U.S. and International Equities
U.S. stocks ended the week mostly lower as the energy, financials, and communication services sectors lagged the S&P 500 Index. According to FactSet, approximately 85% of the S&P 500 Index has now reported first quarter results, with earnings beat/surprise metrics ahead of recent averages. However, bank concerns continue to weigh on investors’ minds following reports that PacWest Bancorp (PACW) is exploring strategic alternatives amid a steep decline in its share price.
Support is increasing from Wall Street executives along with bank analysts for U.S. regulators to initiate stringent action in order to improve the nation’s banking sector following extreme volatility in shares of several small regional banks. In addition to PacWest, shares of several regional banks have declined over 10% this week as some short sellers have taken advantage of widespread concerns about the effects of higher interest rates and shaky commercial real estate fundamentals on weaker-capitalized banks.
International stocks ended higher this week amid mostly improving economic reports. Moreover, emerging market equities are trading at a 34% discount to the S&P 500 Index on a next 12-month price to earnings (P/E) valuation basis, below the 10-year long-term average discount of 30%.
Fixed Income Mixed
The Bloomberg Aggregate Bond Index finished higher as bond prices increased while yields declined. High-yield corporate bonds, as tracked by the Bloomberg High Yield index, ended the week lower.
Credit default activity increased in April to a 33-month high and raised both the high-yield bond and leveraged loan default rates to a 2-year high. Year-to-date 17 companies have defaulted, totaling $31.4 billion in bonds ($9.8 billion) and loans ($21.6 billion).
Total defaults already account for 74% of last year’s $47.8 billion full-year total and have easily surpassed 2021’s full-year 14-year low of $13.9 billion. The par-weighted U.S. high-yield bond and loan default rates have increased to 2.18% and 2.74%, respectively. As lending standards continue to tighten due to stress in the banking sector, we expect defaults to continue to rise and high yield bond yields and spreads to widen.
Energy prices finished lower this week on concerns over future demand following weaker-than-expected economic reports out of China, the world’s largest oil importer. OPEC+ began voluntary output cuts at the beginning of May, however some traders remain skeptical that the cuts will actually happen. The major metals, gold, silver, and copper, ended the week mixed.
Economic Weekly Roundup
U.S. March Housing
Single family construction spending declined in March for the eleventh consecutive month. This sector of the economy will likely continue to shrink as the broader economy slows and mortgage rates remain elevated. New multi-family construction projects continue to grow. As more projects come to market, increased supply of residential units should eventually ease rent prices.
U.S. March PMI
Purchasing managers reported an increase in input prices for March. New orders continue to shrink, indicating the pipeline for new business is shrinking and is consistent with other reports that indicate rising recession risks.
U.S. April ISM Services
The U.S. services sector maintained growth in April as new orders increased amid a surge in exports, but businesses continued to face higher prices for inputs, indicating that inflation could remain elevated. The Institute for Supply Management (ISM) stated this week that its non-manufacturing PMI increased to 51.9 in April from 51.2 in March, though services inflation remained strong. A measure of prices paid for inputs by service businesses marginally increased to 59.6 from 59.5 in March.
German March Inflation
The pace of German inflation eased slightly with consumer prices increasing 7.6% year-over-year, down from March’s 7.8% year-over-year figure. The slowdown has primarily been attributed to goods and services. Further data shows energy prices rising only 6.8% and food prices showing a steep jump, increasing 17.2% year-over-year, although declining month over month for the first time since October 2021.
Investors should know that positive inflation news from Germany, alongside negative inflation news from France and Spain, has created uncertainty over next steps by the European Central Bank. Furthermore, the German government is currently forecasting inflation to fall to 5.9% during the remainder of 2023.
Weekly Unemployment and Monthly Payrolls
Initial claims for the latest week came in above economists’ expectations as well as the prior week. Continuing claims came in below estimates as well as the prior week. The labor market is expected to further loosen up during the second quarter as companies respond to slowing demand triggered, in part, by the Fed’s tighter monetary policy.
April’s employment report surpassed economist expectations as nonfarm payrolls increased 253,000 for the month, well above economists’ consensus forecast for payroll growth of 180,000. The unemployment rate was 3.4% against an estimate for 3.6% and tied for the lowest level since 1969. In recent months, the relationship between the supply and demand for labor has been coming into balance. Job postings, which had reached almost double the number of available workers, declined during the first quarter.
The following economic data is slated for the week ahead:
- Monday: Wholesale Inventories (Mar)
- Tuesday: NFIB Small Business Index
- Wednesday:April Consumer Price Index, Hourly Earnings (Apr), Average Workweek (Apr), Treasury Budget (Apr)
- Thursday: Weekly Initial and Continuing Unemployment Claims, April Producer Price Index
- Friday: Export/Import Price Index, Michigan Sentiment
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