Equity markets were flat to slightly down last week despite encouraging economic and earnings reports. The 10yr U.S. Treasury yield topped 3% for the first time since early 2014 with positive economic data continuing to provide support for the Fed tightening campaign. Recent skepticism surrounding the European growth outlook and mixed data from Japan has investors reassessing forward views on non-U.S. markets while geopolitical concerns seem to be more sanguine today than a few weeks ago.
- We’re in the heart of earnings season with a blended earnings growth rate at 20% and record high profit margins of 11.1%. Corporate tax cuts have been additive to margins. The guidance spread (# raising vs # lowering) has been strong but talk of increasing input costs stemming from commodity prices and wage inflation have caught investors’ attention.
- 73% of companies have beaten earnings estimates which would tie for the highest beat rate since 1999. The current revenue beat rate of 71% is also an encouraging data point.
- The U.S. dollar surged 1.4% last week, its biggest week since 2016, as U.S. to non-U.S. government bond spreads and relative economic momentum are favoring U.S. markets. The current Treasury to German bund spread is its highest since 1989.
- Bianco Research points out that Fed speeches are signaling a regime shift, of sorts. The word count has shifted notably from ‘financial stability’ to ‘inflation’ for the first time since the 1990’s.
- The IMF reported a $173t (245% of GDP) record level of global non-financial debt, a $54t increase from 2008. The silver lining is that 80% of the increase stems from China (>$25t) and developed nation governments (>$18t) in response to the GFC.
- Bloomberg reported China’s adoption of electric bus technology (17% share) results in 279,000 fewer barrels of oil consumed each day, a non-trivial and rising influence in global markets.
- Rising yields are injecting regular way volatility into equity markets. Year end (current) 2yr and 10yr U.S. Treasury are 1.89% (2.47%) and 2.41% (3%) respectively. Money market yields finished the week at their highest yields since January 2009.
- Inflation break evens (10yr) are at their highest levels since the taper tantrum in 2014, having moved from 1.2% to 2.2% since early 2016.
Economic Release Highlights
- A 2.3% first read on Q1 GDP beat estimates of 2%. Strong business capital expenditures of 6% overcame the expected slowdown in consumption (weather and a big Q4 number).
- The Q1 Employment Cost Index revealed annual private sector wage and salary growth of 2.9% for March, the highest growth in nearly 10 years.
- Strong job market? First time claims last week of 209k was the lowest weekly reading since 1969. This was the 164th consecutive week of less than 300k jobless claims, the longest streak on record, and we are at 24 weeks of sub 250k claims, the longest such streak since 1973.
- All three March housing related indicators (home sales and prices) beat expectations last week. Strong demand and limited supply have taken prices up 5.5% from last year. Relative to their peaks in 2007, the national price index is now up 8.2%. 11 of 20 cities detailed in Case Shiller reports are back above mid 2000 record high prices.
- April’s Consumer Confidence Index beat expectations (128.7 vs 126 expected) but did reveal a dramatic fall in stock market sentiment. For the first time since the election, more consumers expect stocks to go down than up. This, just a few months after the same report registered record high stock market sentiments. The average one year S&P 500 return following the 4 largest declines in positive market sentiment is 21% – clearly a contrarian data point.