(Tuesday Pre-Market) Stocks finished a volatile trading week under pressure from steep declines in oil, weakness overseas, and market-crushing remarks by U.S. Federal Reserve President Janet Yellen that helped send the S&P 500 (SPX) down to nearly two-year lows.
Yellen testified Wednesday and Thursday to Congress, making some upbeat remarks about job growth but she disappointed bullish investors who had hoped she would rule out further rate hikes.
And then traders had a long weekend to think about it all.
U.S. markets were closed Monday for the President’s Day holiday and with Tuesday’s opening bell the focus will likely turn to several Fed presidents speaking over the next few days and the re-opening of mainland China’s stock market after a week-long holiday break. Also, two key U.S. economic reports—the Producer Price Index (PPI) and the Consumer Price Index (CPI)—loom on Wednesday and Friday, respectively, giving investors another read on current inflation.
SPX—which slipped under psychologically important 1900 earlier this month (figure 1)—descended well below that line to the lowest levels since early 2014 by late last week. European markets also stayed in the red, with banking stocks taking a hit amid falling earnings and interest rates.
Interest rates on 10-year U.S. Treasury notes fell below 1.6% last week to set a three-year low as investors increasingly sought relative safe havens in the bond market, while gold rose to its highest level in a year at more than $1,200 an ounce. In one indication of economic fears, the yield spread between 10-year and 2-year Treasury notes fell to its narrowest gap since late 2007. A narrowing spread between those rates indicates expectations of weaker growth and low inflation ahead.
Fed Speakers in Focus: Though Yellen’s testimony to Congress dominated the headlines last week, other Fed speakers get their day in the sun this week, starting with Philadelphia Fed President Patrick Harker, who speaks at 9 a.m. ET Tuesday at an economic forecast conference. He’ll be followed later Tuesday by Minneapolis Fed President Neel Kashkari, who will speak at 10:30 a.m. ET on lessons from the financial crisis, and by Boston Fed President Eric Rosengren at 7:30 p.m. ET Tuesday on the economic outlook. But that’s not all. St. Louis Fed President James Bullard will make an outlook speech at 6 p.m. ET Wednesday. Bullard said last month that weak oil prices reduced his concerns about inflation. Investors, as always, will likely closely listen to the Fed presidents’ speeches, focusing this week on how their statements might differ from Yellen’s recent remarks.
Oil Cheapest Since 2003: Speaking of weak oil, U.S. oil futures, bashed by concerns about lack of demand amid record high supplies, fell below $27 last week to their lowest level since 2003. Gasoline prices in parts of the U.S. have slid under $1.20 a gallon, but it’s unclear if savings in gas expenditures will translate into consumer spending elsewhere, as they’ve historically done. There is some talk in the markets about gas prices carving out a seasonal low in coming weeks before many regions switch to more expensive summer blends of gasoline with the approach of spring. While average U.S. regular gas prices fell below $1.75 last week for the first time since 2009, some industry analysts see a seasonal rise to $2.50 by summer, still a relatively low level.
Keeping an Eye on PPI, CPI: Investors will likely closely watch Wednesday morning’s Producer Price Index (PPI) release for January, which measures prices at the producer level before they’re passed on to consumers. They’ll also likely look ahead to Friday morning’s release of the Consumer Price Index (CPI) for January (see the full economic calendar below). Producer prices fell 0.2% in December thanks to lower energy prices, and rose 0.1% with energy and food prices not factored in. The CPI fell 0.1% in December, while core CPI, which excludes food and energy, rose 0.1%. Should PPI and CPI remain at low levels, that could reinforce impressions that the Fed will be in no hurry to hike rates anytime soon in a low inflation environment. Indeed, by late last week, Fed Funds futures contracts were pricing in no potential rate hikes until early 2018.
Does Volatility Leave You Spinning?
TD Ameritrade’s JJ Kinahan and Craig Laffman recap volatility drivers, covering the potential Fed impact, on February 17, at 9 a.m. ET.