RECAP: for the week ending September 16th, 2016

September 18, 2016

     U.S. stock market finished modestly higher for the week despite elevated volatility that continued to wake the market up after trending sideways for most of the summer. Energy sector stocks underperformed as crude oil traded lower after statements from the International Energy Agency and OPEC indicated that elevated inventories are likely to keep the price of oil near current levels through 2018. The NASDAQ outperformed other indexes through its heavy focus on a strong tech sector. A speech on Monday by Lael Brainard, a member of the Fed’s Board of Governors and a noted “dove,” lived up to her reputation by indicating that the central bank is in no rush to raise interest rates again.

Soft U.S. economic data released during the week helped solidify expectations for the Fed to hold off on a rate increase until the end of the year. Retail sales fell 0.3% in August from July, while August industrial production and manufacturing numbers both showed declines of 0.4% from July.

In Europe the week was riddled with uncertainty about monetary policy in the future. The pan-European Stoxx 600 Index fell, and benchmark 10-year UK and German government bond yields hit their highest levels since late June as investors worried that central banks had run out of ammunition to fight slowing growth. Over the past week, yields on more than $1 trillion of sovereign and corporate bonds have moved back into positive territory as investors questioned the future of bank stimulus.

In Asia, the Nikkei 225 Index fell 446 points (2.6%) and closed at 16,519.29. Year-to-date, the Nikkei is down about 13%, the large-cap TOPIX 100 Index is off almost 16%, and the TOPIX Small Index is more than 13% lower. The yen strengthened for the week and closed above ¥102 per U.S. dollar on Friday. The yen has gained about 16% versus the greenback thus far in 2016. The Financial Times reports that Sayuri Shirai, a former Bank of Japan (BoJ) Board member, said at a meeting of the Japan Society in New York that the BoJ should lower its aggressive 2% inflation target to a more reasonable 1% before it announces the findings of the “comprehensive assessment” of its monetary policies after the September 21 policy meeting. Some market watchers call the “comprehensive review” an unadulterated stall tactic that allowed the BoJ to build support or consensus before it lowers interest rates further into negative territory and/or adjusts the composition of its government bond-buying program.

China’s economy strengthened in August, reducing the likelihood of a sharp slowdown in China that could restrain global growth. Industrial production and retail sales both picked up in August, Many analysts had expected China’s central bank to reduce interest rates or the reserve requirement ratio for domestic banks by the end of 2016 to maintain economic growth, but such monetary easing now seems unlikely. However, China’s economy continues to rely heavily on public stimulus and housing. Private investment remains in a slump, while wage growth is slowly decelerating and faces pressure from new efforts to cap minimum wage growth.

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