The AM Call: What Could Go Wrong?

• It was a short week for markets last week, with February inflation data coming in on Friday after markets were already on Easter break. Overall markets were flattish last week awaiting the PCE report and comments from Fed officials that they were in no rush to cut rates. For the first quarter of 2024, equity markets rallied strongly with the S&P 500 (SPX) up 10.6% year-to-date, while bonds were flattish (AGG, down -0.8%). We note that the Nasdaq was up 9.3% for the year-to-date, as we saw market leadership broaden out to include sectors such as energy and financials. That said, we are skeptical that equities can continue this blistering pace of appreciation for the rest of the year. Although we acknowledge that recent macro data supports the elusive “soft landing” thesis, we believe that markets have fully priced in this scenario.
• The Fed’s preferred inflation metric came in mostly as expected for February, with core PCE MoM up 0.3%, down from a revised 0.5% increase in January. On a YoY basis, core PCE rose by 2.8%, in-line with the estimate, and down from 2.9% in January. Futures are now showing a 66% chance of the first Fed cut by June, up slightly from last week, given this slow, but steady, decline in inflation. However, risks remain skewed to staying “higher for longer” on rates, with market attention shifting to the March jobs report later this week.

• We also got February personal income and spending last week, which showed consumers spending more than their incomes rose. Income was up by 0.3% vs. estimate of 0.4%. Spending rose by 0.8%, compared to the estimate for 0.5%. These figures show that consumers are spending above their income gains, which typically portends a slowdown in spending in future months.

• In earnings, Q4 wrapped up with positive surprises from Cintas (CTAS), Restoration Hardware (RH) and McKesson (MCK), in-line results from Carnival Cruises (CCL) and Walgreens (WBA), and a big miss from Gamestop (GME). 
• In tech news, the Financial Times reported that the Chinese Government is placing new guidelines to phase out use of Intel (INTC) and Advanced Micro (AMD) chips in government servers in favor of locally produced ones, while Apple (AAPL) iPhone shipments in China fell by 33% in February after a 39% contraction reported in January as it continues to lose market share and the Chinese Government filed a complaint in the WTO against Biden’s EV tax credit. Amazon (AMZN) made an additional $2.75 bn investment in AI-company Anthropic, and Lucid (LCID) received a $1 bn cash injection from its largest shareholder, the Saudi Arabia Public Investment Fund.
• In corporate news, Visa (V) and Mastercard (MA) reached a settlement to reduce and cap credit card swipe fees charged to merchants ending a two-decade long antitrust legal battle and which is expected to save merchants $30 bn over the next five years, and Home Depot (HD) announced it will acquire building product distributor SRS Distribution for US$ 18 Billion

The Week Ahead

• Macro data for the week ahead will be focused on the March jobs report Friday. The consensus estimate for change in nonfarm payrolls is 200,000, down from 275,000, in February. The unemployment rate is forecast to decline to 3.8%, while average hourly earnings rise by 4.1% YoY, down from 4.3% in February.

• In equities, it should be relatively quiet for earnings with no significant companies reporting. 1Q24 earnings season begins week of April 8th.

Market Summary – Returns and Yields

• The figures below are through March 28, which concludes the first quarter of 2024. Major equity markets were up for the year-to-date, while bonds were mixed.

For additional insights, be sure to check out our blog post from last week.

Definitions, sources, and disclaimers

Definitions:

• Gross Domestic Product (GDP): A comprehensive measure of U.S. economic activity. GDP is the value of the goods and services produced in the United States. The growth rate of GDP is the most popular indicator of the nation’s overall economic health. Source: Bureau of Economic Analysis (BEA).
• GDPNow is not an official forecast of the Atlanta Fed. Rather, it is best viewed as a running estimate of real GDP growth based on available economic data for the current measured quarter. There are no subjective adjustments made to GDPNow—the estimate is based solely on the mathematical results of the model. In particular, it does not capture the impact of COVID-19 and social mobility beyond their impact on GDP source data and relevant economic reports that have already been released. It does not anticipate their impact on forthcoming economic reports beyond the standard internal dynamics of the model.
• The Current Employment Statistics (CES) program produces detailed industry estimates of nonfarm employment, hours, and earnings of workers on payrolls. CES National Estimates produces data for the nation, and CES State and Metro Area produces estimates for all 50 States, the District of Columbia, Puerto Rico, the Virgin Islands, and about 450 metropolitan areas and divisions. Each month, CES surveys approximately 142,000 businesses and government agencies, representing approximately 689,000 individual worksites. Source: Bureau of Labor Statistics (BLS).
• Initial Claims: An initial claim is a claim filed by an unemployed individual after a separation from an employer. The claimant requests a determination of basic eligibility for the UI program. When an initial claim is filed with a state, certain programmatic activities take place and these result in activity counts including the count of initial claims. The count of U.S. initial claims for unemployment insurance is a leading economic indicator because it is an indication of emerging labor market conditions in the country. However, these are weekly administrative data which are difficult to seasonally adjust, making the series subject to some volatility. Source: US Department of Labor (DOL).
• The Consumer Price Index (CPI): Is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Indexes are available for the U.S. and various geographic areas. Average price data for select utility, automotive fuel, and food items are also available. Source: Bureau of Labor Statistics (BLS).
• The national unemployment rate: Perhaps the most widely known labor market indicator, this statistic reflects the number of unemployed people as a percentage of the labor force. Source: Bureau of Labor Statistics (BLS).
• The number of people in the labor force. This measure is the sum of the employed and the unemployed. In other words, the labor force level is the number of people who are either working or actively seeking work.Source: Bureau of Labor Statistics (BLS).
• Advance Monthly Sales for Retail and Food Services: Estimated monthly sales for retail and food services, adjusted and unadjusted for seasonal variations. Source: United States Census Bureau.
• Federal Open Market Committee (FOMC): Responsible for implementing Open market Operations (OMOs)–the purchase and sale of securities in the open market by a central bank—which are a key tool used by the US Federal Reserve in the implementation of monetary policy. Source: Federal Reserve.
• The Federal Funds Rate: Is the interest rate at which depository institutions trade federal funds (balances held at Federal Reserve Banks) with each other overnight. When a depository institution has surplus balances in its reserve account, it lends to other banks in need of larger balances. In simpler terms, a bank with excess cash, which is often referred to as liquidity, will lend to another bank that needs to quickly raise liquidity. Source: Federal Reserve Bank of St. Louis.
• The “core” PCE price index: Is defined as personal consumption expenditures (PCE) prices excluding food and energy prices. The core PCE price index measures the prices paid by consumers for goods and services without the volatility caused by movements in food and energy prices to reveal underlying inflation trends. Source: Bureau of Economic Analysis (BEA).

Sources: U.S. Bureau of Economic Analysis (BEA), Bureau of Labor Statistics (BLS), U.S. Department of Labor (DOL), Federal Reserve, Federal Reserve Economic Database (FRED), Federal Reserve Bank of Atlanta, U.S. Census Bureau, Department of Housing and Human Development (HUD), U.S. Department of Agriculture, U.S. Energy Information Administration (EIA), U..S Department of the Treasury, Office of the United States Trade Representative (USTR), U.S. Department of Commerce, data.gov, investor.gov, usa.gov, congress.gov, whitehouse.gov, U.S. Securities and Exchange Commission (SEC), Morningstar, The International Monetary Funds (IMF), The World Bank (WB), European Central bank (ECB), Bank of Japan (BOJ), European Parliament, Eurostats, Organization for Economic Co-operation and Development (OECD), National Bureau of Statistics of the People’s Republic of China, Organization of the Petroleum Exporting Countries (OPEC), World health organization (WHO).

Financial Markets – Recent Prices and Yields, and Weekly, Monthly, and YTD (Table): Bloomberg, Weekly Market Data is in USD and refers to the following indices: Macro & Market Indicators: Volatility (VIX); Oil (WTI); Dollar Index (DXA); Inflation (CPI YoY); Fixed Income: All U.S. Bonds (Bloomberg Aggregate Index); Investment Grade Corporates (Bloomberg US Corporate Index); US High Yield (Bloomberg High Yield Index), Treasuries (ICE BofA Treasury Indices); Equities: U.S. Industrials (Dow Jones Industrial Average); U.S. Large Caps (S&P 500); U.S Tech Equities (Nasdaq Composite); European (MSCI Euope), Asia Pacific (MSCI AP), and Latin America Equities (MSCI LA); Sectors (S&P 500 GICS Sectors) Source: Bloomberg. Fed Funds Rate probabilities, Source: CME FedWatch Tool.  

Important Disclosures:

The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment in any jurisdiction, nor is it a commitment from Amerant Investments, Inc. or any of its affiliates to participate in any of the transactions mentioned herein. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit and accounting implications and determine, together with their own professional advisers, if any investment mentioned herein is believed to be suitable to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yields are not reliable indicators of current and future results.

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