Spring has sprung! On Friday, stocks leapt on obscure news from China, upbeat bank earnings, and interesting corporate announcements. After a week of low volatility in which traders were searching for something to get off the couch over, Friday’s interesting mix of news gave them something to trade on.
WHAT YOU NEED TO KNOW:
1) China is showing some signs of life. Before Friday’s open, Chinese economic releases showed that Credit usage has increased causing traders to conclude that the aggressive stimulus being offered by the central bank is having a positive effect. Another release showed that exports increased at a better than expect rate. The numbers were one of the key drivers of Fridays’ rally in equities.
2) The Fed has not given up on inflation. Last week’s Fed speakers were committed to letting the public know that inflation is not dead, just under control – for now – and that they will resume hiking if inflation picks up. Bond traders don’t like that kind of talk and put some pressure on longer maturity bonds. If inflation picks up, bond investors require more yield to compensate for the loss of real yield (which factors inflation into total return) and bonds sell off as a result. Ten year treasury yields added 10 basis points in the second half of last week.
3) Earnings matter folks! JP Morgan Chase, Wells Fargo, and PNC Bank all released earnings on Friday. JP Morgan beat estimates by +9.9% and PNC beat by +3.3% while Wells Fargo missed by -7.7%. JPM and PNC climbed on Friday becoming one of the key drivers in Friday’s equity rally. Wells Fargo didn’t fare so well selling off by -2.62% on the session. Upbeat bank earnings combined with a yield curve that has resisted staying inverted have given investors hope that perhaps the banking sector may be in for a rally. More bank earnings are due out this morning before the bell.
The markets spent much of last week floating up a lazy river with little or no tangible news to hold on to in advance of earnings season, which kicked off on Friday. While some companies began releasing Q1 earnings prior to Friday, the “official” season begins with large banks’ releases. Friday’s move in equities put the S&P 500 within 1% of its all time high achieved last September and all indexes are showing positive technical signs building a case for new potential highs – if warranted by earnings. Earnings matter! On Friday, the S&P 500 climbed by +0.66%, the Dow Jones Industrial Average traded up by +1.03%, the Russell 2000 ticked up by +0.36%, and the NASDAQ 100 index rose by +0.44%. The VIX index, also known as the fear index, traded down on Friday, hitting its lowest level since last October when equity indexes were at their all time highs. Though this is a positive sign for bulls, it is also a sign of investor complacency and long periods of low volatility are usually followed by erratic high volatility market action (see chart 5 in my attached daily chartbook). Bonds traded off for a second straight day on Friday bringing 10 year yields to 2.56%, up +7 basis points in the session. The 3 month / 10 year yield curve is still positive at +13 basis points.
WHAT TO LOOK FOR TODAY:
The Federal Reserve Bank of New York will release its Empire State Manufacturing Survey and General Business Conditions number which is expected to have ticked up to 8.0 from last months 3.7. The Bank of China will release an Overall Business Outlook this morning and, given its impact on not only the global economy but also the US stock market (as evidenced by Friday’s rally), it can impact trading today. Goldman Sachs and Citigroup will announce earnings this morning before the bell and, given Friday’s mixed release from its peers, they will be carefully scrutinized this morning. Fed governors Evans and Rosengren will speak today. Traders will debate the talk show circuit from the weekend which included everything from immigration to more Fed bashing (the “cut rates now movement” continues to grow amongst politicians), though those discussions may take second seat to Tiger Wood’s masterful Masters Tournament win.
WHAT TO LOOK FOR IN THE WEEK AHEAD:
In this shortened trading week we will get a good amount of economic data to chew on starting with Industrial Production tomorrow followed by Trade Balance, Retail Sales which is always a market mover, manufacturing/services PMI, the Conference Boards Leading Index, and a number of monthly housing numbers. The Fed will release its Beige Book on Wednesday which will highlight economic conditions across all of the Federal Reserve regions. The Beige Book always features insightful, non numeric, information about the health of the US economy. 47 of the S&P 500 members will release earnings this week. Amongst the earnings releases, we will hear from B of A, Morgan Stanley, Netflix, United Health Group, J&J, IBM, American Express, Honeywell, and Alcoa. Please refer to the attached weekly economic and earnings release calendars for more details. Also this week, Pinterest may begin trading shares in its IPO on the New York Stock Exchange on Thursday. Lots to look out for!