Bank of Japan and Oil Detracting Market's Focus from Weak GDP Report

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The capital markets are cranking this morning with newsflow, opting at this time to favor all of the seemingly positive developments. The S&P futures are up 13 points and are trading 0.9% above fair value.

The biggest news item of note is that the Bank of Japan (BOJ) surprised markets with a decision to adopt negative interest rates: -0.1% to be exact. The decision stemmed in part from its concerns that the underlying trend in inflation might be delayed by falling oil prices and the uncertainty surrounding the Chinese economy.

Japan's Nikkei surged 2.8% Friday in response to the news. We should say it was a Pavlovian response. The BOJ rang the bell of added accommodation and orders to buy instantly followed. The move to negative rates, though, is really a problem masquerading as a headline solution.

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We say that knowing a decision by a central bank to take its main borrowing rate negative is really a tacit admission that the outlook stinks (for lack of a better word). Also, the latest policy move is leading to a pronounced weakening in the yen against the dollar and further dollar strength is not a good thing for emerging markets trying to repay dollar-denominated debt, the export prospects for the US, the earnings prospects for US multinationals, the inflation trends in the US, or for dollar-denominated commodity prices.

For the time being, global markets appear to be cheering the appearance of a central bank put, but in the grand scheme of things, we hear the sound of one hand clapping with the BOJ's latest move.

There isn't much cheering going on for's (AMZN) latest earnings report. Shares of AMZN are trading 11% lower in pre-market action after the company reported an operating profit of $1.00 per diluted share that was well below analysts' average expectation. The irony, we suppose, is that Amazon's stock often reacted better when the company was losing money. Shame on it for actually reporting a profit.

Sometimes it can be hard to figure out what is exactly expected of a company. All we can tell from the initial reaction to Amazon's report is that investors didn't think it measured up well enough to the market's very lofty expectations.

Microsoft (MSFT), on the other hand, topped analysts' average earnings expectation and is acting as an offset to the weakness in Shares of MSFT are indicated nearly 4.0% higher.

There weren't many offsets in the advance fourth quarter GDP report. It was quite weak as expected, showing an annualized rate of real GDP growth of just 0.7%. That was below the consensus estimate of 0.9% and down from 2.0% in the third quarter. The GDP Deflator was up 0.8% ( consensus +0.9%) after a 1.3% increase in the third quarter.

The report showed weak quarter-over-quarter readings for all key components. Personal consumption expenditures were up just 2.2% versus 3.0% in the third quarter, gross private domestic investment declined 2.5% after declining 0.7% in the third quarter, exports were down 2.5% after increasing 0.7% in the third quarter, imports were up 1.1% after increasing 2.3% in the third quarter, government spending was up 0.7% after increasing 1.8% in the third quarter, and the change in private inventories was -$16.9 billion.

The increase in personal consumption expenditures accounted for 1.46 percentage points of GDP growth, which was offset primarily by the negative contribution from net exports (-0.47 percentage points) and the change in private inventories (-0.45 percentage points).

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Final sales of domestic product, which exclude the change in inventories, were up just 1.2% after increasing 2.7% in the third quarter. That was the weakest pace since a 0.2% decline in the first quarter of 2015.

In a separate release, it was reported that the fourth quarter employment cost index increased 0.6%. That was in-line with both the consensus estimate and the third quarter increase.

Wages and salaries increased 0.6% and benefits increased 0.7%. Compensation costs for civilian workers increased 2.0% for the 12-month period ending in December 2015 versus 2.2% for the 12-month period ending in December 2014. Wages and salaries for the 12-month period were up 2.1%, unchanged from 2014.

We can't say there is a lot to cheer in the early economic releases. The GDP report just doesn't measure up in the context of what many had thought it might look like only a short time ago. If nothing else, it lends clarity to why corporate guidance for the first quarter has been weak.

Traders, however, are still cheering the move in oil prices. They are up another 1.1% this morning to $33.60 per barrel in spite of the stronger dollar as visions of a potential production cut agreement are still dancing in the market's head. On a related note, Chevron (CVX) missed analysts' average earnings expectation for the December quarter by a large margin on a 36.5% decline in revenue. It is down 1.6% in pre-market action.

The bump in oil prices and the happy, happy move by the BOJ are whetting the appetite of traders this morning. They will at least make for a positive open.

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About Patrick O'Hare