Volatility Faded in April, Fed and ECB Expected to Hike Rates This Week
Last Week Review
Global equities gained 0.5% last week, led by a 0.6% return from U.S. equities and an 0.2% increase among non-U.S. developed market equities. Emerging markets lost 0.2%. The two-year Treasury yield fell 0.18% and the 10-year yield fell 0.15%, while bond credit spreads increased slightly.
Lower Volatility in April
Equity market volatility trended below long-term averages in April. March’s banking sector unrest has faded, and we think the resulting slowdown in bank lending has given investors hope that central banks will wind down rate hikes. However, inflation pressures persisted while economic indicators and a 5% to 6% decline in first-quarter U.S. company earnings presented a challenging outlook. Global equities gained 1.5% in April, and growth stocks maintained their large year-to-date lead versus value. U.S. interest rates were slightly lower, though based on futures trading the expected peak of the federal funds rate increased.
Fed’s Preferred Inflation Gauge Higher Than Estimates
The core Personal Consumption Expenditures Price Index, which excludes volatile energy and food prices, rose 4.6% year-over-year in March, higher than estimates and only slightly below 4.7% in February. We don’t expect the slight decrease to deter the Federal Reserve from hiking its policy rate by 0.25% at its next meeting. The rate path is a bit more uncertain thereafter, however, as economic growth continues to slow.
U.S. House Passes Debt Ceiling Bill
The U.S. House of Representatives passed a Republican-led debt ceiling bill in a tight vote on Wednesday. It is highly unlikely to pass through the Senate in its current form, but its sets the stage for debate over the coming weeks. With the so-called X-date — when the government would default on Treasurys — approaching as early as June and investors expecting a bumpy path to an agreement, Treasury markets have started to show some uncertainty. We think most investors still expect an eventual resolution.
Big U.S. Tech Earnings Top Expectations
Earnings from Microsoft (MSFT), Alphabet (GOOG), Meta (META) and Amazon (AMZN) topped expectations last week, contributing to a 1.1% gain last week for U.S. growth stocks.
This Week Preview
Fed and ECB Expected to Increase Rates
The Federal Reserve and European Central Bank are expected to increase their policy rates by 0.25% after meeting this week, as they balance persistent inflation with economic trouble spots. Tuesday’s release of the preliminary euro area Consumer Price Index could change expectations for the European Central Bank’s decision on Thursday. Investors expect that both central banks are approaching their peak policy rates, but the environment remains highly dynamic.
U.S. Jobs Report and Global Purchasing Managers’ Reports Scheduled This Week
The April U.S. jobs report is scheduled for Friday. Estimates show 180,000 jobs added in April from 236,000 in March, an uptick in the unemployment rate to 3.6% from 3.5%, and unchanged wage growth at 4.2%. Further, final Purchasing Managers’ Index data for the U.S., Europe and China will also be released throughout this week. We think investors will look to the report in China to evaluate the economic recovery since the government lifted pandemic lockdowns.
Upside U.S. Earnings Surprises Fail to Spark Momentum
While aggregate U.S. earnings and revenue growth have trended better than feared, positive price reactions have been muted relative to historical averages so far. Among this week’s earnings reports are Starbucks (SBUX) on Tuesday and Apple (AAPL) on Thursday.
Source: Bloomberg for data, news developments and schedule of economic releases. Data as of April 30, 2023.
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