The Week in Review: Volatility High, Prices Low
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U.S. equities saw a fall and recovery amidst greater uncertainty about falling prices in Europe and in the U.S.
The S&P 500 saw three straight days of steep declines before reviving at the end of this week, leaving the index down nearly 1.3% for 2015. The tumult in prices caused the volatility index, or VIX, to peak near 23 before closing at 17.01 on Thursday afternoon. Treasuries also saw mixed movements, with the 10-year Treasury yield dipping below 2% on continued fears of disinflation, only to recover to 2.01% by the end of Thursday.
U.S. equities saw a fall and recovery amidst greater uncertainty about falling prices in Europe and in the U.S.
The S&P 500 saw three straight days of steep declines before reviving at the end of this week, leaving the index down nearly 1.3% for 2015. The tumult in prices caused the volatility index, or VIX, to peak near 23 before closing at 17.01 on Thursday afternoon. Treasuries also saw mixed movements, with the 10-year Treasury yield dipping below 2% on continued fears of disinflation, only to recover to 2.01% by the end of Thursday.
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Services Sluggish, Employment Mixed
With growing uncertainty about the pace of economic activity in the United States, investors were unsettled further by a report released Tuesday that non-manufacturing services demand fell in December.
According to the Institute of Supply Management, non-manufacturing services demand fell 5.2% month-over-month in December, despite “mostly positive” responses from businesses about business conditions in the United States.
The survey also noted that total employment activity rose, which echoed a separate release from payroll processor ADP. In their report, ADP noted that private companies added 241,000 workers in December, with 194,000 jobs added to the service sector, far beyond expectations.
Despite overall strength in the market, the Bureau of Labor Statistics noted that adult men saw higher unemployment in November, as 9.1 million remain unemployment throughout the U.S. Long-term unemployment, while lower than in 2013, remained at 2.8 million.
Weakening Exports
Although most economists agree that the United States is the strongest economy globally going into 2015, stocks and growth expectations stumbled with data released this week indicating that exports from the U.S. are falling. According to the Department of Commerce, the U.S. trade deficit grew with China and the E.U., with exports stagnating. However, exports remain 18% above their highest point before the 2008 global financial crisis.
In total, exports fell 1% month-over-month to $196.4 billion in November, and some analysts believe exports could fall further as weak commodity prices and a strengthening dollar pinch demand for U.S. produced goods.
Deflation Fears
Weak demand from out-of-work Americans and falling oil drove the Federal Open Market Committee to announce this week that they do not expect interest rates to rise in the first quarter of 2015, and that the Federal Reserve will remain “patient” in its interest rate setting policy.
In Europe, fears of deflation have heightened after Spain announced prices fell 1.1% at the end of 2014. The euro fell to a nine-year low on Thursday, with analysts at several investment banks warning that the currency will likely fall further.
Oil also fell for the week, with WTI futures closing on Thursday below $49 and Brent futures trading at $51.12. Further declines in oil could accelerate the deflationary trend in Europe, while also bringing the likelihood of negative price growth in the United States.
