U.S. and global stocks declined this week. U.S. Treasury yields declined (and prices rose) modestly due to the weaker jobs number released Friday. Commodities rose, especially energy and metals. The dollar rose also.
A sharp rally on Wednesday reversed after the Fed minutes showed they may start unwinding their balance sheet late this year. The FED’s balance sheet grew from less than $1TN before the financial crisis to $4.5TN after all the bond purchases termed as quantitative easing. So, the FED indicated they may start the process of shrinking the balance sheet by not reinvesting all the proceeds from bonds maturing. Based on the minutes, it is not known if the FED would gradually reinvest fewer of the proceeds or if they would stop reinvesting all together. Right now, there is no talk about selling off bonds in the portfolio. The minutes also indicated that after the next two quarter point increases the FED would likely pause short term rate increases as it gradually starts the process of not reinvesting bonds so that it can gauge any effect without the short-term rate increases muddying the waters.
Why this is important, is that any effort by the FED to reduce the balance sheet will have somewhat of an upwards effect on longer term interest rates. With the FED no longer a buyer of bonds, the supply being sold on the open market will increase and the bonds may have to offer a higher interest rate to attract buyers. My take is that the market reaction was overblown on Wednesday and that the FED is being very cautious about doing this. I also think this is a good idea. If the FED focused solely on short term rates they could push them higher than long term rates which is called an inverted yield curve. Inverted yield curves historically have preceded recessions.
The Labor Department reports issued this week that seemed to contradict each other regarding the health of jobs. First time claims for unemployment, indicated that layoffs, fell sharply in the prior week but March Jobs creation came in weak while unemployment fell. I don’t place too much weight on a single month of job gains as this figure can be volatile. In recent years, we’ve seen one weak month followed by a strong surge the following month. A warm February likely pulled forward some March hiring. For example, construction added only 6,000 jobs in March after adding 59,000 in February. Also, a 2.7% increase in earnings from a year ago may be an indication that hiring is constrained by a lack of qualified workers and companies are having to pay more to attract and retain workers.
World leaders praised the U.S. for acting against the Assad regime for its use of chemical weapons. While this seemed to have little effect on the markets the next day, it remains to be seen if this creates a possible military confrontation with Russia and or Iran and what the long-term results will be. Hopefully, the U.S. does not get fully dragged into another middle east war.
Looking forward, 1st Quarter earnings start coming out this week. We see this a likely positive catalyst for the markets. Earnings which were negative for four consecutive quarters, have seen growth in the 3rd and 4th quarters last year. According to Factset, n company forecasts for the S&P 500 are for an 8.9% increase in Q1 earnings. However, as actual earnings usually exceed forecasts, earnings may be even higher.
In the numbers this week:
- The Institute for Supply management reported
- Its manufacturing purchasing managers index fell from 57.7 in February to 57.2 in March. 57.2 still represents a healthy acceleration albeit at a slightly slower rate.
- Its non-manufacturing index fell from 57.6 in February to 55.2 in March.
- Both these indexes indicate the economy is accelerating, just a slower rate of increase.
- Auto sales in March were 1.6% lower than last March.
- The Commerce Department reported the trade gap fell 9.6% in February as imports fell and exports rose slightly. From a year ago, exports have now risen 7.2%. Most of the decline in imports was in consumer goods.
- The Energy Information Administration’s Weekly Petroleum Data report is here: wpsrsummary (10).
- The Energy Information Administration reported
- Weekly field production of crude oil increased 70,000 barrels per day in the prior week.
- Natural gas in storage rose 2 Bcf from the prior week but is still above the five-year average.
- Baker Hughes reported that oil drilling rigs rose 10 to 672. Gas drilling rigs rose 5 to 165.
- The Labor Department reported
- Initial claims for unemployment fell 25,000 to a seasonally adjusted 234,000. The four-week moving average of claims, designed to smooth out weekly fluctuations, fell 4,500 to 250,000.
- The U.S. created 98,000 jobs in March, the slowest pace since May 2016.
- The unemployment rate fell from 4.7% to 4.5%.
- Average hourly earnings in March were 2.7% up from a year ago.
Please call us if you have any questions.
Loren C. Rex, CFP®, AIF®, MA Erik Smith
President Managing Partner
Generations Financial Planning & Wealth Management 269-441-4143
77 E. Michigan Ave, Suite 140
Battle Creek, MI 49017
Carrie Fuce, Assistant 269-441-4091
Toll Free: 800-513-8180
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These are the opinions of Loren Rex and Erik Smith and are not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Indices mentioned are unmanaged and cannot be invested into directly. Past performance is not a guarantee of future results.