The Daily Prophet: Of Stocks, Profits and Yellen's Credibility

A roundup connecting the dots in global markets.

After clearing away the champagne bottles, confetti and balloons after the Dow Jones Industrial Average's historic rally above 20,000, stock traders got back to business today. No case of buyers' remorse could be found, as the index rose again, marking its first three-day rally since early December.

With valuations at their highest since the dot-com bubble, there are plenty of skeptics to question the durability of this eight-year bull market. But one of the things this rally has going for it is the return of corporate profit growth. In fact, earnings for members of the S&P 500 are on track to rise at the fastest pace in two years. Profits jumped 6.3 percent for companies that have announced results, a rate that, if sustained, would make this quarter the best since September 2014.

"The best news is that fundamentals are improving and are unlikely to leave that trajectory in the near term,'' equity strategists at Wells Fargo Investment Institute write in a note to clients.  

The big debate among bond traders in the last two years is whether the Federal Reserve had lost its credibility. The Fed looked very hawkish in both 2015 and 2016, forecasting multiple interest-rate hikes, stronger growth and faster inflation. As we now know, the central bank only managed to raise rates once each year, and inflation failed to meets its 2 percent target. The Fed is back at it, anticipating three rate increases, but this time it may actually happen. Bond traders are finally coming around to the idea that inflation is on the rise, with breakeven rates on five-year Treasury-Inflation Protected Securities rising to 2 percent for the first time since mid-2014.

One chart making the rounds on Wall Street shows a rare divergence between the dollar and Treasury yields. Much of the dollar's strength in the second half of last year can be tied to yield-starved international investors piling into the currency to obtain the higher interest rates paid on U.S. fixed-income assets relative to the near-zero rates offered by European and Japanese debt. But in the last week or so, the greenback weakened even though Treasury yields marched. So are interest rates no longer driving the dollar? Strategists at Brown Brothers Harriman aren't convinced that's the case. They say there have been short term divergences numerous times over the past year, and this "correction'' will soon reverse.

The big selloff in global bonds that captivated markets the last half of 2016 has taken a breather in the U.S. But not in Europe, where politics have traders on edge. Leaders in Spain and Germany voiced concern that the Europe Union faces collapse if anti-establishment forces succeed. They point to their common neighbor France as the potential trigger. Europe’s electoral calendar, with ballots this year in France, the Netherlands and Germany -- plus possibly Italy -- presents the continent’s “enemies” with the chance to wreck the EU, according to the German Vice Chancellor Sigmar Gabriel, a Social Democrat.


Forget the weatherman. If you really want to know how cold it's going to get in the U.S. just check the market for natural gas. According to Bloomberg News's Jonathan N. Crawford, futures climbed the most in two weeks as a shot of polar air from Canada prepared to spread across the northern central U.S. from Feb. 5 through Feb. 9, according to Commodity Weather Group LLC. The low in Minneapolis could be 6 degrees Fahrenheit (minus 14 Celsius) on Feb. 5. Seasonable temperatures are forecast for much of the rest of the nation.


There's plenty for traders to keep an eye on Friday. First, the Commerce Department will release its first look at how fast the economy grew at the end of the last year. The consensus is for a slowdown to 2.2 percent on an annualized basis from the 3.5 percent recorded in the prior quarter. Then, U.K. Prime Minister Theresa May meets President Donald Trump in the hope of laying the groundwork for a U.K.-U.S. trade deal. The pound has been on the rise the last couple of weeks, and a positive outcome could keep interest in the currency high.     

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.