Weekly Market Report: April 26th, 2024

Corporate earnings, discounting market rate cut expectations, and a full economic calendar were the key drivers in the market last week with a stagflation GDP narrative countered by healthy consumer spending and inflation dynamics. By week’s end, the S&P 500 (+2.7%) and NASDAQ (+4.2%) both closed with healthy gains, snapping their three- and four-week losing streaks, respectively. Healthy earnings reports from several big technology companies helped equity market sentiment. Bond yields edged slightly higher across the curve last week with the 10yr UST yield closing at 4.67% while the USD and commodity markets were relatively flat.

Market Anecdotes

• Markets continued to calibrate rate cut expectations last week with warm inflation numbers, a slower than expected GDP report, and some deteriorating U.S. PMIs adding to the conversation.
• Strong personal consumption and private investment in Q1 helped offset a seemingly disappointing GDP report which was dragged down by net exports, government spending, and private inventories.
•  Employment data within the PMI survey show slowing demand for labor, particularly across service sectors.
• The BOJ held steady last week following a move to hike rates for the first time in 20yrs. The Yen has weakened by 10% YTD (vs USD) and touched a 34-year low last week. A key driver behind the Yen is interest rate differentials which are influenced directly by Fed policy expectations.
• Some momentum behind Chinese equities has brought YTD returns nearly in line with global averages. Key drivers include what were very compelling valuations, touching a 12yr low of 8x, and some equity market oriented central policies designed to foster confidence.
• We’re at the midpoint of the U.S. earnings season with top- and bottom-line blended growth of 4% and 3.5%, respectively, with beat rates (77%) and beat margins (8.4%) generally in line with historical averages.
• Bank earnings reports have revealed that the NII (net interest income) and NIM (net interest margin) party of 2023, which benefited from rising rates and garnered significant flight to quality deposits (SVB) is winding down.
• U.S. government debt of $28t totals just over 100% of GDP with an average duration of 6-7 years and a healthy 30% reliance on foreign buyers/holders which is well below the 40% level we saw 5 years ago. For reference, outstanding Japanese government debt stands at 255% of GDP but the savings rate is 39% versus a mere 3.5% in the US.

Economic Release Highlights

• Headline (core) PCE inflation in March came in slightly above YOY forecasts, (2.8% vs. 2.7%) and in line with MOM forecasts (0.3% vs. 0.3%). Personal Consumption again exceeded forecast (0.8% vs 0.6%) while Personal Income growth of 0.5% was in line.
• First quarter U.S. GDP of 1.6% was well under consensus forecast of 2.3% and below the bottom end of the forecast range of 1.7%-2.8%.
• April U.S. PMI (C,M,S) of (50.9,49.9,50.9) saw both services and manufacturing come in under their respective spot forecasts.
• Global PMIs (C,M,S) in April for the Eurozone (51.4,45.6,52.9), UK (54.0,48.7,54.9), and Japan (52.6,49.9,54.1) reflected continued economic expansion overseas.
• Durable Goods Orders in March grew 2.6%, higher than the forecast of 2.3%. Ex-Transportation (0.2% vs 0.3%) and Core Capital Goods (0.2% vs 0.2%) were generally in line.
• The final UofM Consumer Sentiment index was revised lower from 77.9 to 77.2 and one-year inflation expectation ticked 0.1% higher to 3.2%.
• New Home Sales in March registered 693K, ahead of the spot consensus 670k and above the high end of the 625k-685k range. Pending Home Sales grew 3.4% MoM, well ahead of the 1% consensus expectation.

Weekly Market Report: April 12th, 2024

A closely watched economic calendar, ample Fedspeak, and ramp in geopolitical tensions made for a volatile week in the markets. A third consecutive warmer than expected CPI print was complemented by eleven Fed speaking engagements offering speculation and soft guidance on the thought process behind U.S. monetary policy. Additionally, the looming Iranian-Israeli conflict was well telegraphed in the media and came to fruition over the weekend. By the end of the week, global equity markets consolidated by 1.5%-2.5% and counter balancing forces of inflation pressures and flight to quality (geopolitical tensions) netted a second consecutive double rise in bond yields. Commodities declined slightly in what has otherwise been a very strong year and the USD rallied on what was likely a geopolitical driven flight to quality bid.

Market Anecdotes

• Bond yields, Fed fund futures, currency markets, and equity markets each notched a reaction to Wednesday’s CPI print, FOMC minutes, and some weak UST auctions with interest rates surging, 2024 Fed rate cuts fading, a strengthening USD, and stock markets consolidating.
• Interestingly, despite all of the noise across equity and bond markets, volatility measures of both have yet to move notably higher.
• With last week’s weak reception of UST auctions and FOMC minutes reflecting interest in slowing the pace of Fed balance sheet runoff, a timely report from Alpine Macro examined the question, “Is fiscal policy driving the treasury selloff?” left us with a definitive answer of “maybe”.
• The most recent J.P. Morgan Duration Survey shows, while duration indications had become very long coming (net 20%) into the year, they’ve fallen back toward neutral today as the bond market trend of November/December has reversed into 2024.
• BCA highlighted the “Mel rule”, a labor market oriented leading recession indicator, similar to the “Sahm rule”, with the exception that the latter has been triggered and the former has not. Their historical accuracy of predicting recession makes them worth a listen.
• First quarter corporate earnings kicked off last week in what will be a closely watched cycle given the inflection points and uncertain path forward with respect to the overall economy (growth/inflation/employment).
• An encouraging indicator of global growth BCA noted last week is the carry trade where investors go long high yielding currencies and short lower yielding currencies.
• The BoC and ECB met last week, both leaving rates unchanged. The ECB did set the table for a June cut, noting Euro area inflation has different dynamics than the U.S. and they’re largely pleased with the trajectory.
• Last weekend’s attack on Israel by Iran in response to an embassy bombing puts geopolitics and oil infrastructure back on the front burner with early indications that cooler heads and diplomacy will be the goal of the U.S. and G7 nations.

Economic Release Highlights

• March YOY headline (3.8 vs 3.7) and core (3.5% vs 3.5%) CPI along with MOM headline (0.4% vs 0.3%) and core (0.4% vs 0.3%) both came in slightly warmer than forecasted.
• March headline PPI (YOY 2.1% vs 2.3% and MOM 0.2% vs 0.3%) registered below expectations while the core readings (YOY 2.4% vs 2.3% and MOM 0.2% vs 0.2%) were warm and in line, respectively.
• UofM Consumer Sentiment in March came in at 77.9, slightly below consensus forecast of 79.0.
• The March NFIB Small Business Optimism Index registered 88.5 versus consensus forecast of 89.9.

Weekly Market Report: April 5th, 2024

With first quarter earnings season on the doorstep, markets took in a full (and healthy) calendar of economic reports last week, several Fed speaking engagements, and a fresh dose of geopolitical risk. Market implications amounted to speculation surrounding the beginning of Fed rate cuts alongside persistently elevated geopolitical anxiety in the Middle East. Global equity markets were mixed with the U.S. and
developed international markets down approximately 1% countered by a rally in China and India to buy emerging markets. Bond yields moved notably higher on the back of strong growth and higher for longer narratives from FOMC members. Commodity markets also rallied on the growth backdrop and oil (+4.5%) received a strong bid thanks to fresh conflict between Iran/Syria and Israel.

Market Anecdotes

• Fed speak last week saw 18 public comments from FOMC members mostly continuing the hawkish narrative we’ve seen steadily over the past few months, most notably clearly hawkish comments from Logan and Bowman in the wake of Friday’s strong jobs report.
• Economic reports and Fed narratives have now taken expected rate cuts in 2024 down to 2.6 with a cut not fully priced into the futures market until September.
• The recent uptick in U.S. inflation data stands in stark contrast to the EU where flash estimates of headline (2.4%) and core (2.9%) inflation are continuing to decline and surprising to the downside.
• First quarter earnings, set to begin next week, are forecasted to grow 3.6% to $54.94. The first quarter saw a smaller than usual downward estimate revisions of 2.5% but both the number and percentage of companies issuing negative guidance increased more than usual.
• Bespoke noted the historically high (bullish) bull/bear spread readings for both AAII and II surveys with the latter in the 99.3rd percentile since 1997, the former in the 84.5th percentile, and the average of the two in the 96.4th percentile – historically a notable contrarian indicator.
• A counter data point to the deteriorating consumer thesis from Bespoke last week was their Consumer Pulse Survey reflecting a record seven consecutive months of a declining share of respondents indicating they Agree or Strongly Agree they are living paycheck to paycheck.
• Rising federal debt has driven net interest costs to 2.77% of GDP with 3.1% expected by year end, a level not seen since peak deficit spending in 1991. The CBO estimates we’ll hit 3.9% by 2034, consuming over 22% of tax revenue.
• Oil prices surged following Iranian/Hezbollah threats of retaliation on Israel for a strike on the Iranian consulate in Damascus. Tight supply dynamics, robust growth, and risks of conflict expanding beyond Gaza pose clear upward pressure on oil prices.

Economic Release Highlights

• March payrolls came in well above consensus (303,000 vs 200,000) with the participation rate increasing 0.2% to 62.7%. The headline unemployment rate fell to 3.8% and average hourly earnings grew 0.3% MoM and 4.1% YoY.
• The February JOLTS report of 8.756M job openings was in line with the spot forecast and essentially unchanged from the prior month.
• The March ISM Services Index was slightly under forecast (51.4 vs 52.7) while the Manufacturing Index beat both the spot forecast (50.3 vs 48.3) and consensus range of 47.5 to 49.5.
• The March JPM PMI Index (C,M,S) registered 52.3, 50.6, 52.5, a slight improvement over February’s 50.3 manufacturing and 52.4 services readings.

Weekly Market Report: March 29th, 2023

Broad equity markets closed higher for the week, month, and quarter in a holiday shortened trading week where the S&P 500 was up 0.40%, 3.43%, and 10.4% respectively. The economic calendar was relatively full but due to markets being closed on Friday, the most watched report (PCE) came after the market closed for the week. Bond yields and currencies were both relatively flat on the week while commodity markets managed a 1.4% gain with WTI oil rallying 3.2% to $83.17 and gold (+2%) marking a new record high of $2,214 per troy ounce.

Market Anecdotes

• The S&P 500 notched a second consecutive quarterly double-digit return, something we haven’t seen since 2012. Of note, never have we seen three consecutive double-digit quarters.
• Equity markets continued to display some of the ‘rotation dynamics’ highlighted recently where 2024 laggards are leading and momentum/growth names are settling in behind. Quarter-end dynamics may be a factor, but a healthy consumer and macro backdrop are certainly helping.
• In terms of policy implications from March FOMC forecast revisions, we’d suggest they paved an easier path forward for themselves with no clear need to deviate from planned policy if growth stays reasonably strong and if core inflation hovers around 2.5%.
• An important distinction between the Fed and markets is that the former sees the long-term neutral rate at 2.56% while the latter at 3.5%, meaning the Fed sees policy as more restrictive than the market longer term.
• Remembering that financial markets and the economy frequently deviate from economic forecasters, including the Fed and most others, particularly over a multi-quarter or multi-year horizon, serves to remind investors the trend is your friend, until it is not.
• The third estimate of U.S. 4Q GDP was revised up from 3.0% to 3.3% and also saw a reduction in core PCE from 2.1% to 2.0% and an acceleration in q/q corporate profits from Q3 3.4% to Q4 4.1%.
• BCA’s note of caution last week was that while the 3mo trailing average unemployment rate, currently 3.76%, has yet to trigger the Sahm Rule, it has triggered in 20 of 50 states and, combined with auto/credit card delinquency rates, dwindling pandemic savings, and softening labor demand, persistently robust consumption may fade over the coming year.

Economic Release Highlights

• The pace of headline (core) PCE inflation in February was generally in line with forecasts, registering 2.5% (2.8%) YoY and 0.3% (0.3%) MoM. Personal Consumption exceeded forecasts (0.8% vs 0.5%) while Personal Income growth of 0.3% was slightly under the 0.4% forecast.
• Consumer Confidence for March registered 104.7, lower than both the spot forecast of 106.7 and forecast range of 105-108.
• The final March UofM Consumer Sentiment Index was revised higher from 76.5 to 79.4 while 1yr (3% to 2.9%) and 5yr (2.9% to 2.8%) inflation expectations ticked lower.
• February’s Durable Goods Orders report showed New Orders (1.4% vs 1.3%), Ex-Transportation (0.5% vs 0.5%), and Core Capital Goods (0.7% vs 0.1%).
• The third estimate of 4Q U.S. GDP was revised higher from 3.2% to 3.4% A/R with Personal Consumption Expenditures increasing from 3.0% to 3.3%.
• China’s CFLP PMI (C,M,S) surprised to the upside in March with readings of 52.7 (50.9 prior), 50.8 (50.2e), 53.0 (51.5e).
•  Case-Shiller Home Price Index showed gains of 6.6% YoY and 0.1% MoM, both within the broad consensus range.
• February New Home Sales of 662k came in slightly under the consensus forecast of 675k. Pending Home Sales increased 1.6% MoM, slightly more than the 1.3% forecast.

Weekly Market Report: March 22nd, 2023

Markets took in a good number of central bank policy meetings and a relatively full economic calendar last week. Both equity and bond markets rallied nicely on what could be categorized as a dovish policy week and a relatively constructive economic calendar. Equity markets in the U.S, Europe, and Japan all marked new record high closes which, because it had been 30 years since the prior Japanese high, hasn’t happened in a long time. Bonds rallied with yields declining across the curve, pushing the 10yr UST bond yield back down near 4.20% while the USD continued its bullish move higher, up 1% on the week and 3% in 2024. Commodity markets were relatively flat with oil hovering around the $80 mark.

Market Anecdotes

• The March FOMC meeting didn’t deliver any surprises and reinforced the Fed has little concern that the inflation trajectory has changed. The dovish narrative was welcomed by the markets who seem fine with a loosening policy bias overall, and rate cuts beginning in June.
• Reading into the Fed’s formal quarterly forecasts, it seems that variability of inflation forecasts appears to be declining, indicating increasing confidence inflation will continue to move toward its 2% target.
• Foreign central bank policy announcements from the BoE, RBA, SNB, and BoJ were squarely in the dovish camp including the BoJ’s decision to end its 8-year experiment with NIRP. Interest rates across broad global bond markets have, in large part, begun to look normal again.
• Strength and resilient economic growth in the U.S. continues to defy forecasters and lead the world with Q1 growth forecasts doubling from 1% to 2% since the beginning of the year and 25 consecutive months of sub-4% unemployment.
• Key contributing factors for dominant U.S. economic growth include very aggressive fiscal policy and elevated spending patterns of the U.S. consumer, averaging a PCE of 69.3% since 2022, well above the pre-CoVid level of 67.6%, and very clearly coming from lower personal savings rates.
•  Recession indicators, the LEI and yield curve inversion, both with long and varying lags, are still flashing caution with the LEI posting a 20th consecutive YoY contraction reading and the 2yr/10yr curve inversion, at 447 days, surpassing the prior record of 445 days from the 1970’s.
• A note from BCA suggested China’s real estate sector contraction is in line for a fourth consecutive year of contraction with home sales, new development, and funding headwinds.
• Both supply and demand forces have bolstered the 13% rally in WTI this year with supply side influences including Ukrainian bombing of Russian refining facilities and OPEC+ continuation of production cuts along with increasing growth forecasts on the demand side.

Economic Release Highlights

• U.S. March PMI readings (C,M,S) at 52.2, 52,5, 51.7 saw the composite and manufacturing surveys exceed consensus but saw the services component miss.
• Non-U.S. March PMI (C,M,S) readings were mixed including the Eurozone (49.9, 45.7, 51.1) and the UK (52.9, 49.9, 53.4).
• February Housing Starts (1.521M v 1.449M) and Permits (1.518M v 1.500M) both registered above their respective spot forecasts.
• February Existing Home Sales exceeded estimates (4.38M vs 3.920M) and the range of 3.85M to 3.95M by a relatively wide margin.
• The March Housing Market Index came in above expectations (51 vs 48) and the forecast range of 46 to 50.