Economic News is Constructive, but Not Conclusive
The primary catalyst was a stronger than anticipated report on China’s manufacturing activity in March that was released before the week even began, setting a tone that carried through to the stronger than expected U.S. reports on both manufacturing and conditions in the labor market. The possibility that policy stimulus is beginning to gain traction in China was cheered on all fronts, especially in Europe, as it allowed investors to look past a dismal month for manufacturing activity, in Germany in particular, where already anemic activity was revised even lower. Despite the weakness in the Eurozone, the JP Morgan Global Manufacturing PMI index was flat in March, the first month since last April that the index did not decline.
Also helping matters were the generally constructive assessments of the progress being made between the U.S. and China in their trade talks. While both sides acknowledge that difficult decisions remain, the impression being created is that a deal is within reach, perhaps sometime in the next several weeks.
Bond Yields and the Jobs Report Bounce Back
Bond yields responded to the brighter economic outlook by bouncing off their recent lows. After touching a fifteen-month low yield of 2.37 and closing at 2.41 percent two weeks ago, the ten-year note yield ended last week at 2.50 percent. The three-month to ten-year yield curve steepened to seven basis points and the two-year to ten-year curve edged higher to 16 basis points (a basis point is 1/100th of a percent).
The March U.S. jobs report, which saw the creation of 196,000 new non-farm jobs, helped to ease the anxiety caused by February’s paltry jobs growth of a revised 33,000, originally reported as just 20,000, and the soft ADP employment report on Thursday. Year-over-year average hourly earnings growth eased back to 3.2 percent from 3.4 percent in February, although the length of the average work rose slightly. But there was little to complain about in a report that overall suggested continued growth and low inflation.
Economic Data Brings Investors Positive News; Will it Last?
Although the economic news last week was generally constructive, it is not yet conclusive. One or two data points do not make a trend. But the news was encouraging nevertheless. While investors await additional data confirming the evidence of nascent economic stabilization, the no small matter of first quarter corporate earnings results will take center stage. In one sense, so much negativity has surrounded the prospect of a year-over-year decline, unless the quarter is dramatically worse than feared, stocks may be set up for a positive surprise.
Factset estimates earnings will decline 3.9 percent in the first quarter following a larger than typical decline in estimates during the quarter. The worst of the downward revisions were concentrated in energy, materials and technology. The full-year estimate now sits at 3.7 percent. Quarterly revenues are estimated to be relatively steady throughout the year, averaging between 4 ½-5 percent. There has been a focus on profit margins coming under pressure as the economic cycle matures, due to rising input costs and limited pricing power, and this bears watching. But, although margins did fall slightly in last year’s fourth quarter, and are expected to fall again in the first quarter, they remain quite high historically. JP Morgan and Wells Fargo unofficially open the earnings reporting season on Friday.
Headlining the U.S. economic calendar this week are producer and consumer prices, consumer sentiment and minutes of the Fed’s March meeting. The European Central Bank also meets this week, with little new action expected. And despite the somewhat more optimistic economic outlook, the International Monetary Fund has warned it is likely to once again lower its growth outlook this week.
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The NASDAQ composite index measures all NASDAQ domestic and international based common type stocks listed on the Nasdaq Stock Market.
The EURO STOXX 50 is a market capitalization-weighted stock index of 50 large, blue-chip European companies operating within eurozone nations. The universe for selection is found within the 18 Dow Jones EURO STOXX Supersector indexes, from which members are ranked by size and placed on a selection list.
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The Nikkei index is a price-weighted average of 225 stocks of the first section of the Tokyo Stock Exchange.
The Shanghai Composite Index is a capitalization-weighted index of all stocks on China’s Shanghai Stock Exchange.
The JP Morgan Global Report on Manufacturing is compiled by IHS Markit based on the results of surveys covering over 13,500 purchasing executives in over 40 countries. Together these countries account for an estimated 98% of global manufacturing output. Questions are asked about real events and are not opinion based.
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