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Weekly Vantage Point | 12.21.15

Falling Oil Sparks Global Growth Concerns

December 21, 2015 – U.S. stocks fell sharply on Friday, with the S&P 500 registering its worst two-day slide since September 1 (-3.3%) and more than fully erased its gain on the week. Investors were spooked by weaker oil prices and afternoon comments from Moody's Investor Services, saying "weak commodity prices are likely to persist for years." The Bloomberg Commodity Index, which tracks the prices of 22 raw materials, fell 1.24% last week, having fallen on Thursday to its lowest level since March 1999. The collapse in oil prices—West Texas Intermediate (WTI) crude is down nearly 35% year-to-date—and the broader tumble in commodities spawned new concerns over a slowdown in world growth. Selling intensified near Friday's closing bell due to the quarterly options expiration, known as quadruple witching.

Meanwhile, it was a historic week on Wall Street as members of the Federal Reserve's policy committee voted unanimously on Wednesday to raise interest rates for the first time since June 2006, increasing its federal funds rate by ¼-point to a new target range of 0.25%–0.50%. The move ends the Fed's so-called zero-interest-rate-policy that has been in place since December 2008. Fed Chair Janet Yellen emphasized that "future rate normalization (increases) will occur gradually" next year. She added that the central bank projects its key interest rate to end 2016 at 1.375%, implying four future ¼-point rate increases from the new target range. In a key economic data release last week, the consumer price index (CPI) was unchanged last month, while the core-CPI, which excludes volatile food and energy prices, rose 0.2%. Headline consumer prices are up just 0.5% from a year ago, while core prices are up a full 2%.

For the week, the S&P 500 slipped 0.31%, the Dow Jones Industrial Average lost 0.79%, and the NASDAQ Composite slipped 0.19%. Five of the ten major sector groups declined, led by Materials (-3.05%), Technology (-1.30%) and Energy (-1.05%). Utilities (+2.77) and Telecom (+1.34%) outperformed. WTI crude oil ended at $34.73/barrel, capping its seventh weekly decline, losing 2.5% last week. Gold prices fell 0.8% during the week. Treasury prices also declined last week, with the yield on 10-year Treasury notes gaining 7.7 basis points to finish at 2.205%.

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Week’s Economic Calendar

Monday, December 21: Chicago Fed National Activity Index;

Tuesday, December 22: Final 3Q GDP, Existing Home Sales;

Wednesday, December 23: Durable Goods Orders, Personal Incomes & Outlays, New Home Sales, Consumer Sentiment;

Thursday, December 24: Weekly Jobless Claims, Markets Close Early;

Friday, December 25: Christmas Holiday, All Markets Closed.

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Market Watch
Stocks 1-Wk MTD 3-Month YTD 1-Year
Dow Jones -0.79% -3.34% 4.54% -3.90% -3.66%
S&P 500 -0.31% -3.48% 2.98% -0.58% -0.64%
NASDAQ -0.19% -3.59% 2.29% 5.13% 4.90%
Russell 3000 -0.31% -3.90% 1.64% -1.42% -1.28%
MSCI EAFE -0.17% -3.07% -1.12% -2.55% -2.09%
MSCI Emerging Markets 2.12% -2.96% -4.59% -15.55% -13.49%
Bonds 1-Week MTD 3-Month YTD 1-Year
Barclays Agg Bond -0.35% -0.06% -0.20% 0.81% 1.13%
Barclays Municipal 0.00% 0.57% 1.90% 3.17% 3.45%
Barclays US Corp High Yield -0.95% -3.50% -5.63% -5.43% -4.58%
Commodities 1-Week MTD 3-Month YTD 1-Year
Bloomberg Commodity -1.23% -4.46% -11.69% -25.73% -28.61%
S&P GSCI Crude Oil -3.19% -13.42% -19.90% -32.31% -33.68%
S&P GSCI Gold -0.99% -0.03% -6.40% -10.06% -10.86%
Source: MorningStar
Chart of the Week: Core CPI Inflation is Already up to 2.0%
View larger image »

Trends of low overall inflation and a gradual acceleration of the CPI measure of core inflation were sustained in November. The CPI was unchanged on declines in energy (-1.3%) and food (-0.1%) prices. We expect weak energy and food prices to keep the CPI close to flat through the first quarter of 2016. The core CPI increased 0.18% in November and the over-year-ago change edged up to 2.0% from a recent low of 1.6% at the beginning of the year. Core goods prices remained weak in November and were down 0.2% on the month and are down 0.6% year-over-year (YoY). But the CPI for core services increased 0.3% in November and accelerated to 2.9% YoY.

We believe that core personal consumption expenditures (PCE) prices—the Fed's preferred measurement of inflation—will likely hold at 1.3% in November. Considering the chart above, we forecast the unusually wide split between these two leading measures of core inflation will widen further in coming months. Part of the divergence reflects different scope and source data for the price of medical services. We expect the core PCE for medical services to rise 0.14% in November but be up 0.9% YoY and 1.0% annualized over the past six months.

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The Barclays U.S. Aggregate bond Index is an unmanaged index composed of Barclays Credit government bond index, mortgage backed securities index, and asset backed securities index and is generally representative of the US Bond market.

The Barclays U.S. Corporate High Yield Index measures the market of USD-denominated, non-investment grade, fixed-rate, taxable corporate bonds. Securities are classified as high yield if the middle rating of Moody's, Fitch, and S&P is Ba1/BB+/BB+ or below, excluding emerging market debt.

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CRB Index: A pricing index that measures changes in the price of 22 commodities that are believed to be among the first to react to changes in economic conditions.

The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

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The S&P GSCI Gold Index, a sub-index of the S&P GSCI, provides investors with a reliable and publicly available benchmark tracking the COMEX gold future.

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