Exceed Expectations

Exceed expectations.  Stocks rose moderately on Friday with some indexes hitting new highs after an exceedingly good economic number.  Stocks climbed on Friday because the economy is doing well while bonds also climbed because traders are projecting rate cuts.


WHAT YOU NEED TO KNOW:

1)  The economy is doing well… on the surface.  On Friday, the Bureau of Economic Analysis reported that GDP grew at an annualized rate of +3.2% in the first quarter beating economist projections.  The number represents a pick-up in growth compared to the prior quarter’s growth rate of +2.2%.  Observing the numbers behind the number, economists note that the big headline growth number masked some dangerous signals about weakness in consumer spending and business investment.  With these categories being major economic drivers, weakness can indicate trouble ahead.  An atypical swelling of inventories appears to be responsible for the larger than expected top line growth figure.  Inventories typically recede after unnatural buildups which can drag on growth in future quarters.

2)  Bond traders are still not convinced that all is well.  Despite the good GDP figure and a run up in stocks, bond investors continue to factor in rate cuts in the future.  Fed funds futures indicate a 68% probability of a 25 basis point rate cut by next January.  FYI, 68% is pretty good odds.  Also FYI, just because traders think something is going to happen, it doesn’t mean that it will, in fact, happen.  For now, we need to continue to watch the economy really closely.

3)  The US trade delegation is headed to Beijing this week.  Though there have been rumblings that there are still some major sticking points between parties, progress is being made.  Vice Premier Liu will be in the US next week.


THE MARKETS:

Stock traders liked the good news about the economy and bought stocks lifting the S&P 500 and the NASDAQ composite indexes to new all-time highs.  The S&P 500 traded up by +0.47%, the Dow Jones Industrial Average rose by +0.31%, the RUSSELL 2000 climbed by +1.03%, and the NASDAQ 100 inched up by +0.12%.  The healthcare sector led stocks higher after lagging behind in the prior quarter and the energy sector lagged on the drop in crude oil prices.  Speaking of the -2.93% drop in crude on Friday, the fall was in response to a President Trump comment that he was in touch with OPEC leaders and asked them to increase production to bring prices down.  WHILE YOU SLEPT, President Putin along with other oil producers reaffirmed their commitment to keep oil production limited, consistent with current policy.  Oil futures continue to slide, despite the statements.  On Friday, bond traders drove up bond prices bringing 10 year treasuries down by -4 basis points to 2.49%, slightly below the Fed funds target.  The 3 month / 10 year yield curve flattened out by -3 basis points to pick +8 basis points, which is flat but still positive.


WHAT TO LOOK FOR TODAY:

This morning we will get reads of Personal Income and Spending for March and Income is expected to have grown by +0.4 and Spending is projected to have grown by +0.7%.  The core PCE (personal consumption expenditures) Deflator, the Fed’s favorite inflation indicators, is expected to show a year over year growth rate of +1.7%, which is below the +2% target set by the Fed.  We have no major pre-bell releases this morning but after the bell we will hear from Alphabet/Google, Continental Resources, MGM resorts, AK Steel, and Tenet Healthcare, amongst others.  Trump will be interviewed by Fox News this morning and Boeing will be in the spotlight once again today amongst reports that regulators are looking into whistleblower claims regarding the 737 Max 8 as CEO Dennis Muilenburg addresses shareholders at Boeing’s annual meeting.


WHAT TO LOOK FOR IN THE WEEK AHEAD:

This week is packed to the gills with data starting with the PCE figure this morning, tomorrow we will get the Conference Boards Consumer Confidence Indicator, on Wednesday we get ADP employment change along with manufacturing PMIs, Thursday brings Factory Orders as well as Durable Goods Orders, and finally on Friday we will get the monthly Employment Situation from the Bureau of Labor Statistics which is expected to show that +182 non-farm payrolls were added and that the unemployment rate remained unchanged at 3.8%.  Another hot item this week is the Fed’s FOMC meeting which will take place starting tomorrow and culminating in their policy decision announcement Wednesday afternoon.  Though the Fed is largely expected to keep rates steady, their policy statement along with the press release that follows can go a long way in affecting markets, as we have seen in past months.  150 S&P 500 companies will report earnings this week making it the busiest week for earnings so far in this earnings season.  Please refer to the attached weekly earnings and economic calendars for details.

daily chartbook 2019-04-29

econ numbers 4_29

earnings releases 4_29

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