Following a long weekend and a two-week long rebound that saw the S&P 500 Index recover 105 points (+5.9%), US equities appeared to be heading for a higher opening. A below-par Empire State manufacturing report put paid to that, however. Much of the recent concern over the health of the US economy has been explained at the hands of the weather – a continuing trend as the mid-Atlantic and northeastern corner takes another shellacking Tuesday. With investors buying into such premise, softer data has been accompanied by weaker bond yields. The weekend issue of Barron’s Magazine carried a headline forwarding the case for 4% GDP growth for the year, which one would think might help spur thoughts of virgin territory for equities as the rebound for the economy continues.
The cover story focused on the strategy of an economic think-tank that, to its credit, puts its money where its mouth is, beating the benchmark index for its investors last year. The trio of economists formulating its views hold the housing recovery as central to its theme. So vigorous will it be and as the ripples spread that the Federal Reserve will mark its return to conventional monetary policy raising its benchmark short term fed funds rate before the end of this year. However, the yield curve flattening strategy it adopts is highly likely to miss the mark in the event that the bond market discounts a rise in interest rates in the typical panic-ridden manner to which it is prone.
Overnight the Bank of Japan said that rather than allowing its prevailing asset purchase scheme to expire on schedule in March, it will instead double the pace of purchases ahead. Over the weekend the government released a lackluster growth report showing the economy stalled in the fourth quarter. As a result of central bankers’ actions the Nikkei 225 Index surged by 3.1% for its strongest one-day rally in a little over six months, propelled by renewed weakness for the yen. The dollar rebounded by one yen to buy ¥102.42 while the euro, pound and Aussie dollar all staged strong advances against the Japanese unit.
In China the markets ran the other way after the Peoples Bank sought to drain liquidity from the system in a sign that it hopes to rein in lending. Meanwhile over in the Eurozone, investors are digesting a further rise in regional auto sales and a dip in German investor optimism surrounding the economic outlook. Needless to say, stocks are mixed. Minutes from the Reserve Bank of Australia’s February 4th meeting also released overnight show that the central bank expects monetary policy has now run its course, with investors discounting diminished expectations of a further move. The Aussie dollar weakened relative to its US counterpart – something the RBA suggested would likely add to inflationary pressures.