OREANDA-NEWS. March 31, 2016. The five week rally in the S&P 500 ran out of steam last week. There was no steep selloff, nor was there strong downside volume, but stocks could not muster the strength to push higher. A firmer dollar and the Belgian terror attack took their toll on risk appetites in the shortened trading week. Oil was unchanged on the week, closing at \\$39.46 a barrel, but not before reaching \\$41.45 on Tuesday, its highest level since Dec. 1, and 59 percent above its Feb. 11 trough. After falling to its lowest level since mid-October on March 17 at 94.76, the DXY U.S. dollar index has staged a modest comeback, ending the week at 96.29, pushing commodity prices and emerging market stocks lower in the process.

The S&P Goldman Sachs Commodity index reached its highest level since early December on March 17, just as the dollar bottomed, and has since fallen 3 percent. Emerging market stocks slumped 1.6 percent on the week, putting at least a temporary halt to a surge that had taken the index higher by 16 percent in the previous five weeks.

The Fed’s Next Rate Hike Could be Closer Than Many Think

St. Louis Fed President James Bullard said last week that the next rate hike might not be too far off if the economy performs as expected. Philadelphia Fed President Patrick Harker also spoke about the Fed’s need to get on with it in regard to raising rates. Chicago Fed president Charles Evans made remarks regarding future rate hikes. These all came just days after the Federal Open Markets Committee (FOMC) chose to keep rates unchanged at its March meeting, citing headwinds from overseas and unsettled markets, which was widely interpreted as dovish by investors. But last week’s rhetoric shifted that outlook somewhat, contributing to the dollar strength. The Fed meets in April, but the market-based odds of a rate hike then are less than 10 percent. The odds do not approach 50 percent until the Fed’s June meeting.  

As the Fed continuously reminds us, this is all data dependent. And for the data hungry, this week serves up plenty to digest. On Monday, the latest readings on personal consumption and income for the month of February are scheduled, as is the February inflation reading of the Personal Consumption Expenditures (PCE) deflator, which is expected to show the highest core rate in 3.5 years at 1.8 percent.
On Friday, the March employment report is expected to show another month of solid job growth, in the vicinity of 200,000. On the same day the ISM manufacturing index is expected to show a resumption of growth after five months of contraction.
Last Friday, Q4 GDP in the U.S. was revised upward to an annualized pace of 1.4 percent from the previous estimate of 1.0 percent. The revision was driven by an increase in personal consumption, evidence that the consumer continues to be the one bright spot on the domestic economic landscape. The GDP report also showed that corporate profits declined 3.1 percent in 2015, the weakest result since 2008. Not unexpectedly, weakness in the energy sector was the primary cause. First quarter earnings season in the U.S. kicks off on April 11, and according to Factset data expectations now call for a decline of 9 percent compared to the first quarter of last year, which would mark the fourth successive quarterly decline.

A Look at the Eurozone … What Could a ‘Brexit’ Mean for Markets?

Eurozone equities also slumped last week. Most of the selling came on Thursday ahead of the Good Friday holiday, not immediately following the terrorist attack on Tuesday as might be presumed. In the wake of the attacks, London bookmakers raised the odds of Britain voting to exit the European Union in June to 40 percent from roughly 33 percent prior to the attack. Some odds makers now place the odds as high as 45 percent.

The possibility of a so-called Brexit introduces a new element of risk into European markets that could prove to be exceptionally disruptive. U.K. equity markets, in particular, could be quite vulnerable, as could other markets throughout the European Union. Although the U.S. would likely see less of a reaction, it might not be completely insulated from the disruption that would follow a yes vote.

Important Disclosures:       

The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances.

The S&P 500 is an index containing the stocks of 500 large-cap corporations, most of which are American. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill.

The U.S. Dollar Index (DXY) measures the dollar's value against a trade-weighted basket of six major currencies.

The S&P Goldman Sachs Commodity Index is a composite of diversified, unleveraged commodity futures which serves as a commodities market benchmark and an economic indicator.

The Personal consumption expenditures (PCE) are measures of price changes in consumer goods and services. Personal consumption expenditures consist of the actual and imputed expenditures of households; the measure includes data pertaining to durables, non-durables and services.

The ISM manufacturing index is a national manufacturing index based on a survey of purchasing executives at roughly 300 industrial companies.

MSCI-All Country World Ex. U.S. Index: Is an unmanaged index representing 48 developed and emerging markets around the world that collectively comprise virtually all of the foreign equity stock markets.

Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance. Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution and involve investment risks including possible loss of principal and fluctuation in value.