There were modest gains in equities last week with the S&P 500 gaining 0.8%, but this small gain signalled not only new highs but closed the week above 3,000 for the first time. With the backdrop centred around trade tensions affecting the global economy and central bank watching, market moves this week encapsulated the recent upside surprise in US employment data from previous week as well as last week’s comments from Fed Chair, Jerome Powell, in-light of this stronger than expected data. Treasuries lost some ground, with 10-year yields gaining 9 basis points over the week to close at 2.12%.
After eight straight weeks of Treasury yields falling from over 2.5% to 2% we saw some very slight pull-back last week as 10-year yields rose 3 basis points to close out the week at 2.03%. Correspondingly equity valuations were boosted on a mix of good data with the S&P 500 pushing new highs and closing the week up 1.65% at 2,990, just 0.3% below 3k.
The meek pick-up in markets has continued in the wake of the fragile trade truce between the US and China agreed at the G20 last week, with this optimism then boosted by a week of upside surprises in PMI, ISM and non-farm payroll data with the last of these coming in at 224k versus estimates of 160k. Taken together with the other resilient indicators, the stronger payroll headline should dispel the calls for a 50bp ease at the end of July meeting, but 25bp is still likely given the Fed does not meet in August. After July the next meeting is September 18th so we have two more NFPs by then. Of course, trade frictions and the President’s involvement could have a massive impact in the meantime.
Over in Europe, the data painted a broadly weaker picture with a -2.2% slump in Germany factory orders, far worse than the predicted -0.2%. At least the markets seemed to welcome the proposals for the next European Central Bank Chair, Christine Lagarde, and European Commission President, Ursula von der Leyen. Lagarde is seen as a tame and tolerable choice who symbolises a likely continuation of Draghi’s accommodative policies but also signals the further trend of central bank politicisation as – like Jerome Powell - she is not your usual hardened economist.
Forthcoming economic data includes Japan machinery orders and balance of payment data in addition to Germany trade and industrial production on Monday; this is followed by Australia business confidence on Tuesday and Australia consumer confidence on Wednesday, along with UK trade balance, GDP, industrial and construction output, China inflation and FOMC minutes. On Thursday are US, Germany and France inflation data, followed by China trade and foreign direct investment data, Japan and Euro area industrial production and US PPI on Friday.
US 10-Year Treasury yields closed the week (and month/quarter) a fraction of a basis point above 2% after falling a further 5 basis points in what is now an 8-week rally; equities waned a little with the S&P 500 down -0.3% on the week. Much of the week saw muted trading in anticipation of the weekend’s G20 summit offsetting some of the usual end of month/quarter activity. Meanwhile, in Europe Bund 10-year yields fell further into new negative territory reaching -0.335% with credit markets on the whole benefiting from further support.
Central banks were front and centre last week with significant dovish comments from Draghi and others at the annual European Central Bank Forum and from the Fed rates announcement. Optimistic market sentiment was boosted further by expectations of a reopening of US-China trade talks at the forthcoming G20, with a number of poor economic data readings having little dampening effect on the positive trend. US 10-year Treasury yields – after dipping below 2% midweek – closed out the week just 3 basis points lower but continued the 8-week downward trend to 2.05%. Meanwhile, the S&P 500 touched new-intraday-highs of 2,964, and closed the week up 2.2% at 2,950, with notable performance in energy stocks in-line with the bounce in oil prices. While equity markets are rising on expectations of lower-for-longer-rates helping prop flagging growth, credit markets are tightening over growth concerns and falling inflation expectations.
Last week we saw the short-end of the market start to price in three 25bp cuts to the funds rate this year and then nothing more, which is a little strange. Some argue for an ‘insurance cut’ as early as this week’s FOMC meeting sighting the Middle East situation, trade tensions and some further evidence of economic weakness, notably the last payrolls data. We feel a cut this week is unlikely; it is also unlikely that the Fed would cut three times and stop as the market is pricing.
Last week saw US 10-year Treasury yields tightening again - another 4 basis points to 2.08% - now yielding half-a-percent lower than just 6 weeks ago. Safe-haven assets were boosted by further concerns of tariffs on Mexico at the start of the week, along with a disappointing nonfarm payroll figure on Friday which, at just 75k, came in 100k below the 175k consensus estimate (and a downward revision to the previous month’s reading). But unlike most of May, as Treasuries rallied equities were also on the front foot last week, with the S&P 500 up a sharp 4.4% to 2,783, marking the best week for equities in six months. Meanwhile, just after Greek government yields hit all-time lows the European Commission issued a warning, for both Greece and Italy, that their recent policy choices will hinder their ability to service their debts and meet set targets.
The slide in equities and US Treasury yields accelerated last week; the 10-year saw yields fall 20 basis points to 2.12%: in a fifth straight week of strengthening from 2.6% in mid-April and demonstrating a strong seven-month trend from November 2018 highs above 3.2%. the S&P 500 had its fourth down week in a row, down 2.6%, and its worst since the tumult around Christmas 2018. Meanwhile, German 10-year Bund yields hit all-time lows of -0.206%: even lower than the negative yields back in mid-2016 when the US 10-year yielded 1.35%. Other negative sentiment signals this week include the Japanese yen strengthening 1% to 108.3 against the dollar, and Emerging Market spreads widening 15-20 basis points (contributing to spreads around 10% higher than at the start of the month but with yields broadly unchanged as risk-off assets rally in isolation).
After a terrible start to the week, the S&P 500 closed down just -0.76%. US “trade tensions” with the EU and “trade war” with China continued to escalate at the beginning of last week. But following a big dip on Monday, President Trump signalled a postponement of tariffs on European autos helping allay fears, at least in relation to US and European markets. The brinkmanship with China, however, continues with the blacklisting of Huawei in a tat-for-tit against China’s retaliatory 25% tariffs on a further $60 billion of imports after trade talks fell through the week before last.
Last week was all about the rising trade tensions between the US and China which resulted in ten year UST notes 5bp lower in yield and the S&P 500 index nearly 3% lower on the week.
The threat of tariffs reaches beyond US-China to the US’ other trading partners such as Europe and Japan. Trump has been threatening to impose tariffs on auto imports and a ‘section 232’ report from the US Department of Commerce on February 17 opened the door for him to impose 25% tariffs on auto imports on national security grounds: the President has 90 days to make a decision on this, although with opposition from Congress and with trade talks ongoing the decision could get delayed. Europe agreed a mandate in April to begin negotiations with the US on industrial goods although has threatened to suspend negotiations if auto or further tariffs are imposed.
With the Easter holidays the week got off to a slow start. There was talk from the Federal Reserve officials about the conditions under which they would cut interest rates, including a scenario where inflation drifts lower even if the economic growth doesn't falter. Such a scenario isn't seen as particularly likely, and they said a rate cut isn't imminent or under consideration for their meeting April 30-May 1. However, the threshold for such action has been a topic of conversation in recent interviews and public remarks.
In the markets, the S&P 500 touched fresh highs, closing the week just shy of 2,940, after gaining 1.2% on the week. US Treasuries made parallel gains with 10-year yields falling 6 basis points and back below 2.5%. Meanwhile, the US dollar made further gains with the DXY Index closing out the week by pushing above 98 for the first time in nearly 2 years.
Last week was a continuation of markets cautiously venturing further into a risk-on environment with the S&P 500 and MSCI World both up around a half percent and US 10-year Treasury yields moving 7 basis points higher, following the 9 basis point move the previous week. One driving factor was reassurances out of the ECB meeting which, along with leaving rates unchanged, signaled favourable conditions for the forthcoming round of TLTROs in September. Another factor was, of course, the further extension of the Brexit deadline: which prevented a hard Brexit on Friday just gone but will prolong uncertainty without giving much time for a public vote on either the deal or a new Government. With this still short lifeline given, Parliament have now changed gear to reach a compromise: agreeing to recess for a couple of weeks over Easter. Some discussions remain ongoing but the spluttering and stalling and persistent market concerns have been evident in the FX markets: where sterling has remained somewhat range-bound despite the real and imminent no-deal scenario being averted. Perhaps some are balancing the deal positives with potential political negatives with the latest poll data adding to concerns of a Corbyn government within the year.
Although economic data was mixed last week, equities pushed higher as markets seemed to focus more on the positive services data versus the weaker narrative seen in some manufacturing data: including undershooting PMIs and most notably abysmal factory orders out of Germany (although China’s manufacturing PMI was stronger on the back of stimulus measures). Both the S&P 500 and MSCI World indices were up 2% last week; meanwhile cyclicals, financials and technology outperformed defensives and US 10-year Treasuries sold off 9 basis points to yields of 2.5%. Once again, the US-China trade deal was said to be getting “closer and closer” according to the Director of the US National Economic Council, Larry Kudlow, and it does finally feel like this turtle facing headwinds is nearing a finishing line: at least with stage one of the negotiations expected to be signed-off by June.
US Treasuries closed out a fourth week of gains, with yields falling a further 4 basis points on the 10-year to yields of 2.4%; this brought the rally in Treasuries for the month of March to over 30 basis points. Equities also performed over the last week of March with the S&P 500 up 1.2% closing up 1.8% on the month to cement in steady monthly gains for the first quarter of 2019. It seems equities are still focusing on the stimulus effects of the recent more accommodative stance of the Fed; whereas the bond market is putting more importance on the move as another warning sign of a looming cyclical slowdown, and even near-term prospect of a recession following the US yield curve (briefly) inverting between the 3-month and 10-year points.
USD 10-year Treasuries rallied 15 basis points to 2.44% last week following rekindled growth concerns and the Fed’s further back-pedalling on last December’s rate hike. On Friday, a sharp -1.9% fall in the S&P 500 more than unwound earlier gains to close the week down -0.8%. Adding to the unsettledness was the media-attention-grabbing inversion of the US Treasury yield curve between the 3-month and 10-year marks, which has historically had a strong correlation with a coming recession (leading from a few months to a few years).
Both stocks and bonds were on the front foot last week after US core inflation data came in up just 0.1% month-on-month, further relieving any lingering fears of immediate runaway inflation. The year-on-year core figure came in at 2.1% (0.1% below expectations and the previous month’s reading) while real average hourly earnings were up 1.9% yoy. The S&P 500 ended the week up 2.9% while US 10-year Treasury yields rallied 4 basis points to 2.59% - pushing below 2.6% for the second time this year (after flirting with such low yields for a day early in January) but this time falling yields come even as USD 24bln in supply was swallowed up by a bond hungry market.
Risk-off assets including higher-grade bonds were favoured last week as US 10-year Treasury yields fell 13 basis points to 2.63% while US equities lost momentum: with the S&P 500 falling -2.2% after almost ten straight weeks of gains this year (with one -0.2% week in January). While the US Fed was busy receiving another string of criticism from President Trump the ECB was busy issuing some dovish guidance and detailing new TLTROs for September providing a boost to Italian debt markets. Broader negative sentiment could not be avoided with numerous downward revisions to global growth forecasts in addition to weak data from US manufacturing ISM and the Fed’s Beige Book release detailing the economic drag from the government shutdown.
Last week global markets began with equities on the front foot with further announcements that a detailed trade deal between the US and China is near completion; the Chinese CSI 300 was up +6% on Monday alone and rallied further to close out the week. Other global equities were also positive performers with the S&P 500 up +0.4% making the ninth week out of the ten this year to yield a positive return. In addition to the positive statements over a potential trade deal, Fed chair Powell reiterated the FOMC’s willingness to be patient before any further rate hikes, and data last week (including US GDP and China PMI) exceeded their (meagre) expectations. US 10-year Treasury yields rose 10 basis points to 2.75% - remaining within the 2.60-2.75% range they have traded on for most of 2019 thus far.
Another week of mixed data, another positive week for equities with the S&P 500 up 0.62% whilst US 10-year Treasury yields held around 2.65%. The week began with a cloud over EU growth prospects with Francois Villeroy de Galhau, an ECB Council member warning that the slowdown in the EU economy over the recent months has been ‘significant’, to the extent that if it becomes clear it’s not a temporary blip, the ECB will have to change its forward guidance.
Last week, the Dow Jones Industrial Average was again up a full +3.1% on indications Trump may allow some concessions and extensions on both the international trade talks and border wall funding disputes; the former would otherwise revert to higher tariffs on the 1st March. The latter avoided another federal government shutdown over the weekend: but only through the Republican Senate agreeing to fund around a quarter of the border wall expense and Trump declaring a national emergency to divert funding for the rest.
Last week we had a quiet start with a lot of Asia out due to the Chinese New Year. We started the week with warnings from Ignazio Visco, the Bank of Italy’s Governor, warning of the downside risks to the central bank’s forecast for economic growth after the nation slipped into a recession in the last quarter of 2018. The recession, Italy’s third in a decade comes as the bank’s latest growth projection of 0.6% GDP growth for 2019 and 1% for 2020 start to look optimistic, in spite of being in-line with national and international forecasters. Visco acknowledged ‘The prospects for the Italian economy are less favourable today than they were a year ago’ adding there are ‘significant risks on the downside’.