Risk on!
Knowing that this week was back-loaded in terms of both macroeconomic data released and the unofficial start of first-quarter earnings season, it was difficult to enjoy the risk-on behavior exhibited on Thursday for what it was. Maybe it's just an old superstition, but I always like to come into what I think will be a big event (or events) if not on weakness, then coming off something closer to a flat line.
In actuality, at the headline level, markets have more or less flatlined of late. Thursday's 1.33% move higher for the S&P 500 did take the index to its highest level since early February, but also closed less than one-half of one percentage point above its previous two-week high. Much the same can be said concerning the Nasdaq Composite. The more tech-focused index did run 1.99% on Thursday, but after closing in the red for six of the seven days prior. The Nasdaq Composite is still down from where it was early last week.
Why Thursday?
Thursday's risk-on moves were driven largely by the macro. The attention grabber was the Bureau of Labor Statistics' Producer Price Index for March, which was released just one day after that agency published its data for March consumer prices. The PPI. most notably on a month-over-month basis, wasn't just cool -- it was outright frigid. Headline March PPI printed at -0.5% month over month versus expectations for flat from February, and down from a February print that was flat from January. In short, month-over-month PPI has not shown growth since January and has not shown consecutive months of growth since November and December.
Why this matters so much is that many consider producer or supplier prices to be something of a leading indicator (though it does not always work out that way) for consumer prices. Much of the drop-off in March can be attributable to gasoline prices that we know are higher now than they were last month. That said, on a month-over-month basis, core PPI (stripping out food and energy prices) still hit the tape at -0.1% month over month. This was the first contraction on a monthly basis for this series in almost two years.
On a year-over-year basis, March PPI printed at growth of 2.7%, down from 4.9% in February and 5.9% in January. Remember, headline PPI had been running at growth of 11%-plus for three successive months just about a year ago. Core March PPI printed up 3.4% from a year ago, down from 4.8% in February and 5.2% in January.
This report reinforced the idea that inflation is slowing, or in the case of month-over-month PPI already is in a state of not just disinflation, but overt deflation. March CPI data had put some doubt into financial market participants concerning further improvement with what looked to be somewhat stickier inflation at the core, especially knowing that gasoline prices will be a headwind against further headline improvement in April. This report acted to soothe those inner (or outer) fears.
Simultaneously released with March producer-level prices was the Department of Labor's weekly report on state initial and continuing jobless claims. Initial claims topped expectations for a third consecutive week at 239,000 and have printed above 220,000 for seven consecutive weeks after not coming even close to that number or even 200,000 for the seven weeks prior to that. Continuing claims did hit the tape lower than they had a week before, but still stand within 0.07% of the high for the series since late 2021 and up a rough 35% from early last Autumn.
The Takeaway
Aren't falling producer prices and rising initial jobless claims against a backdrop of already elevated continuing jobless claims considered harbingers of recession? Of course they are. This had market participants, at least those trading currencies and equities, betting on the Fed pausing its aggressive interest rate policy sometime soon. We have certainly seen the Fed's resolve in prioritizing the fight against inflation over economic performance fracture of late, with camps of both hawks and doves developing where for so long there had only been hawks.
Interestingly, not everyone is so convinced that the Federal Open Market Committee (FOMC) is about to consider a pause. While the US dollar was very weak on Thursday and the US Dollar Index flirted with levels not seen in roughly a year's time, equities, crude, precious metals and cryptocurrencies all rallied. That said, Treasury yields largely stagnated while fed funds futures are still pricing in a 69% likelihood for another 25- basis-point increase to be implemented on May 3, which would take the benchmark overnight rate to a range of 5% to 5.25%. This is still seen by those trading this market as the terminal rate.
Marketplace
Outside of the Dow Transports, which was weighed down by Delta Air Lines (DAL) as well as several truckers and rails, the rest of the equity index universe got a boost from the softer producer prices and weakening labor market data.
Winners beat losers by a rough 5 to 2 for names listed at both the New York Stock Exchange and the Nasdaq. Advancing volume was dominant, taking a 71.9% share of composite NYSE-listed trade and a 72% share of that same metric for Nasdaq listings. Aggregate trading volume did stall, however, and if you're a market bull you would like to see trading volumes increase on broad rallies such as the one you enjoyed on Thursday.
This was not the case as trading volume actually decreased small for NYSE listings as well as across the S&P 500. Trading volume did manage a tiny day-over-day increase for Nasdaq-listed stocks as well as across the Nasdaq Composite.
Ten of the 11 S&P SPDR sector ETFs closed in the green, with Discretionaries (XLY) up top at +2.21%, followed by the two growth sectors, Communication Services (XLC) and Technology (XLK) . Only the REITs (XLRE) closed in the red, and that fund was down just 0.32% for the session.
Fed Balance Sheet
With the banks coming into focus this morning, I think it natural that we take a look at the Fed's balance sheet information, which is released weekly.
For the week ended April 12, total assets held by the Fed decreased by $17.587 billion to $8.615 trillion. As far as banks leaning on the Fed for cash, loans against the Bank Term Funding Program increased by more than $8.5 billion to $76.707 billion, while loans against the discount window decreased by more than $3.1 billion to $67.921 billion. The crisis in deposits at regional banks back in March, while not having disappeared, has indeed stabilized. The knock-on effects of tighter lending conditions will help push the national economy into recession, but that moment of intense fear does seem to have passed. For now.
The consumer is not entirely convinced. According to the Investment Company Institute, as reported by Bloomberg News, a rough $30.3 billion in cash flowed into US money market funds for the week ended April 12, taking total assets held in these funds up to a record $5.28 trillion. This broke the old record set just seven days earlier. About $384 billion in cash has moved into these money funds since March 8.
Cup With Handle?
Choose your size. With physical gold reaching for the sky on a weaker US dollar, we are talking gold futures priced as a continuous contract.
First we look at a weekly 12-year chart. We see peaks in 2011 and 2020, with attempts to top that level made early in 2022 as well as right now. If one sees this as one long cup-with-handle pattern, the pivot would be $2,100. That puts my target for long-term holders of physical gold at $2,415 per ounce. For now. I expect in dollar terms over the much longer run, as the dollar loses some of its dominance as "the" reserve currency to the world but retains its place as a key reserve currency, that this target is probably conservative, but I am working with what I see here, technically.
On a shorter-term chart that still goes back to early 2022, readers will see a much smaller cup-with-handle pattern with a $1,975 pivot. These features are approaching a short-term technically overbought condition, so a smallish retracement could be in the offing. That said, my target price for gold for those with a limited time horizon would be $2,270.
Economics (All Times Eastern)
08:30 - Retail Sales (Mar): Expecting -0.4% m/m, Last -0.4% m/m.
08:30 - Core Retail Sales (Mar): Expecting -0.3% m/m, Last -0.1% m/m.
08:30 - Import Sales (Mar): Expecting -0.2% m/m, Last -0.1% m/m.
08:30 - Export Sales (Mar): Expecting -0.2% m/m, Last 0.2% m/m.
09:15 - Industrial Production (Mar): Expecting 0.2% m/m, Last 0.0% m/m.
09:15 - Capacity Utilization (Mar): Expecting 78.9%, Last 79.1%.
10:00 - U of M Consumer Sentiment (Apr-adv): Expecting 62.7, Last 62.0.
10:00 - Business Inventories (Feb): Expecting 0.2% m/m, Last -0.1% m/m.
13:00 - Baker Hughes Total Rig Count (Weekly): Last 751.
13:00 - Baker Hughes Oil Rig Count (Weekly): Last 590.
The Fed (All Times Eastern)
08:45 - Speaker: Reserve Board Gov. Christopher Waller.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: (BLK) (7.72), (C) (1.71), (JPM) (3.35), (PNC) (3.68), (UNH) (6.07), (WFC) (1.16)
