The AM Call: We Need to Talk About Rates

• It was another volatile week for the markets as Fed talking heads continued to dominate Treasury action. Chair Powell went on the record to note a “lack of further progress” in reaching the Fed’s 2% inflation goal. Meanwhile, regional Fed Presidents Bostic and Mester both indicated they were in no rush to cut rates, while New York Fed President Williams refused to rule out another rate hike if the data warranted.
• Recent macro data continues to suggest that monetary policy is not as restrictive as thought. The Powell pivot in fall 2023, while a welcome development across risk markets at the time, may ultimately prove to be counter-productive in ensuring inflation returns to the Fed’s 2% goal. With rate cuts pretty much off the table for the May and June FOMC meetings, we sense that current elevated rate volatility will persist. In short, we need to keep talking about rates. 

• Our base case view had been the Fed would cut three times in 2024, while markets clearly got ahead of themselves pricing in six rate cuts for 2024. Now we’re back to a “higher for longer” scenario with futures pricing in only 1 or 2 cuts starting in the second half of 2024. The policy-sensitive 2Y Treasury is brushing up close to 5%, simultaneously pulling the long end of curve with the 10Y around 4.6%.
• In equities, markets saw massive sell-offs as Technology stocks lead the way driven by the Semiconductor/AI popular stocks (NVDA, ARM, SMCI, AMD), as investor rotated away from overperforming growth stocks amid increased geopolitical risks and shift in consensus sentiment regarding the magnitude of rate cuts. Q1 Earnings season entered its second week, with a stellar Netflix (NFLX) report falling to impress investors as the 9.3M new subscribers that beat the 4.8M expected mark and strong 16% positive EPS beat were overshadowed by a disappointing in-line revenue growth guidance of 16% for Q2 and a new reporting policy that will fail to disclose subscriber information starting in 2025. In other earnings, strong beats were delivered by Goldman Sachs (GS), Morgan Stanley (MS), United Airlines (UAL) and American Express (AXP), while ASML Holdings (ASML), Discover Financial (DFS), US Bancorp (USB) and Prologis (PLD) posted significant misses with Taiwan Semiconductor (TSM), Charles Schwab (SCHW), United Health (UNH), Johnson & Johnson (JNJ), Procter & Gamble (PG) and Bank of America (BOC) released rather in-line expected figures. In corporate news, Apple (AAPL) iPhone Shipments slid 10% in March on an yearly basis driven by a dragging Chinese Market, Live Nation was reported to be facing antitrust lawsuit by the Department of Justice regarding it’s Ticketmaster business, Tesla (TSLA) has issued a request to it’s shareholders to re-approve Elon Musk’s US$ 56Bi compensation package after a domicile switch post the previous judicial denial in Delaware courts and in unrelated news also recalled 3.8k Cybertruck models due to a pedal manufacturing issue and announced a 10% workforce reduction amid slowing sales
• March retail sales came in hotter than expected. Retail sales rose 0.7% MoM, vs. estimate of up 0.4%. Excluding Auto and Gas categories, retail sales rose 1.0% compared to 0.3% estimate. February retail sales were also revised higher.

The Week Ahead

• This week’s macro data will include 1Q advance GDP, personal income and spending, and personal consumption expenditures (PCE) data for March.
• PCE is the Fed’s preferred inflation metric, which skeptics might attribute to the fact that it tends to come in lower than CPI. In any event, March PCE will be less important than in recent months, since the Fed has already made clear that it is likely to hold rates higher for longer for an extended period of time.

• 1Q GDP annualized advance estimate is forecast at 2.3%. a slowdown from the 3.4% rate in 4Q23. We note, however, that GDPNow is stronger than the consensus estimates at 2.9%.

• Personal income is expected to climb by 0.5% while spending rises by 0.6%. Durables goods exp Transportation are expected to be unchanged at +0.3%.

• In equities this week, Microsoft (MSFT), Alphabet (GOOGL), Meta (META), Tesla (TSLA), ServiceNow (NOW), IBM (IBM), Intel (INTC), Lam Research (LRCX), Texas Instruments (TXN), Snap (SNAP), Roku (ROKU), Pepsi (PEP), UPS (UPS), General Electric (GE), General Motors (GM), Ford (F), Raytheon (RTX), Lockheed Martin (LMT), Baxter (BSX),  Boeing (BA), Caterpillar (CAT), Honeywell (HON), Gilead (GILD) are all set to report.

Market Summary – Returns and Yields

For additional insights, be sure to check out last week’s blog post.

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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