U.S. equities continued their surge higher, gaining 2.7 percent last week to close at another record high of 4128 on the S&P 500 Index. That brought the year-to-date rise to 9.9 percent, with almost 4 percent coming just since the start of April. Further evidence of gathering economic momentum came in the form of the ISM services sector report’s rise to a record high. The minutes from the Fed’s March meeting also provided some reassurance that monetary policy is likely to remain on hold for some time. Bond yields also contributed to the positive tone by easing slightly, as the ten-year yield fell 4 basis points to 1.66 percent. That is down from its recent peak of 1.74 at the end of March. High yield spreads also narrowed to their tightest in over two years last week. The dollar eased, and the VIX index declined to its lowest level in over a year.  

The pace of vaccine distribution has also accelerated recently. The U.S. daily average of inoculations now exceeds 3 million, with a single day total of 4.6 million on April 10. The U.S. has now fully vaccinated 22 percent of its population, with 36 percent having received at least one shot.

Inflation concerns persist; emerging markets get a boost
Despite the Fed’s assurances regarding policy, inflation continues to be a concern for investors. Producer prices in March rose 1.0 percent, well beyond expectations, evidencing rising price pressures early in the production chain. The trailing twelve month increase was 4.2 percent, the fastest rise in ten years. The core rate climbed 0.7 percent in March, and 3.1 percent for the trailing twelve months, also the fastest rate of increase in ten years. The March Consumer Price Index will be released on Tuesday this week and, owing to depressed readings from last year, is expected to show a sizeable year-over-year increase. The Bloomberg consensus anticipates a 2.5 percent twelve-month increase in the headline rate, up from 1.7 percent in February. That would be the highest in almost three years. The twelve-month core rate is expected to rise a more modest 1.5 percent. Also expected to show large increases this week are the March reports on retail sales and industrial production, both amplified by weather-related depressed readings in February.

Emerging market indices will likely get a boost to begin the week from a rebound in the shares of Alibaba, one of the largest index constituents. The Chinese government announced a fine equivalent to 4 percent of the company’s revenue for regulatory violations, removing an overhang that had weighed on the stock for six months. Shares of Alibaba climbed 6.5 percent in Hong Kong trading on Monday in response.
Earnings season gets underway
The primary focus this week domestically will be on earnings, as the big banks kick off the first quarter reporting season. Earnings are expected to grow 25 percent compared to last year, according to Factset, and may exceed that total if historical experience holds true. A lot is riding on earnings growth to help moderate the rise in market valuations. The forward P/E ratio of the S&P 500 currently sits above 22X, a level which outside of the present time has not persisted for any meaningful duration since the late 1990s. Of course, prevailing interest rates are meaningfully lower now, and expected to stay that way for some time. Nevertheless, some moderation would be welcome.

The Chinese economy has been one of the first to recover from the pandemic headwind, and later this week we will learn just how robust that recovery is. First quarter GDP will be released on Friday and is expected to show astounding year-over-year growth of 18.5 percent, supplemented by strong March readings in industrial production and retail sales.

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Sources: Factset, Bloomberg. FactSet and Bloomberg are independent investment research companies that compile and provide financial data and analytics to firms and investment professionals such as Ameriprise Financial and its analysts. They are not affiliated with Ameriprise Financial, Inc.
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The Institute for Supply Management (ISM) Non-Manufacturing Report compiles data from the U.S. services sector by surveying purchasing executives in over 60 different non-manufacturing industries, including construction, mining, agriculture, communications, transportation and retail trade.
The Chicago Board Options Exchange (CBOE) Volatility Index (VIX) is a widely used measure of market risk. It shows the market's expectation of 30-day volatility. The VIX is constructed using the implied volatilities of a wide range of S&P 500 index options.

The Consumer Price Index (CPI) measures the average change in prices over time that consumers pay for a basket of goods and services.

A 10-year Treasury note is a debt obligation issued by the United States government that matures in 10 years. The 10-year yield is typically used as a proxy for mortgage rates, and other measures.
In general, equity securities tend to have greater price volatility than debt securities. The market value of securities may fall, fail to rise or fluctuate, sometimes rapidly and unpredictably. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole.
International investing involves increased risk and volatility due to potential political and economic instability, currency fluctuations, and differences in financial reporting and accounting standards and oversight. Risks are particularly significant in emerging markets due to the dramatic pace of economic, social, and political change.

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