Market Recap - Week Ending 04.16.21
Overview: Stock markets rallied across the globe last week, driven by optimism over economies reopening as vaccinations ramp up. International developed stocks (MSCI EAFE) led the way up 1.7%, with the S&P 500 Index up 1.4% on the week. In the U.S., the first quarter earnings season got off to a strong start. Earnings reports last week were dominated by big banks, with JPMorgan Chase, Goldman Sachs, and Morgan Stanley all reporting record results. Strong stock and bond trading demand and robust markets fueled results. Publicly traded company first-quarter earnings season ramps up this week, with several closely watched technology companies set to report earnings, including Netflix and Snap. Last week, FactSet estimated that S&P 500 companies would report aggregate earnings per share growth of 28% for the first quarter, the biggest jump in more than a decade.
Economic data: This week’s economic data reports will be relatively light, and members of the Federal Open Market Committee will enter their quiet period before their next meeting and monetary policy decision at the end of the month. In data last week, initial jobless claims fell to the lowest level during the pandemic to 576,000 for the week ending April 10, indicated a further economic recovery. Meanwhile, consumer prices (CPI) rose 2.6% year-over-year, the largest increase in two years (see details in next section). In China, gross domestic product (GDP) rose 18.3% year-over-year, the fastest pace on record. The caveat is that this increase was only 0.6% higher than the pre-pandemic level of the fourth quarter of 2020, which suggests that economic growth in China from the COVID-19 rebound may be normalizing.
Inflation Watch (from JP Morgan): Consumer prices rose in March at their fastest pace in nearly nine years, with the headline CPI rising 0.6% (consensus 0.5%) and the core CPI, excluding food and energy, rising 0.3% (consensus 0.2%). The main contributor to higher inflation in March was gasoline prices, which rose +9.1% m/m. Notably, the report revealed a rebound in core services prices as the U.S. economy reopens, with food away from home increasing 3.7%, while “limited services meals” jumped 6.5% for the year. While the upside surprise in inflation was small, it could be important as it increases the odds that inflation, as measured by the personal consumption deflator, will remain solidly above 2% y/y from April of this year well into 2022. Fed officials have indicated that they expect personal consumption expenditure (PCE) inflation to average around 2.4% y/y in 4Q21, but that they will regard increases later this year as likely transient. The PCE deflation has recently tracked headline CPI closely, and our estimate of the March PCE deflator is now 2.3% y/y. However, if inflation prints continue to run solidly above target, it could create some communication challenges for the Fed. As inflation is expected to rise over the next few quarters, the Fed will certainly be closer to its criteria for raising short-term rates, but more imminently, it will be closer to its criteria for tapering, which simply requires significant progress toward 2% inflation and maximum employment. Investors should continue to manage their duration of fixed income assets carefully and consider the possibility that tapering could happen sooner than the market expects.
Weekly Returns and Data:
Sources: JP Morgan Asset Management, Goldman Sachs Asset Management
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