Summary and Price Action Rundown
Global risk assets are tentatively higher this morning as corporate earnings reporting season kicks off in earnest today with megabank results, while investors await more key US economic data tomorrow. S&P 500 futures point to slightly higher open after the index rose 0.3% yesterday, posting a new record high and upping year-to-date gains at 10.3%. EU equities are posting modest upside, while Asian equities mostly rallied overnight. Longer-dated Treasuries are holding most of their recent gains, with the 10-year yield trading at 1.63%, which is toward the bottom of its three-week trading range. Meanwhile, the broad dollar index is flat around its lowest level since mid-March. Oil prices are extending this week’s rebound, with Brent crude climbing toward $65 per barrel, amid a continued sideways trading pattern.
Treasury Market Equanimity Continues Ahead of More Key US Economic Data
Longer-dated Treasuries have evidenced encouraging stability in the face of upside inflation and labor market metrics over the past few weeks, though the tests to this newfound placidity will continue. Yesterday’s highly-anticipated data release indicated that the US Consumer Price Index (CPI) rose 0.6% month-on-month in March, up from 0.4% in February and above consensus expectations of 0.5%. Gasoline prices were the biggest contributor to the monthly gain, surging 9.1% in March and responsible for about half the overall CPI increase. Gasoline is up 22.5% from a year ago, part of a 13.2% increase in energy prices. Food was up 0.1% overall, with food away from home the largest contributor at 3.7%. The shelter component also came in above expectations at 0.3%. This pushed the annual rate up to 2.6%, above expectations of 2.5% and well above February’s 1.7%, as the base effects of the pandemic take hold. Furthermore, Core CPI, which excludes the more volatile food and energy components, rose 0.3% m/m and 1.6% y/y, both above expectations of 0.2% and 1.5%.
Despite headline CPI growth of 0.6% marking the fastest increase in consumer prices since 2012, investors were seemingly cognizant of base-effect and other distortions in the data, which Fed officials have repeatedly flagged, as both equity and Treasuries rallied notably following the CPI numbers. Adverse headlines regarding Johnson & Johnson’s Covid-19 vaccine may have also added to the bid for safe haven Treasuries, with solid demand also evident in the afternoon’s auction of $24 billion in 30-year notes.
The next test for the newfound stability of the Treasury yield curve will be tomorrow’s retail sales data and, to a lesser extent, industrial production figures for March, with both expected to surge after a weather-related setback in February. Today’s import and export price figures will be noted, along with commentary from the Fed’s Beige Book report, but none of these are expected to elicit a market response. – MPP view: We still believe that the current Treasury equanimity will run into questions about a taper over the summer, amid an accelerating recovery, unless the Fed begins to message more forcefully about the continuation of QE over the coming months rather than focusing on rate hikes, as the two are inextricably linked and the taper fires the starting gun on the process of accommodation withdrawal. Some analysts are predicting an announcement of the taper as early as the June meeting, whereas we expect the Fed over the next few months to begin to ramp up its signaling of a steady path of QE to year-end.
Mega-Bank Results Mark Official Start to Earnings Reporting Season
The first quarter (Q1) is projected to feature robust earnings growth, but analysts are questioning whether the good news is already reflected in equity prices, while today’s reports from leading US banks will be scrutinized for margin improvement amid rising interest rates. Earnings reporting season kicks off in earnest today, with JPMorgan, Goldman Sachs, and Wells Fargo announcing their results before the opening bell, along with Bed, Bath & Beyond and First Republic Bank also reporting today. Thus far, JPMorgan’s figures have topped estimates but its shares are trading lower in the pre-market as investors ponder the nuances of the report. Yesterday, Fastenal stock lost 1.4%, though off the lows of the morning, after the industrial fastener giant and manufacturing bellwether lagged sales expectations and cited rising production costs and the challenges of meeting a shifting demand preference for mainstream product lines at the expense of safety products in Q1. Tomorrow features a continuation of mega-bank results, including Bank of America and Citi, with other industry mainstays like BlackRock, Delta Airlines, UnitedHealth Group, PepsiCo, Rite Aid, Alcoa, and JB Hunt reporting. Overall, Q1 is estimated to feature earnings growth of 24.5% but analysts anticipate that actual results will better this rate to rival the torrid 26.1% pace in Q3 2018, with a statistical lift from the comparison to last year’s challenged start to the year amid the onset of the pandemic. But with expectations already elevated, the bar to impress investors is higher and analysts have flagged the risk of shrinking profit margins from higher production and operating costs. – MPP view: The last few earnings seasons have delivered quite nuanced price reactions during the course of reporting but have not durably altered the broad equity market trends, and we anticipate that this will pattern will repeat. More traditional economy stocks, which have outperformed in anticipation of the post-Covid recovery, will be more impacted by rising input prices than the tech sector, for instance. Overall, it may be hard for equities to establish clear directionality amid all the noise and crosstalk from these results and management guidance, but we do not think that anything will amount to a gamechanger for either the bull market or the relative advantage of value stocks as the economic recovery builds momentum.
Bitcoin Surges Ahead of Coinbase Public Trading Debut – Coinbase, the leading cryptocurrency exchange, will be listed on the Nasdaq today, with analysts noting the expected valuation of approximately $100 billion and noting the somewhat rare direct listing approach, as opposed to the typical IPO process. Meanwhile, increasing the buzz over the Coinbase debut, Bitcoin, the flagship cryptocurrency, is registering an all-time high this morning above $64K. Though anticipation of increasing mainstream acceptance and demand for digital assets is fueling interest in the Coinbase listing and optimism for further upside in cryptocurrency valuations, some analysts express wariness over the heightened regulatory scrutiny that will inevitably follow. Treasury Secretary Yellen has made broadly balanced statements on Bitcoin and cryptocurrencies, but has been consistent in her concerns over their use for tax avoidance and illicit funding purposes. – MPP view: So far, Bitcoin has weathered the 2021 storm for momentum-driven assets admirably, displaying a lack of correlation that investors/speculators are certainly taking note of – the ARK Innovation ETF, Tesla shares, and the SPAC index all remain well off their highs from earlier this year.
Mixed EU Economic Data – Industrial production for the EU contracted 1.0% month-on-month (m/m) in February, bettering expectations of a 1.3% retrenchment but deteriorating from the 0.6% the prior month. This translates into a -1.6% year-on-year pace, highlighting the persistent challenges to the regional recovery during a period of Covid-19 resurgence and reintroduction of containment measures in various areas. This comes after yesterday’s ZEW economic expectations survey for the EU reflected deterioration in April, slipping from 74.0 the prior month to 66.3, though this remains at the high end of the survey range. Germany’s ZEW outlook reading showed a similar pattern of backsliding, though overall levels remained high. The euro has managed a roughly 2% rally versus the dollar this month as the ongoing uptrend in longer-dated Treasury yields paused, removing a key source of lift for the greenback. – MPP view: We expect the widening economic divergence between the US and EU over the coming months will rekindle dollar strength against the euro to some degree, with the Fed’s decision to taper or not to taper (that is the question) over the summer offering the most salient catalyst for renewed upside pressure on longer-dated Treasuries and the greenback.