GREEN SHOOTS FOR THE ECONOMY

Stocks opened pretty flat this morning, waiting for the flood of earnings announcements scheduled this week. Today, the Dow is flat and the SPX is up .2%. The financial sector jumped 1.3% in early trading in reaction to rising interest rates (see below). The communications services sector is up .6% on a pop in telecom stocks. On the other hand, utilities and REITs—which are sensitive to interest rates—are down .5% to .7% today. Commodities are trading mostly lower. Copper plunged more than 5%--a big move for one day. We’ve heard that Chinese authorities are pulling back on economic stimulus, believing they’ve succeeded in stabilizing their economy. WTI crude oil is flat at $63.30/barrel. Bonds are selling off, especially at the long end. The 10-year US Treasury yield backed up to 2.53%. But the big news on the interest rate front is a surprise steepening of the yield curve. You may recall I’ve flagged the flat yield curve as a potential problem for the market and economy. The difference between short-term and long-term interest rates has been very small, suggesting slowing economic growth. Specifically, the difference between the 2-year and 10-year Treasury yields has been in the range of just .10% to .20% for about five months now. But late last week the gap started to widen, breaking out of that range. This could be good news and it bears watching.

I should probably point out that the SPX achieved a record all-time closing high on Friday. Stocks have generally performed very well this year, but that doesn’t mean volatility is a thing of the past. CNBC’s Sarah Eisen said it best: “You better be in the right stocks this earnings season. Because if you’re not, you get punished really hard.” It’s not out of the ordinary for a stock to plunge 10% (i.e. Intel) when management issues weak earnings guidance.

March’s Personal Income & Spending report is modestly encouraging, revealing a bump in consumer spending. On a month-over-month basis, consumer spending jumped a better than expected .9%. On a year-over-year basis spending has improved to a 3% growth rate (from 2% in December). So things on the demand side are moving in the right direction, suggesting consumers are bouncing back from a rough winter. Results weren’t great, however, on the income side. Personal Incomes posted a weak month, rising only .1% from prior month levels. But this seems to be due to a drop in the farming sector (which Bloomberg described as “fallout from the trade war”). Stripping that out, incomes rose 4.2% from year-ago levels—a decent rate of growth. Finally, core retail price inflation (“core PCE”) was pretty weak, rising only 1.6% from year-ago levels. So inflation is still very tame and should keep the Federal Reserve on the sidelines.


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