POTUS tweets on Sunday declaring new tariffs by week’s end put a charge of volatility into equity markets. It was the biggest weekly drop this year which would otherwise would have been pretty quiet with a light economic calendar and wind down of Q1 earnings. The trade war headline (an increase from 10% to 25% on $200b of Chinese imports and threat of initiating a 25% tariff on an additional $300b+) didn’t seem to impact markets too much. Interest rates fell on the back of the risk off sentiment leaving the 3m-10yr slope at only 4bps.
- A Sunday POTUS tweet on new tariffs sent a jolt of volatility into the markets but thus far has felt more like run of the mill position clearing. Intraday buying on weakness was constructive.
- Tariff burden is small in the context of the overall economy, at approximately 0.32% of GDP.
- Of note is the trade deficit with China narrowed from $37.6b in December to 28.8b today, the narrowest since Nov 2016. Surging Chinese demand (non-ag) has been the clear driver.
- The U.S. government will likely resume subsidy payments to farmers for lost business as a result of the China trade negotiations.
- This was the last big week of earnings reports, with the S&P 500 now 90% reported. The bottom line moved closer to positive territory with blended rate now at -0.5%, likely putting the risk of an earnings recession behind us. Full 2019 earnings expectation currently stands at 4.51%.
- S&P 500 beat rates are at 76% (earnings) and 59% (revenue).
- A broader look beyond just S&P 500 has E/R beat rates of 62.8% and 56.5%, which would mark a fifth consecutive EPS beat rate declaration and the weakest revenue beat rate since Q416.
- The guidance spread improved from last quarter’s downdraft but still sits slightly in the red at -0.1, still net negative but much less so than where they were a few months ago.
- The S&P 500 is trading at a trailing P/E multiple of 17.38x versus a 25yr average of 16.8x (5% above historical average). The tech sector carries the highest valuation at 17% premium to its long-term average while healthcare, financials, and materials are all below respectively. The current fwd P/E is 16.5x which is equal to its five-year but above its ten-year average.
- Current fed funds futures are pricing in a 64.2% probability of a rate cut by year end, a 35.7% probability of no move, and a 0% chance of a rate cut.
- The Fed released a paper highlighting risks in the leveraged loan market, citing sizable 20% growth in 2018 to $1.1t.
- Congressional subpoenas for tax records and probes involving possible obstruction of justice are making life complicated for POTUS but amount to months of challenges to be decided by the courts.
Economic Release Highlights
- March JOLTS report highlighted ongoing imbalances between openings and hires. Openings surged 4.8% (7.488mm) while hires fell 0.6%, now at a record gap of 1.828mm. Year-on-year, openings are up 8.6 percent vs only a 0.6 percent rise for hires.
- April headline and core CPI grew by 2% and 2.1% respectively. The reading was a bit more subdued than expected by YoY rates continued to trend slowly back toward 2% levels.
- April PPI (producer prices) were moderate in April (0.2% MoM) but core PPI rose 2.4% YoY which may foretell a core PCE move back toward 2%.
- The Eurozone ESI has moved back close to neutral levels while China has moved solidly back into positive territory.