BMA Market Insights: All String of Market Moving Data Ahead

A heavy data week is ahead of us as global corporate earnings and economic data continue to be released while U.S. and China continue trade negotiations. The Federal Reserve will grab investors’ focus midweek as it’s scheduled to meet April 30th-May 1st. While the FOMC is not expected to make any changes to its key policy rate of 2.25-2.50%, the post-meeting press conference will be scrutinized for any changes in sentiment given recent data. A hawkish sentiment may result in increased market volatility.

Of late, key Chinese and U.S. economic data have surprised the markets to the upside. Late last week, first quarter U.S. GDP rose 3.2% y-o-y, the fastest growth in four years, (see more below). Further, positive sentiment surrounding U.S./Chinese trade talks continues to gather momentum, which could drive consumer confidence and business sentiment.

U.S. trade representative Lighthizer and Treasury Secretary Mnuchin are expected to be in Beijing this week to resume trade discussions. Both sides will likely focus on a number of issues including intellectual property, forced technology transfer, agriculture, services, and enforcement. China will follow suit and is expected to send a delegation to the U.S. to continue talks the week of May 8th.

Following the FOMC rate decision on Wednesday, the Bank of England will opine on its monetary policy the following day. Given the lingering uncertainty surrounding Brexit, the BoE will also likely keep its key policy rate unchanged at 0.75%. While Gov. Carney will host a press conference after the meeting, Carney’s days as the BoE’s chief are numbered given that he is expected to step down at the end of January 2020. Carney extended his role at the BoE twice with the aftermath of Brexit. Government officials started the search process for Carney’s successor last week.

A slew of key economic releases is slated for this week, including GDP data (for the EU and Canada) and manufacturing data (U.S., EU, UK, Canada). On Friday, investors will be keen on April U.S. jobs data. Economists are currently predicting an expected 185,000 jobs were created with the unemployment rate at a steady 3.8% and wage growth at 3.3%.

About 150 of the companies within the S&P 500 are expected to report earnings this week. Technology juggernauts Apple and Alphabet (Google’s parent company) are among the companies on the docket to report this week.

Strong corporate earnings, drove equity markets to record highs last week. Equity indices were further lifted by U.S. GDP data. Both the Nasdaq and S&P 500 closed the week in the green, with the S&P 500 capping the five days at around 2,935. While GDP data surprised to the upside, weakness in consumer spending offset some of the growth. Further, weaker-than-expected inflation data (see more below), placed downward pressure on rates. The 10-year U.S. Treasury yield closed at 2.502% – nearly 10bps lower from the high over the past two weeks.

Finally, oil prices faced downward pressure late in the week, particularly on the back of President Trump pressuring the Organization of Petroleum Exporting Countries to increase production and ease prices. WTI crude ended the week around $62.80/barrel.

I. U.S. Economic Data/Markets

Q1 GDP surprised to the upside rising 3.2% y-o-y (versus expectations of 2.5%). While growth was higher-than-expected, the drop in consumer spending cast a shadow on the report.
- An increase in exports, a fall in imports, and higher inventory investments drove economic growth in the quarter.
  - Net exports added over 1.00% to the 3.2% growth rate.
- Conversely, weaker growth in consumer spending and business investment dragged the data.
  - Consumer spending increased by 1.2%, down from 2.5% in 4Q2018. Consumer spending reflects about two-thirds of GDP.
Personal Consumption Expenditures Prices, the Fed’s preferred measure of inflation, fell to 1.7% for Q12019 from 1.9% reading the previous quarter.
Michigan Consumer Sentiment Index for April nudged higher to 97.2 versus preliminary readings of 96.9.
March Durable Goods increased by 2.7%, the fastest rate in seven months. Analysts expected an increase of 0.5%.
- Demand for autos, planes and networking equipment drove the data.
March New Home Sales hit near 18-month highs, increasing 4.5% on an annual adjusted basis on the back of lower home prices and lower mortgage rates.
Existing Home Sales fell 4.9% in March after the rising the most in four years in February.
Trump Administration is considering overhauling Fannie Mae and Freddie Mac with the possible intention of privatizing the agencies.

II. U.S. LIBOR Replacement, Secured Overnight Funding Rate (“SOFR”)

The Alternative Reference Rate Committee (“ARRC”), a group convened by the Federal Reserve Board to find an alternative reference rate to LIBOR issued a User’s Guide to SOFR last week.
The ARRC also released recommended fallback language for floating rate notes and syndicated loans to help create a smooth transition away from LIBOR, once it is no longer usable.

III. Key Economic Data Outside the U.S.

Eurozone
- Germany’s IFO business climate index surprised to the downside falling to 99.2 in April, compared to 99.7 the previous month. Markets participants largely expected a reading of 99.9.
Japan
- Bank of Japan kept its key rates unchanged with 10-year Japanese government bond yields at around zero and the short-term deposit rate at -0.1%. The bank promised to keep rates low at least until the spring of 2020.
  - The bank acknowledged it would take more time to meet its inflation target of 2%.
  - The bank’s quarterly outlook report reflected expectations that core CPI would rise 1.6% in the year ending March 2022.
- The unemployment rate rose to 2.5% last month, a 0.2% increase from February.
- Industrial production dropped 0.9% in March m-o-m on the back of slowing demand for exports of autos and manufacturing equipment.
Canada
- Bank of Canada kept its policy rate unchanged at 1.75%, as expected. Key takeaways from the meeting included:
  - Expectations that the growth in 1H2019 will be slower than initially anticipated in January in part due to lower energy prices, trade policy uncertainty and global growth slowdown. The bank lowered its growth forecasts for 2019 to 1.2% from forecasts of 1.7% in January.
  - Growth in 2H2019 is expected to improve relative to the first half on the back of stronger consumption due to expectations of higher wage growth.
  - Gov. Poloz noted that the bank could raise rates if upcoming data support that the current slowdown is temporary.
  - CAD dollar dropped to a three-month low (just under 74 U.S. cents) on the bank of BoC Gov. Poloz’s post-meeting conference.