The holiday shortened week saw volatility rise, equity markets pull back, and demand for safe haven bonds drive interest rates down to levels not seen since November, prior to the Fed’s recent two rate hikes. The drivers were a mix of mediocre economic results and geopolitical stressors. Conflict escalation in Syria, saber rattling with North Korea, speculation surrounding a potential April 28th partial U.S. government shutdown, and uncertainty regarding the upcoming presidential election in France on April 23rd all contributed to the risk aversion sentiment in the markets.

Weekly Anecdotes:

  • First quarter earnings kick off in earnest this coming week. Analyst expectations for bottom line growth of 9.2% for S&P 500 companies would represent the fastest growth since Q4 2011, albeit largely due to a depressed year over year hurdle rate.
  • Global companies are expected to benefit from faster non-U.S. growth and a slightly weakened U.S. dollar in the upcoming Q1 earnings season. FactSet reported that companies with greater than 50% of sales inside the U.S. are forecasted to grow earnings by 6% while companies with less than 50% of sales inside the U.S. are expected to grow 15.7%.
  • In routine ‘risk off’ behavior, cyclicals (industrials, financials, materials) lagged last week while defensives (consumer staples, REITs, utilities) led the way.
  • The CBOE Volatility Index (VIX) has jumped 27% since April 6 to its highest level since November.
  • Bianco Research pointed out what seems to be a clear end to China’s capital outflow issues in January of this year and a corresponding resumption of U.S. Treasury bond purchases – likely a factor in the declining interest rate environment of late. China’s capital flows in April are expected to be positive $18.9b.
  • Bloomberg notes that the BoJ now owns ⅔ of the total domestic ETF market in Japan, which they’ve been actively investing in since 2010.
  • Futures markets are currently pricing in a 54.8% likelihood of a 25bps rate hike at the June FOMC meeting.
  • Interest rates fell sharply across the curve last week with the 10-year U.S. Treasury (2.24%) now 0.20% below where it began the year.
  • Legitimate or not, the Turkish constitutional referendum results came in over the weekend resulting in a clear shift away from a democratic framework in Turkey with checks and balances. President Erdogan will assume more authoritarian type powers after the next election (2019) leading to speculation on how this may alter the landscape in the Middle East.

Economic Updates:

  • Headline and core CPI both fell unexpectedly on a M/M basis in March. Y/Y headline and core CPI in March both declined as well registering 2.4% and 2.0% respectively.
  • The PPI, measuring wholesale inflation, came in more subdued than expected, in sync with CPI data indications.
  • Q1 consumer spending is in trouble. March retail sales decreased 0.2% from February which was also revised sharply lower from 0.1% to -0.3%. Even ex/ vehicles and gasoline, March sales only rose by 0.1%. Heavy weather and late tax returns may have factored in somewhat.
  • The Atlanta Fed cut its Q1 GDP forecast to a mere 0.5% – it was over 2% just two months ago. Soft consumer spending, ISM Non-Manufacturing Report on Business, and weak wholesale trade data contributed to the downward revisions.