The S&P 500 surged 2.5% last Friday, its best one-day gain in more than four months, as investors cheered Japan's surprise new stimulus measure and better-than-forecast manufacturing data in the Chicago area. The Bank of Japan said it will encourage banks to lend by imposing a negative 0.1% interest rate on certain excess cash holdings. This first time move is also expected to weaken the yen and boost inflation. Wall Street sentiment also improved after a slightly weaker-than-forecast gross domestic product (GDP) report suggested the Federal Reserve may slow its pace of further interest rate hikes this year. In the first of three government GDP estimates, fourth quarter growth cooled to a 0.7% annualized rate—down from a final 2% pace the prior quarter. Although not yet final, 2015 U.S. GDP real growth expanded by 2.4%, the same pace as in 2014. Further GDP revisions are due out in February and March when more information becomes available.
For the week, the S&P 500 rose +1.77%, its second weekly gain in 2016, trimming its year-to-date (and worst 10-day start to a year) loss to -4.96%. Since its 1,812 intra-day low on January 20, the benchmark equity index has rallied more than 7%. The Dow Jones Industrial Average gained nearly 373 points, representing a +2.32% gain for the week. EAFE (Developed International) increase +1.5%.
What We’re Reading
Bank of Japan Implements Negative Rate Policy -- Reuters
GDP Growth Downshifts in Fourth Quarter -- Investor's Business Daily
Wait-and-See Mode for the Fed -- Bloomberg
Chart of the Week:
December New Home Sales Jumped to 10-Month High; Fourth Quarter Sales Up 15.3%
New home sales soared 10.8% in December, the most since August 2014, to a 544,000 annualized pace. These figures, which were reported by the U.S. Census Bureau and Department of Housing and Urban Development on January 27, 2016, included upward revisions to prior months that leave new home sales for the quarter up a solid 15.3% on a seasonally-adjusted annualized basis. JPMorgan's latest forecast looks for continued gains in housing starts, based partly on the strong upturn in housing permits in the fourth quarter of 2015. The reported increase in new home sales provides important demand-side support for this forecast (see preceding chart).
Nevertheless, a separate reading from the Census Bureau on Housing Vacancies and Homeownership provided mixed takeaways for the housing market. The data showed the number of households grew by only 0.4% in 2015. The report also shows the beginnings of a recovery in the homeownership rate. The rate had declined from a seasonally-adjusted peak of 69.4% in the second quarter 2004 to a multi-decade low of 63.5% in second quarter 2015 before edging up in each of the past two quarters to 63.7%. If sustained, the rise in home-ownership would support the market for single-family homes.
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