Weekly Market Report: April 7, 2023
The first week of April was relatively quiet with the equity markets at the doorstep of 1Q23 earnings season. Last week’s economic calendar flashed some (welcomed?) signs of slowing growth and a cooling labor market. U.S. equity markets ended the week pretty flat with the VIX back down around 18. Large caps (S&P 500 -0.10%) outperformed small (Russell 2000 -2.7%), oil jumped 6% on the Saudi production cut news, and the yield curve bear flattened, pushing the 10yr UST down to 3.39%.
- With U.S. equity markets up 7% YTD, inflation staying above target, a vigilant Fed, and U.S. equity market trading at a premium, we expect markets to be particularly discerning with regard to Q1 earnings reports, profit margins, and forward guidance.
- March labor market data across job creation, weekly/continuing claims, wages, quit rates, and job openings suggest the hot labor market is cooling but certainly not in a typical recessionary fashion. The unemployment rate typically moves sideways for two years prior to recession.
- Monetary policy news last week included some Fed speaking engagements where Bullard noted stronger than expected Q1 economic data and the need for monetary policy to continue to pressure inflation. May fed funds futures leaned back toward a 25 bps hike.
- The flow from bank deposits to money markets has slowed but ripple effects into the Fed repo market are pronounced with nearly 40% of money market assets now parked at the Fed’s Reverse Repo Facility.
- BCA Research suggested the 2023 uptick in inflation, while maybe just noise, may more likely be a result of an increase in aggregate demand resulting from a rebound in real disposable income.
- A quick look at housing market technicals show that while inventories have risen, they remain 19% below pre-pandemic levels. Meanwhile the average age of U.S. homes has risen to 31 years, the oldest stock since 1948 and vacancy rates remain near record lows of 0.8%.
- The European response to the Russian energy crisis has created optimism by breaking up the unhealthy reliance on Russian energy. Additionally, the sizable fiscal response (4.3% of GDP) has left the private sector (and banks) very well capitalized.
- It’s worth noting that while the USD experienced a brief rebound in February, it is down 11% collectively since the late September 2022 peak and more likely remains in a structural bear based on balance of payments and relative valuations.
- WTI crude oil surged 6.6% last week thanks in part to OPEC 2.0 announcing a 1.16mbpd production cut scheduled to begin next month taking total cuts since October 2022 to nearly 2.7mbpd.
Economic Release Highlights
- The March jobs report revealed 236,000 jobs, in line with the forecast of 240,000. The unemployment rate dropped to 3.5% from 3.6 and average hourly earnings growth registered 0.3% MOM and 4.2% YOY, all relatively inline as well.
- March ISM Manufacturing Index registered 46.3, falling short of the spot forecast 47.5 and slightly above the low end of the consensus range. ISM Non-Manufacturing (Services) came in well below forecast (51.2 vs 54.4) and were also slightly above the low end of the consensus range.
- The March JPM Global PMIs (C,M,S) registered (53.4, 49.6, 54.4) with Eurozone (53.7, 47.3, 55.0), U.K. (52.2, 47.9, 52.9), and India (58.4,56.4,57.8) surveys looking relatively robust.
- February JOLT Survey registered 9.931mm job openings, below consensus 10.4mm forecast.