Most of the major domestic equity indexes closed last week with modest gains. The tech-heavy Nasdaq performed best, aided by strength in semiconductor stocks early in the week. Better-than-expected results from Hewlett-Packard gave a further boost to tech shares on Friday. Utilities and materials stocks also performed well, while real estate shares lagged as interest rates rose. Consumer staples shares also underperformed, as Wal-Mart sold off early in the week following an earnings miss and guidance that disappointed.
Some stability in closing levels masked considerable intraday swings in the major indexes. After rising when trading resumed on Tuesday morning, stocks reversed course and fell sharply in the afternoon. Traders noted a lack of consensus to explain the selling, although many pointed to some combination of continuing worries over recent volatility, rising interest rates, and the S&P 500 breaking below its 50-day moving average of 2,725.
Intraday volatility continued on Wednesday, when attention seemingly turned to the release of minutes from the Federal Reserve’s late-January policy meeting. Stocks rose initially following the release but then fell back as traders seemed to detect a more hawkish stance among policymakers — even prior to the release of data showing higher inflation in January and a substantial increase in hourly earnings. The minutes indicated that Fed officials have greater confidence in the near-term economic and policy outlook, and most analysts expect another rate increase following the March 20-21 FOMC meeting. Nevertheless, stocks seemed to get a boost on Friday from the Fed’s semiannual report on monetary policy to Congress, which indicated that officials expected inflation to remain below the Fed’s 2 percent 2018 target.
Note that the Fed’s January meeting predated federal government spending increases that were signed into law on February 9. It is unclear whether the fiscal stimulus from the budget agreement will further bolster policymakers’ confidence in their growth and inflation outlook. In combination with recent tax cuts, the budget agreement is also likely to increase government borrowing considerably such that annual federal deficits will likely exceed $1 trillion in coming years. Last week brought evidence of the first ramp-up in government borrowing, with roughly $258 billion in new issuance from the U.S. Treasury, according to Bloomberg. As the market absorbed the new supply, yields increased across the yield curve to their highest levels in several years while multiple benchmark U.S. Treasury issues on the front end of the curve reached their highest yield levels in a decade. Yields decreased on Friday, however, as traders appeared to join a modest “flight to safety” in anticipation of the upcoming Italian elections.
European stocks ended the week generally mixed with relatively light volume. Despite a heavy week of corporate earnings reports and positive economic indicators, major indexes in the region were subdued. The pan-European index STOXX 600 index was essentially flat as traders seemed to be on guard about the prospect of rising inflationary pressures. The German DAX 30 moved marginally higher following reports of solid demand for German exports. Britain’s FTSE 100 moved marginally lower, weighed down by some disappointing corporate earnings and a report that the unemployment rate in the U.K. rose slightly in the fourth quarter of 2017.
In Asia, the major stock market benchmarks rose modestly last week. Data from Japan show that manufacturing activity and exports remain positive, purchasing managers’ index figures remain solidly in expansive territory, and exports rose 12.2 percent in January, exceeding expectations and marking the 14th straight month of gains. Combined with a slight decline in import growth, the rise in exports helped narrow Japan’s trade gap significantly while employment increased at a faster pace and saw its best growth in 11 years.
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