After a choppy day, U.S. equities finished modestly higher to close out the trading week, as investors got another heavy dose of earnings results, and scrutinized a much stronger-than-expected read on Q1 GDP.
Treasury yields were lower despite the data, and the U.S. dollar fell modestly, paring a recent run. Crude oil prices were sharply lower following a rally as of late and gold was higher.
The Dow Jones Industrial Average rose 81 points (0.3%) to 26,543
The S&P 500 Index was up 14 points (0.5%) to 2,940
The Nasdaq Composite increased 28 points (0.3%) to 8,146
In moderate volume, 763 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq
WTI crude oil fell $1.91 to $63.30 per barrel and wholesale gasoline was down $0.03 at $2.05 per gallon
The Bloomberg gold spot price increased $8.51 to $1,285.68 per ounce
The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was down 0.2% at 98.01
Markets were mixed for the week, as the DJIA fell 0.1%, the S&P 500 Index rose 1.2%, and the Nasdaq Composite advanced 1.9%
First look at Q1 GDP surprises, consumer sentiment revised higher than expected
The first look (of three) at Q1 Gross Domestic Product, the broadest measure of economic output, showed a quarter-over-quarter annualized rate of expansion of 3.2%, after the unrevised 2.2% expansion in Q4, and well above the 2.3% growth forecasted by Bloomberg. Personal consumption gained 1.2%, topping forecasts of a 1.0% rise, and following the unadjusted 2.5% increase recorded in Q4. The bulk of the stronger-than-expected growth came amid a boost in nonfarm inventories, rising exports and a drop in imports—which are a subtraction in the calculation of GDP.
On inflation, the GDP Price Index came in at a 0.9% rise, below expectations of a 1.2% gain and the unrevised 1.7% increase seen in Q4, while the core PCE Index, which excludes food and energy, moved 1.3% higher, south of expectations of a 1.4% increase, and following the unadjusted 1.8% advance in Q4.
Treasuries were higher despite the data, as the yield on the 2-year note fell 4 basis points (bps) to 2.28%, while the yields on the 10-year note and the 30-year bond decreased 3 bps to 2.50% and 2.92%, respectively.
The market reactions to the GDP report may have looked a bit counter-intuitive, with stocks subdued, bond yields seeing noticeable pressure and the U.S. dollar failing to extend its recent rally. However, personal consumption slowed significantly from Q4, residential spending declined for a fifth-straight quarter, business investment decelerated and the inflation data was more subdued than expected. Also, one of the main contributors to the growth was the build-up in inventories, which could turn into drag if personal consumption, business investment and residential spending are not strong enough to chew through the increased stockpiles.
The final April University of Michigan Consumer Sentiment Index was adjusted higher to 97.2, from the preliminary figure of 96.9 and expectations of 97.0. The index was below March’s 98.4 level. The 1-year inflation forecast remained at March’s 2.5% rate, and the 5-10 year inflation outlook fell to 2.3% from 2.5%.
Europe mostly higher following U.S. economic output surprise, Asia mixed
Europe preceded the US markets with session mostly higher across the pond and the euro and British pound were higher versus the U.S. dollar, amid some choppy trading following a recent run for the greenback and the upbeat U.S. GDP report. Bond yields in the region were mostly lower. In light economic news, French consumer sentiment came in slightly below estimates for April.
Stocks in Asia finished mixed, following the diverging action in the U.S. yesterday as the heated up earnings season remained in focus. Japanese equities declined, with the yen modestly trimming yesterday’s solid gain, while the nation heads toward a week-long holiday break.
The Japanese economic calendar was in focus, with the nation posting stronger-than-expected inflation and retail sales data, though its industrial production for March unexpectedly declined. Chinese stocks finished mixed, with stocks traded on the mainland rising and shares in Hong Kong declining, as concerns over the potential for the government to scale-back its stimulus campaign in the wake of recent upbeat economic data being countered by lingering U.S-China trade optimism.
Stocks mostly higher amid a flurry of data
U.S. stocks finished mixed this week—with the S&P 500 and Nasdaq returning to record highs—as Q1 earnings season hit a high gear, with bottom-line results continuing to hurdle a ratcheted-down expectation bar. Nearly 78% of the 230 S&P 500 companies reporting thus far have bested earnings estimates, compared to the roughly 53% that have topped revenue forecasts, per data compiled by Bloomberg. Dow member Microsoft Corporation’s upbeat results helped lift the tech sector—despite Intel’s cut forecast—and the tech-giant’s market capitalization briefly north of the $1 trillion mark. Communications services were one of the best performers, courtesy of results from Facebook Inc. and Twitter Inc. while the healthcare sector led the way, rebounding from last week’s drop on concerns about the potential impact of the recent push for “Medicare for all.”
However, materials, industrials and energy issues saw some pressure, and the Dow lagged behind, courtesy of 3M Company’s severely-disappointing earnings report, along with Caterpillar Inc’s comments about declining market share and “aggressive pricing” from competitors in China, and culminating with Friday’s earnings miss from Exxon Mobil. As such, the energy sector was the worst performer, exacerbated by a wild ride in crude oil prices which hit a six-month high as the U.S. ended sanction waivers for importers of Iranian oil, only to fall as the week matured as President Donald Trump said he called OPEC and told them to lower prices.
The economic front continued to paint an upbeat expansion picture, with the Q1 GDP report being preceded by a stronger-than-expected rebound in durable goods orders and an unexpected jump in new home sales. However, Treasury yields moved lower and the U.S. Dollar Index came off highs not seen since mid-2017 with inflation data remaining subdued to keep expectations of a return of Fed tightening in check and potentially furthering discussions regarding if the next move could be a cut.
This sets the stage for next week’s monetary policy meeting by the Federal Open Market Committee (FOMC), where an expected unchanged decision will be followed by Chairman Jerome Powell’s press conference that is highly-likely to be scrutinized. However, the spotlight on the Fed will likely be shared as earnings season will hit its pinnacle and the economic docket will be robust. Personal income and spending will get the ball rolling, followed by Consumer Confidence, preliminary Q1 non-farm productivity and unit labor costs, the ISM’s Manufacturing and non-Manufacturing Indexes, and monthly auto sales. Friday’s release of the April non-farm payroll report is likely to garner the heaviest attention, as it produces key data on both sides of the Fed’s dual—maximum employment and price stability—with job growth projected in the 180,000 range and wage growth expected to continue to grind higher.
U.S. stocks have now recovered their late-2018 losses in a sharp V-shaped move. We’re concerned that the pendulum has swung too far, too fast and we could be vulnerable for a near-term pullback. Economic data has been healthy enough to reduce the fears of a near-term recession, but the disconnect between weak economic surprises and the recently-strong stock market may not be sustainable.