Riding the roller coaster

Finally, my life strategy of being too poor to have any investments is paying off.

djia jan15

What’s the problem? Well, lots of things, apparently:

Weak U.S. economic data has not helped matters today. December retail sales dipped 0.1% in December. Manufacturing in the New York region came in much weaker-than-expected in January and industrial production for December also fell short of estimates. The weak data points prompted at least two Wall Street firms to reduce their fourth-quarter GDP growth projections. Barclays now sees growth at 0.4% in the final quarter of 2015 and UBS cut its estimates to 0.8% from 1.2%.

Stifel’s Bannister lays out what’s spooking investors: “What most investors fear is deflation, a fall in the general price level,” he says. “The two greatest catalysts for deflation have been China devaluing its currency and the Fed potentially going too fast hiking rates.”

If there’s good news, he says, it is that those deflation concerns “may dissipate if China continues to move to stabilize their currency as they have done pretty decisively in recent days,” and if the Fed reduces the number of planned interest rate hikes this year. Bannister sees the Fed hiking rates just a half of a percentage point in 2016, and not the full-point it has forecasted. “That would bring the Fed more in-line with market sentiment, which is positive for stocks,” he says.

Oil fell to under $30 a barrel for the second time in a week Friday —  Brent crude was down 3.8% to $29.72 a barrel at around 5.50 a.m. ET. Crude briefly fell to under $30 a barrel on Tuesday for the first time since 2003. U.S.-produced crude was trading down $1.71, or 5.5%, to $29.49.

Wait, didn’t the Fed just raise rates a couple of weeks ago because the economy was All Better now? Way to go, guys!

China’s economic slowdown is mostly to blame, though some analysts are saying that there’s only so far the Chinese economy can fall so the damage should be limited:

In fact, China is further along in that adjustment than is generally known. The conventional thinking is that China’s economy remains dominated by an industrial sector focused on exports. It was a weakening of China’s manufacturing data early this year that largely set many global investors on edge.

But this ignores the relatively strong services sector, which has been the main engine of Chinese growth for the last three years and now accounts for more than half of the country’s economy, said Nicholas Lardy, a China expert at the Peterson Institute for International Economics. China’s opaque economic and political system makes it impossible to know for sure, but Lardy and other analysts are confident that Chinese private spending has continued to rise even as manufacturing has slowed.

“Our picture of China as a big export machine just isn’t accurate,” said Barry Bosworth, an Asia economic expert at the Brookings Institution. “What matters is that China is fundamentally a domestically based economy. It’s a great big domestic economy. And a threat of a collapse is very small. It’s just got too much wealth behind it.”

But that cheap oil isn’t helping either. It might look nice at the gas pump, but $29/barrel oil contributes to downward pressure on prices across the board, which increases the risk of a worldwide deflationary cycle. This is a fear that people were raising last January, when oil was $20/barrel more expensive than it is right now.

Admittedly, the price of oil can’t get much lower (can it?), but the past couple of weeks of declines really are calling the Fed’s decision to raise rates into question.

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