In spite of an impressive rally on Friday that engendered gains of 2%-3% across most equity market indices, equities were negative on the week. The usual suspects of global growth and oil prices were picked from the line-up of investor concerns and the market deemed them guilty. What was unusual about last week is that oil rose 12% on Friday and still closed the week down 5.7%. Reflecting negative market sentiment, safe haven assets like the US Treasury 10-year note touched a recent low of 1.65% before closing the week at 1.75% and precious metals were up about 5%. The US Dollar fell for the second consecutive week, a welcome respite for domestic exporters. Updated asset class performance details can be found here.
Quicksand – Central bankers… the more they talk and the more they act, the more damage they seem to be doing to investor psyche. On January 29th the Bank of Japan (BOJ) surprised markets by adopting a negative interest rate policy (NIRP). The BOJ’s NIRP was designed to further weaken the Yen and inflate asset prices – however the Yen skyrocketed and Japanese stocks plummeted… oops. Moreover, during her Congressional testimony last week on Wednesday Fed Chairman Janet Yellen suggested that the Fed may pause its tightening if market volatility impacts international demand for US goods. The market took this to heart and sold off hard the next day. Perhaps central bankers should take a basic lesson from hikers, if you fall into a pit of quicksand, the best survival strategy is to not flail about as it only makes you sink faster.
Alchemy – As noted above, Japan recently adopted a NIRP. Though they were not the first central bank to do so as Sweden (Q2 2014), Switzerland (Q4 2014), and the European Central Bank (Q4 2014) started similar experiments previously. Negative interest rate policies, in theory, are supposed to help economies similar to cutting interest rates from higher levels: encourage business investment and consumer spending, increase the value of risky assets (including stocks), devalue the country’s currency (making exports more competitive) and create expectations of higher inflation in the future (hence encouraging people to spend money now). Ten years ago negative interest rates were merely a theory, a seeming impossible anomaly discussed by economists in the way that physicists talk about the implications that time travel could have on changing the course of history. Today NIRP is a reality and like early “scientists” who attempted to convert base metals into gold, central bankers are combining quantitative easing and NIRP – a sort of monetary alchemy – in an effort to create economic growth. Unfortunately, neither economists nor the central bankers engaged in the policies know if this strategy will prove to be productive. Furthermore, they cannot effectively forecast what the unintended effects of these policies will have on economies down the road. NIRP represents the next era of the greatest monetary policy experiment in modern times, which began with Quantitative Easing and the Financial Crisis.
Economic Summary – Retail sales data for January were solid across the board, with the control group (excluding autos, gasoline and building materials) rebounding by 0.6% month-over-month (m/m). It’s worth noting too, that December’s headline Retail Sales decline of 0.1% m/m was revised upward to a 0.2% m/m gain. The labor market also continues to exhibit strength as new jobless claims came in below consensus estimates and the number of Job Openings remains elevated based on data released last week. While there has been increasing chatter about a U.S. recession, those fears appear inflated, at least for now.