Stocks Close Higher Despite Headwinds from Higher Bond Yields
Stock prices were buoyed during the past week, despite the plethora of information traders needed to absorb throughout the week. Besides the many economic releases reported throughout the week, investors were bombarded by the proposed annexation of Crimea by Russia, a Federal Reserve Decision on interest rates, the Chinese Central bank widening the band for the Yuan, and Janet Yellens first press conference as head of the Federal Reserve.
The week began with investor learning that the Crimean people voted by nearly a 97% majority to rejoin Russia, both the US and the EU stated the referendum as illegal. Speaking to Russian President Putin, President Obama said the vote took place under duress of Russian military intervention, and no diplomatic solution was possible amid a large-scale Russian military exercises on Ukraine's borders. Two rounds of sanctions were released during the week by US leaders.
Tensions with regard to Chinese economic growth were somewhat mitigated by the people's bank of Chinese widening the band on its currency. China announced a doubling of the permissible band on its currency from 1.0% to 2.0% around the daily fix. There had been some speculation that Chinese officials were moving in this direction. PBOC officials indicated that this was their intention sometime this year. The move saw the yuan weaken by 1%, and Chinese shares moved higher by 1%.
On Wednesday the Federal Reserve finished their two day monetary policy meeting. The Fed decided to taper its bond purchase program by another 10 billion dollars. Yellens comments were parsed by Fed watchers which drove short term interest rates higher. The FOMC, in its statement said that there would be a considerable period between the completion of the asset purchases and the first increase in rates. When asked what considerable period meant Yellen responded by saying around 6-months. To market participants, this meant that 6-months after the bond purchase program ended, rates would increase. This news pushed short and long term yields higher, and in turn flattened the interest rate curve.
Investors quickly adjusted their expectations. They quickly did the math and saw that interest rate futures were pricing in no movement until the 4th quarter of 2015 and quickly priced in these expectations. The market anticipates the FOMC completing the asset purchases in October. Yellen's clarification points to a hike as early as Q2 15.
While short term interest rates quickly increased, stocks moved lower rapidly. At one point during the Wednesday proprietary trading session the Dow Industrials were down more than 200 points. The Fed did make numerous dovish points, but that seem to go unnoticed once the cat was let out of the bag. For example, the Fed removed the language that pointed to a threshold of unemployment at 6.5% as a trigger to increase rates. The statement actually points to lower rates well beyond this point.
In economic data released during the week, the consumer-price index, increased by 0.1% in February month over month, according to the Labor Department. Core prices, which exclude volatile food and energy costs, also rose 0.1%. Consumer prices were up 1.1% year over year. That was the weakest 12-month gain since October and below the Federal Reserve's 2% target for annual inflation. Core prices were up 1.6% from a year earlier.
Industrial production increased 0.8 percent in February, its largest increase since August, according to the Federal Reserve. That almost unwound January's 0.9 percent decline, which was the largest drop since May 2009. Economists polled had expected manufacturing output to rise 0.2 percent and industrial production to edge up 0.1 percent last month. Last month, the amount of industrial capacity in use increased to 78.8 percent from 78.5 percent in January.
Sales of previously owned homes fell 0.4% in February from January to a seasonally adjusted annual rate of 4.6 million, the National Association of Realtors said Thursday. The National Association of Realtors said the median home price in February was $189,000, up 9.1% from a year earlier, in part because supply constraints are driving up prices