Investors were hoping for a fresh start to February given the previous tumultuous four weeks. Overall, the results were mixed. The Dow Jones Industrial Average was up 0.84 percent for the week and the S&P 500 was down 0.70 percent. The tech-heavy NASDAQ Composite ended the week down 3.18 percent as technology and biotech companies weighed on the index. International markets didn’t fare much better. The Stoxx Europe 600 Index ended the week down 4.78 percent and Japan’s Nikkei 225 closed down 3.99 percent. Oil finished the week lower in uneven trading as investors wrestled with global growth concerns and a possible deal between the largest producers.
The U.S. 10-year Treasury bond hit 1.80 percent, the lowest in nearly 10 months, last week. This marks a sizeable drop from the 2015 year-end yield of 2.27 percent. Fears of slowing global growth have driven investors into government bonds and, as one of the only central banks raising rates, U.S. government bonds are very attractive. Indeed, nearly 25 percent of global government bonds outstanding have below-zero yields. As the demand increases, the price on bonds goes up, pulling yields down. Possibly exacerbating the issue, the U.S. Treasury has announced it will cut the issuance of Treasury bonds maturing in five or more years for the first quarter of 2015 by $18 billion. While the amount is relatively small compared to the $13 trillion in outstanding debt, the recent increase in demand and lower supply could push bond prices even higher. It is important to note if yields drop sharply, investors that are taking negative bets on those bonds may be forced to buy to cover their bets. Known as a short squeeze, the rapid buying of bonds by short sellers covering their bets could move prices even higher and yields even lower.
Jobs, Jobs, Jobs
According to the Bureau of Labor Statistics, non-farm payrolls increased 151,000 in January, nudging the unemployment rate down to 4.9 percent but missing market expectations. Despite unemployment hitting the lowest level since February 2008, markets reacted negatively to the miss on Friday. The U-3 unemployment figure, the more widely reported number the government releases, measures the total number of those unemployed as a percent of the civilian labor force. Many economists instead choose to focus on broader measures, such as the U-6 unemployment rate. The U-6 includes those covered in the U-3 measure but also those still looking for work, but discouraged, as well as those employed part-time for economic reasons. This figure was flat for January, holding still at 9.9 percent. On the bright side, there was a slight increase in wage growth which is something economists welcome as it indicates slack in the labor market may be tightening up and inflation expectations may rise.
Central banks across the world are indicating additional monetary actions could be required to boost inflation and spark growth. The European Central Bank, the Bank of England, and the Bank of Japan are just a few that have either hinted at or already taken additional stimulative actions. The Bank of Japan, for example, surprised the markets last week indicating it would begin setting negative interest rates. While both the European Central Bank and the Bank of England have committed to keeping rates low, the European Central Bank has recently hinted more stimulus may be needed to boost inflation in the Eurozone. A reasonable amount of inflation is generally a good sign for an economy. As consumers debate purchases, the thought about whether the good or service will be more expensive in the future may lead them to buy now rather than wait. Slowing inflation could signal a lack of economic growth as fewer goods and services are bought and sold. What central banks desperately want to avoid is a deflationary situation. Whereas consumers may buy now if they believe prices will be higher in the future, the opposite is true when there is deflation. When this occurs, consumers may delay their purchases with the belief prices may continue to slide, further exacerbating an economic slowdown.
Fun Story of the Week
A man named Carl Reese set a new record for driving from Los Angeles to New York City, or 2,829 miles, in just under 39 hours. As remarkable as that may sound, the way he did it is what’s especially noteworthy. Reese broke the record riding on a motorcycle, alone. Only five other people have completed such a feat with Reese doing it in the shortest amount of time. Preparation for such an undertaking involves painstaking planning and some more unorthodox training methods. Reese began working with a therapist to strengthen his back while taking cycling classes to condition his body for the extended bouts on a motorcycle seat. To break the record, Reese averaged 73 miles per hour and, occasionally, exceeded 110 miles per hour while taking just an hour-long nap and bringing easy-to-eat food such as sandwiches and nuts. Known as the Cannonball Run, the less-than-legal “race” from Los Angeles to New York City began in 1914 with Irwin Baker who rode his Indian® motorcycle between the two cities in 11 days, setting the bar for those who have come after him.