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.

Weekly Market Report: March 15th, 2023

Markets last week took in an economic calendar with additional warmer inflation data points and the associated policy speculation and interest rate volatility. The S&P 500 did mark another record high close (Tuesday) but closed marginally lower on the week (-0.13%, +7.28% YTD) in what was its first back-to-back weekly decline since October. Non-U.S. developed (-0.45%) and emerging (-0.12%) markets both closed slightly lower as well, thanks in part to another week of USD strengthening, at least partially on the “higher for longer” narrative. Bond yields moved notably higher on the week with the 10yr (4.31%) closing back at its February highs. The commodity complex traded broadly higher with WTI oil (+3.88%) and industrial metals both getting solid bids on the week.

Market Anecdotes

• More questions surrounding the progress and trajectory of inflation dynamics surfaced last week with more warm inflation readings (PPI, CPI) which may or may not translate to Fed policy.
• Gradually shifting equity market dynamics over the past month includes cyclical leadership and an increase in stocks trading above their 200-day moving average despite a few of the ‘magnificents’ falling over the same time period.
• Bespoke pointed out that at 517 days, this bull market is sitting exactly at the median bull market duration, but well below the average 1,011 days thanks to the lengthy bull market runs of the past few decades.
• The FOMC and BoJ both meet this week with the former expected to hold but the latter expected to end its negative short term rates and end its seven year yield curve control program.
• With spreads in high yield (315) tightening 133 bps and investment grade (94) by 39bps since their near-term October 2023 highs, it begs the question how much lower can they go? The answer of course depends on the economic outlook.
• A refreshed look at the GDP growth backdrop provides a worthy reminder that falling inflation can paint decelerating nominal GDP growth with a brush of accelerating real GDP growth.
• Bianco Research pulled one from the vault by revisiting the internet bubble tech sector rise and fall as a history lesson possibly pertaining to the current AI craze. The rise in the market has translated to a self fulfilling rise in bullish sentiment and equity market inflows.

Economic Release Highlights

• February YOY headline and core CPI registered (3.2% vs 3.1%) and (3.8% v 3.7%) respectively with MOM readings of (0.4% v 0.4%) and (0.4% v 0.3%).
• February YOY headline (1.6% v 1.2%) and core (2%) PPI along with MOM readings of (0.6% v 0.3%) came in well ahead of expectations.
• Retails Sales in February were generally in line with consensus on the headline (0.6% v 0.7%), Ex-Vehicles (0.4% v 0.4%), and Ex-Vehicles & Gas (0.3% v 0.2%) readings.
• February Industrial Production of 0.1% was in line with the 0% spot forecast and consensus range of -0.5% to 0.2%. Manufacturing Output beat on the upside (0.8% v 0%).
• UofM Consumer Sentiment in March registered 76.5, generally in line with the 77.3 spot forecast and range of 75 to 78.3

Weekly Market Report: March 8th, 2023

Last week markets absorbed a good deal of Fed speak and an economic calendar which lent itself marginally to a higher for longer (firm growth backdrop) narrative. U.S. equity markets exhibited some breadth with the S&P 500, despite marking a new record high, ending the week down 0.26% while most sub-mega cap stocks posted marginal gains. Developed (+1.6%) and emerging (+0.84%) equity markets were both up nicely for the week thanks in part to a weakening USD which gave back 1.11% against a basket of currencies, particularly the Yen. U.S. bond yields declined mostly on the long end pushing the 10yr yields back down below 4.1%. Commodities were mixed with WTI oil down 2.45% to $78 but industrial metals rallied 1%-5% across the board.

Market Anecdotes

• U.S. equity markets powered by a more sanguine view on interest rates, resilient growth, and the mega cap/ AI craze have bounced a remarkable 26% off the late October 2023 lows, perhaps a bit short term overbought, but a strong tape is a strong tape as they say.
• A look at 2024 forecasted revenue and earnings growth of 5% and 11% respectively suggests the street may still be a bit optimistic given growth expectations and potential earnings headwinds.
• Earnings and performance of the companies within the ‘Mag 7’ have seen some dispersion recently which may carry some interesting translations to both active manager performance and market index considerations.
• The ‘strong tape’ is stronger nowhere more so than the AI fueled semiconductor industry where Bespoke noted 80 consecutive SOX closes at least 3% above its 50-dma, a first ever close above the headline S&P 500 index, but still some very wide dispersion within the index.
• A look back provides an important reminder of how equity markets, despite some unsettling volatility with 10 ‘ups’ and 10 ‘downs’, can ultimately generate a nice outcome. Similarly, a Bespoke look at credit spreads and subsequent equity market returns reminds us to be greedy when others are fearful.
• Powell testimony noted policy moves including taking the fed funds from 0% to 5.25% and QT which has reduced the Fed balance sheet from $8.5t to $7.1t have helped bring PCE inflation down to 2.4% (headline) and 2.8% (core) but they remain data dependent on the path forward.
• Central bank news saw the ECB keep their policy rates unchanged last week while rumors of the BoJ considering an end to its NIRP ( -0.10%) sent some volatility into global bond and currency markets. Higher wages and cooling inflation may give the BoJ room to end the extreme policy.

Economic Release Highlights

• February payrolls handily beat expectations (275k vs 190k) and the unemployment rate rose from 3.7% to 3.9%. Labor market participation stayed at 62.5% and average hourly earnings was broadly in line with consensus of 4.3% YOY (0.1% MOM).
• January JOLTS reported a slight decline in job openings to 8.863M.
• U.S. February ISM Services Index (52.6 vs 53.0) was generally in line with the consensus forecast.
• The JPM Global Manufacturing PMI improved from 50.0 to 50.3 in February while final non-U.S. PMI (C, S) readings were Eurozone (49.2, 50.2), China (52.5, 52.5), U.K. (53.0, 53.8).

Weekly Market Report: March 1st, 2023

Markets closed out the month of February with the equity markets in the U.S. (+1%) and developed international (+0.78%) posting solid gains. The impressive run in the U.S. large cap space has enabled the S&P 500 to close higher in 16 of the past 18 weeks, something we haven’t seen in over 50 years. Economic data carried a softening tone last week which allowed bonds to rally. Slightly softer U.S. growth data helped Treasuries rally last week taking 10yr yields back down below 4.2% and the USD slightly down on the week. WTI crude oil closed up 2.5% to $79.97, touching the $80 level briefly for the first time since November.

Market Anecdotes

• A strong start to 2024 with back to back monthly gains despite the hawkish repricing of Fed policy expectations has been notable with consistently favorable financial conditions, resilient growth, and solid earnings from big technology companies leading the way.
• Markets have priced roughly half of the rate cuts projected at the beginning of the year and are now relatively in line with the FOMC dot plot with the first cut (54% probability) expected in June.
• A strong labor market, the healthy consumer, and strong productivity growth have contributed to the constructive outlook while disinflation seems to be losing a little steam.
• A big rally in Chinese stocks feels more like a policy-driven rebound due to several measures intended to prop up the market while macro data has remained lackluster and industrial metals have yet to catch a bid, suggesting patience may be in order.

Economic Release Highlights

• The pace of headline (core) PCE inflation declined slightly in January and was in line with forecasts, registering 2.4% (2.8%) YOY and 0.3% (0.4%) MOM. Personal Consumption of 0.2% was in line but Personal Income growth of 1.0% was well above the 0.4% forecast.
•  U.S. ISM Manufacturing Index slipped from 49.1 to 47.8 in February, missing the consensus forecast of 49.5.
• January Durable Goods Orders declined 6.1%, slightly more than the -4.5% forecast. Also reported were Ex- Transportation (-0.3% v 0.2%) and Core Capital Goods (0.1% v 0.1%).
• Consumer Confidence in February (106.7 v 115.0) missed and registered below the consensus range.
• 4Q U.S. GDP was revised down from 3.3% to 3.2% but Personal Consumption Expenditures were revised up from 2.8% to 3.0%.
• New Home Sales of 661k registered slightly below the consensus forecast of 685k. Pending Home Sales declined 4.9% versus consensus forecast of 0.8% and a range of -2.5% to 4.6%.