Market Commentary - May 4th, 2018
Markets initially viewed last week's FOMC meeting as relatively dovish (U.S. dollar down, stocks up, yield curve steepened). Inflation has crept up to the Fed target, but they seem comfortable letting it run above 2% for a while. PCE jumped from 1.6% to 1.9% last month.
With a positive trajectory on inflation data and one 2018 hike in the books, futures markets are pricing June, September, December rate hike probabilities at 100%, 70%, and 38% respectively.
Uncertainty surrounding U.S. - Sino trade talks weighed on markets last week, taking the S&P 500 below its 200-day moving average, but ultimately bounced off that technical support level.
The economic expansion entered its 107th month this week which ties it with the 1960s expansion for second longest expansion on record - we are now only 15 months short of the longest expansion in history (March 1991 through March 2001).
The U3 3.9% unemployment rate in April was the first time since April 2000 we've seen sub-4% and the U6 rate of 7.8% is at its lowest level since 2001. U3 rate has only been lower than 3.9% one month since the 1960's.
Thus far, Q1 revenue and earnings beat rates are 72.3% and 69.7% respectively - both strong results. Earnings guidance has been positively skewed. With 80% of S&P 500 companies reporting, blended earnings are on pace for 24.3% growth - the highest rate since 2011.
Corporations have announced $1.7t in global M&A deals so far this year, on pace for a new record level of consolidation activity.
After outpacing U.S. growth for two consecutive years, the Eurozone generated an underwhelming Q1 annualized rate of 1.7%. Of note is that while the European economy may be cooling but their equity markets have been outperforming over the past 4-5 weeks.
After a weak 2017, the U.S. dollar has put on a nice rally since mid-April. Last week, the USD broke through its 200-day moving average for the first time in nearly a year.
Nomura noted several statistics showing marginal improvements across Japanese corporate governance landscape: The ratio of cross-shareholdings to the total market cap of all listed Japanese companies fell from 20% in the 2000s to a record low of 15% in FY2017. The percentage of listed companies with over ⅓ independent directors has gone from 6% to 27% over the past three years. Labor force participation of women and older workers has improved notably since 2012 and the number of foreign workers has doubled over the same period.
Inflation acceleration remains solid. March PCE of 2% has finally reached the Fed's target and core PCE jumped from 1.6% to 1.9% - largely due to an extremely weak March 2017 print rolling off. Of note is that the 3m/3m core PCE has moved to 2.5%.
The April jobs report confirmed the job market is as strong as its been in over 40 years. 164,000 jobs created missed expectations but still took the unemployment rate down to 3.9%.
Wages are slowly ticking higher but still relatively benign. Last week revealed 4.45% YoY wages and salary growth, near the strongest levels of the expansion but wage growth in the BLS jobs report registered a modest 2.6% level.
Real consumer spending (3m/3m) through March of 1.06% remains stubbornly low.
ISM Manufacturing (57.3) reflected continued strength across the manufacturing sector but pointed to potential capacity stress. ISM Services (56.8) missed expectations.
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