Friday, April 21, 2023
U.S. and International Equities
Markets Mostly Lower
Stocks ended the week mostly lower as many value sectors gained traction for the second straight week with consumer staples and real estate leading the S&P 500 Index. First quarter earnings so far have been met with a mixed reaction from market participants. Communication services, the top performing sector year to date, was this week’s leading detractor. Energy, which has been a top performing sector for the past three straight weeks on firmer crude oil prices, lagged the S&P 500 Index amid this week’s pullback in West Texas Intermediate crude oil. Financials had a positive showing for the second straight week given last Friday’s reassuring money center bank earnings.
Developed international stocks continue to display strength given improving economic reports. April’s Eurozone Composite PMI reached an 11-month high amid a rebound in service demand while manufacturing remains soft. In addition, Japan’s service activity has risen for four consecutive months as the nation’s trade deficit narrowed for the second month in March.
Fixed Income Lower
The Bloomberg Aggregate Bond Index finished lower as bond prices declined while yields increased. High-yield corporate bonds, as tracked by the Bloomberg High Yield index, also had a negative week.
U.S. high-yield corporate credit spreads have retraced roughly half of their March widening, but nonetheless remain at elevated levels compared to six weeks ago. Equities, on the other hand, have more than fully made back their initial post-March 8 losses. This has left some market participants wondering if credit’s lagging performance is indicative of the asset class pricing in a high probability of recession.
Commodities Mostly Lower
Energy prices finished mixed for the week. Crude oil has rallied from March’s 15-month lows and natural gas prices have pulled back given better weather and demand concerns. But this week, crude oil prices sold off as natural gas prices advanced. The major metals, gold, silver, and copper, ended the week lower.
Economic Weekly Roundup
March Leading Indicators
The Conference Board’s Leading Economic Index fell back to levels last seen in November 2020 when the economy was reeling from a global pandemic. Markets will likely shrug off the decline in the March index since investors already knew the weakness in the 10 underlying components. Historically, an economic contraction has closely followed a decline in the LEI of this magnitude. A recession is all but certain, so the more important question is if markets will hit new lows as the economy contracts. At present, we do not believe this will be the case.
German Producer Prices
The German Producer Price Index declined by 2.6% in March, which beat economists’ expectations due to reduced energy prices. Excluding energy, producer prices rose 7.9% year over year in March, marking the smallest year-on-year increase since June 2021. Non-durable consumer goods prices increased over 15% on a year-over-year basis and 0.7% month over month. Food prices increased by over 19% from March 2022 to March this year.
March Eurozone Inflation
March Eurozone inflation eased last month, but the underlying readings remained sticky as a reprieve in energy prices helped the monthly print. European Central Bank (ECB) policymakers are now concerned that high energy costs have seeped into the broader economy and will adversely affect pricing, making inflation more difficult to tame.
China’s GDP grew by 4.5% year over year in the first quarter, ahead of economists’ forecasts and the highest growth since the first quarter of 2022. Retail sales increased over 10% year over year in March as online sales of physical goods picked up. Annual industrial output last month missed Reuter’s forecast of 4%. The IMF reports that China will be the top contributor to global growth over the next five years, representing over 22% of the total increase.
Weekly Unemployment Report
Initial claims for the latest week came in just below economists’ expectation while continuing claims came in just above the median estimate. The labor market is expected to further loosen up during the second quarter as companies respond to slowing demand triggered by the Fed’s hawkish sentiment.
In addition to a busy week of earnings reports from corporate America, the following economic data is slated for the week ahead:
- Tuesday: Building permits (Mar), FHFA Home Price Index (Feb), S&P/Case-Shiller Home Price Index (Feb), consumer confidence (Apr), new home sales (Mar)
- Wednesday: Durable orders (Mar), wholesale inventories (Mar)
- Thursday: Weekly initial and continuing unemployment claims, Q1 GDP, pending home sales (Mar)
- Friday: BEA Domestic Auto Sales (Mar), ECI Civilian Workers (Q1), Personal Consumption Expenditures (Mar), Personal Income (Mar), Michigan Sentiment (Apr)
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