Equity markets managed to post respectable gains with help from economic and earnings reports and headwinds from higher interest rates.  Sources of recent geopolitical anxiety including trade disputes, Syrian conflict, and North Korea all benefited from constructive narratives.  Interest rates moved sharply higher last week sending a jolt of volatility into the equity markets. Five-year rates of 2.77% are at their highest level in eight years while the ten year yield marked its highest level of the year.  Meanwhile, the (2yr-10yr) yield curve slope hit its lowest level since 2007.

Market Anecdotes

  • Earnings season is underway, and things have started on a very positive trajectory.  Blended year over year earnings and revenue estimates are 18.3% and 7.6% respectively.
  • One clear-cut bullish factor in recent days has been a very strong rally in high yield bonds.  Lower rated paper has seen its spread plunge in last 12 months, particularly in April where spreads have fallen from a high of 4.0% to 3.5% currently…
  • The move in interest rates has been notable.  The 5yr U.S. Treasury hit its highest yield (2.769%) in eight years and the 10-year is set to breach the 3% ceiling shortly.
  • The Fed regional manufacturing indices measure both current and forward expectations.  Two of the five Fed regional manufacturing indices released thus far have revealed a material downgrade in forward expectations.
  • The Fed reported anemic bank loan growth of 3.7% (3m/3m).  This metric tends to lag nominal GDP by 3-4 quarters, so observers are expecting a pickup in the coming months.
  • China reported 6.8% GDP growth but remains worried about a slowdown.  Accordingly, the PBOC cut reserve requirements last week by 1%, freeing up $200b to lending channels.
  • OPEC and non-OPEC (Russia) suggested they could extend production cuts, which have worked well, into 2019.  Excess oil inventories have been absorbed and fell again last week to levels 19.7% below levels last year. Strong global demand has contributed to the industry draw down as well.  Oil is up 60% since last summer lows and hit a new cycle high this week.
  • A slowdown in Eurozone economies led the ECB to ramp up their QE bond buying last week by €16.7b, the largest increase since November 2017.  German consumer confidence fell meaningfully last week and probability of recession in Germany has increased from 6.8% to 32%.
  • Several technical market metrics have moved back into more favorable territory.  Last week, the NYSE advance/decline hit a new high, transports and small caps moved back above their 50 day moving averages, and the S&P 500 broke through resistance level of 2,675.
  • The U.S. Leading Economic Indicator is up 6.5% y/y.  Major market declines are relatively rare when the LEI is increasing.
  • Aluminum surged a near seven-year high of about $2,400 a ton Tuesday as the impact of US sanctions against Russia continues to affect the global supply of the industrial metal.


Economic Release Highlights

  • Retail sales in March moved higher by 0.6%, a reversal of a disappointing February result and higher than consensus expectations.
  • March industrial production moved 4.3% yoy which is an encouraging number driven by heavy mining (shale oil) and utilities activity.  Production activity climbed a modest 3% yoy on strong vehicle and business equipment production.
  • Residential housing starts had a very strong March but was driven in large part by multi-family starts.  Single family permits, starts, and completions all slowed while multi-family starts and completions both surged over 20%.  The median price of a home sold in March surged 8.9 percent compared to March of 2017, the biggest jump in four years.
  • In a supply starved single family home real estate market, slowdowns in new homes coming to market is not welcomed news.