close up about 1.3%. Energy is leading the way (+2.2%) but industrials, materials and financials are also up over 1% in early trading. WTI crude oil has been jumping around on nothing but far-fetched speculation; today it’s trading up toward $40/barrel. There are as many opinions on oil as there are Wall Street analysts. Jeffries says the current oil price is unsustainable and a recovery will be protracted. Merrill Lynch, on the other hand, says US oil production is in freefall and the global oversupply of oil is starting to clear up. Meanwhile, there is no fundamental (supply/demand) reason why WTI crude oil prices are 6% than they were yesterday. Bonds are selling off a bit this morning. The 5- and 10-year Treasury yields are up to 1.18% and 1.74%, respectively. The 2-year Treasury yield, by the way, is down around .7%, suggesting bond traders don’t fear a Fed rate hike any time soon.

Jim Paulsen of Wells Capital Management agrees with JP Morgan CEO Jamie Dimon: the Federal Reserve will soon be forced to resume interest rate hikes and bond yields will rise. Mr. Paulsen sees one of two scenarios playing out this year; either economic growth will accelerate, allowing the Fed to move from a position of strength, or wage growth and hence inflation will increase to the point that the Fed’s hand is forced. Either way, inflation will rise. Under the first scenario, the stock market will likely suffer but in the second scenario it should rise. And Mr. Paulsen sees signs of that more positive scenario already. “If you look at economic surprise indices, they’re rising in the last few months almost everywhere except Japan; Euro zone, the emerging markets, China, Great Britain, here, Canada.”  However, he notes that until we get more clarity on the path forward stocks will likely remain trendless and volatile.

Currency volatility has surged lately, according to a JP Morgan index. As economic metrics surface, relative changes to the outlook for global growth are driving that volatility. Better than expected employment data out of Canada this week caused the Loonie to surge vs. the dollar. The Yen/dollar exchange rate has been all over the place on speculation that central bank stimulus in Japan isn’t working. And speculation that inflation is rising in China (along with evidence that the economy is stabilizing) suggests the Chinese central bank could pull back on some monetary stimulus.  

In an interview yesterday, Federal Reserve Chair Janet Yellen painted a fairly optimistic view of the US economy. She cited “tremendous progress in recovering” from the financial crisis. “We’re coming close to our goal…of full employment.” And we’re making progress toward getting inflation up to normal levels. This is “not a bubble economy.” She noted asset prices, leverage, and credit growth metrics don’t suggest a bubble at all. 

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