Market Perspective for February 22, 2016

Stocks are poised to continue last week’s rally following positive news on the energy front. On Saturday, Russian Energy Minister Alexander Novak indicated the possibility of a formal agreement with Saudi Arabia by March 1 targeting $50 per barrel oil. Oil prices reacted with a 6-percent rally in early trading today.

Rising oil prices are generally a negative for the economy, all else holding constant, but with many companies facing bankruptcies, an increase in oil prices lowers the potential for defaults in the oil patch and reduces the risk for banks with oil and gas industry exposure. While the news of a pricing deal is positive, the United States still has record high inventories. Caution is warranted for investors looking to buy low.

January’s unexpectedly high core inflation reading (0.3 percent on the month and 2.2 percent versus a year ago), along with the drop in unemployment filings will put the Federal Reserve back in the spotlight. Investors will be on alert for any clues as to the central bank’s next move at its March meeting. Investors have discounted any near-term moves, but economic data is mixed, with inflation, employment and GDP growth estimates increasingly supportive of another rate hike. Expectations for another rate hike this year have gone from 25 percent to 50 percent in the past week.

Manufacturing continues to hold back interest rate progress. The flash PMI for February was 51.0, below an expected 52.4 reading. On Tuesday, January existing home sales and the Richmond Fed manufacturing survey will be released, followed by January new home sales on Wednesday. Thursday’s data will include weekly unemployment claims, expected to be slightly higher than last week. Durable goods data for January are out on Thursday as well and consensus is for a 2 percent increase in orders. On Friday, the BEA will release the second estimate of fourth quarter gross domestic product, along with the Personal Income and Outlays for January, which will contain the Fed’s favored measure of inflation, the Core PCE. If core PCE converges with core CPI, this last data point could potentially sway interest rate expectations toward a hike.

Scheduled appearances by Fed Vice Chairman Stanley Fischer and Atlanta Fed President Dennis Lockhart this week may provide hints regarding the Fed’s current mindset. The meeting of G-20 finance ministers in China at the end of the week will also raise the potential for coordinated global action by central banks.

Flash eurozone PMI fell to 52.7 in February, the worst showing in more than a year. The flash PMI for Japan fell to 50.2, barely in expansionary territory. The Japanese PMI was pulled lower by a drop in export orders, pointing to continued weakness in the Chinese economy. January CPI data for the Eurozone is scheduled to be released on Thursday.

In addition to earnings reports from some of Europe’s largest banks such as HSBC, Lloyd’s and RBS, the markets will digest reports from retailers Home Depot (HD), Lowe’s (LOW) and Target (TGT), as well as Best Buy (BBY) and J.C. Penny (JCP). Consensus estimates are for Home Depot, Lowe’s and Target to all show an increase in revenues and earnings per share. Target is expected to show a profit due to strong online holiday sales. Best Buy is expected to report lower quarterly numbers as its holiday sales were weak and it continues to struggle against online retailers such as Amazon. Turnaround efforts are expected to return J.C. Penny to profitability after last quarter’s losses. The slew of retail numbers out this week will affect funds such as SPDR Retail (XRT), which have broad exposure to the sector.

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