Equity markets wrapped up the week, month, and quarter on a strong note with small caps and cyclicals leading the way. Stock market resilience in the face of slowing economic momentum and falling treasury yields was notable. Commodities were flat overall, but oil pierced the $60 level, and is now up 32% on the year but still -7% from one year ago ($64.91). Bond yields fell further last week in a parallel fashion, leaving the 3m/10yr slope only 1 bps in negative territory. Market relevant headlines crossed the wires regarding Brexit and U.S.-Sino trade negotiations, but quarter-end window dressing mitigated any impact.
- Given the plethora of questions surrounding the inverted 3m/10yr curve five days ago, we’d offer a few considerations as follows: o This type of curve behavior is essentially the market saying the Fed it is too tight.
- A bull flattener is the most common form of curve inversion and is the Fed thinking things (short rates) are ok while the long end rates are pricing a declining inflation risk premium and slowing economy.
- There have been 11 occurrences of a 3m/10yr inversion since the mid 1960’s. Forward S&P 500 returns have been below historical averages. o Interesting competing narratives include the simultaneous steepening of the 2yr/30yr and 10yr/30yr along with resilience from copper and homebuilders.
- It is pretty unusual for the 3m/10yr slope to trade through the 2yr/10yr slope which usually inverts first.
- British PM May’s Brexit withdrawal agreement failed in Parliament as did several (8) non-binding ‘indicative’ votes on alternatives. More ‘indicative’ votes are scheduled next week with an April 10th emergency EU summit and April 12th hard Brexit looming.
- Factset reported that while most quarters see 3%-4% reductions in S&P 500 bottom up EPS estimates, the Q1 number ($37.33) has been cut by 7.2%, the largest reduction since the energy market crash in Q1 2016.
- The Lyft IPO caught significant market attention as the second largest U.S. tech IPO since 2001 at a valuation of 10x revenue despite losing nearly $1b in 2018.
- Bespoke’s Fed Speak Monitor turned decidedly hawkish last week with Fed speakers clearly emphasizing ‘patience’ but pushing back on the market’s rate cut expectations.
- 10yr yields have been pushed to 3.6 standard deviations below its 50dma. This is the most oversold on this metric since 2011. Some mean reversion in the short term is likely.
- With balance sheet reduction now ending in September, the Fed loses that tool as a policy lever. Inflation readings (ISM prices paid, core PCE, CPI) have remained very benign.
- U.S. industrial production has grown over 3% faster than ROW over the past year in a nearly unprecedented showing of relative U.S. strength.
Economic Release Highlights
- January PCE data on consumer spending (0.1%m/m) wasn’t able to bounce higher despite the low December hurdle (revised to -0.6%). Personal income remained subdued at 0.2% in Feb.
- Headline and core January PCE inflation of 1.4% and 1.8% respectively raised no eyebrows and probably supports the dovish tone from the Fed and markets.
- 4Q GDP was revised down to 2.2% as expected. Consumer spending of 2.5% and business spending of 5.4% were both strong while residential investment contracted 4.7%.
- Consumer confidence softened to 124.1, badly missing low-end estimates. Views of the economy and outlook for payroll growth were the decidedly downbeat factors.
- March reading on consumer sentiment jumped higher to 98.4, near a six-month high. Both current conditions and forward expectations components had strong improvements.
- February U.S. housing starts (-8.7%) and permits (-1.6%) report remained relatively soft but December and January revisions were a net gain from prior depressed levels.
- February new home sales surged 4.9% to a 667,000 annual rate, a constructive signal on the housing market albeit from a notably volatile data series.
- While recent trade data suggest a rebound, CPB global trade volume through January (3mo) reinforced 4Q global slowdown concerns, with volumes down 7% versus the prior 3mo reading and EM imports -20% annualized.