Market Update

• Stocks pause ahead of Yellen speech; Q1 GDP is in-line. U.S. indexes continue to move sideways this morning after finishing near flat yesterday–the S&P 500 closed 0.02% lower at 2090.10–as traders digest Q1 gross domestic product (GDP) data and await a speech from Federal Reserve Bank (Fed) Chair Janet Yellen for hints about the likelihood of a rate hike next month. There was notable weakness yesterday in the materials sector, while utilities and telecom outperformed. WTI crude oil has pulled back to $49/barrel this morning after breaching $50 yesterday. Overseas markets are also largely unchanged, although the Nikkei Index managed to eke out a modest gain on expectations that a sales tax hike will be delayed. COMEX gold is holding steady and Treasuries are mixed ahead of the holiday weekend after yesterday’s strength across the curve.

Macro View

• Three straight higher months? Yesterday was flat, but the S&P 500 is still up 2.1% for the week, the best weekly gain since early March. In fact, with two days to go until May is over, the S&P 500 is up 1.2% for the month. This would be the fourth straight year May is higher, but would also be the third straight monthly gain. Remember, before the current monthly win streak we saw the first three-month losing streak in more than four years.

• No new highs for 16 years. The S&P 500 last made a new all-time high on May 21, 2015. It made many new highs from 2013 through that May 2015 peak as well. That is on a price only basis, however; if you adjusted for inflation, the S&P 500 still isn’t above the March 2000 peak. In other words, you could argue it has really been over 16 years since the last all-time high, not just over one year. Today on the blog we will take a closer look at this phenomenon.

• Q1 GDP revised higher, but it’s all about Q2 and H2.The initial take on Q1 2016 GDP growth was released in late April 2016, putting it at 0.5%. Based on the new and revised input data (construction, factory shipments, retail sales, etc.) released since late April 2016, the consensus of economists put revised Q1 GDP at 0.9%. The first revision to Q1 GDP was released this morning, and although not quite at expectations, it was revised up to 0.8%. The upward revision came mainly from inventories. Prior to today’s report, Q2 2016 GDP was tracking to between 2.5-3.0% and nothing in this report changes that trajectory for Q2. The market knows that there have been major seasonal issues with Q1 GDP over the past decade or so, and will likely look at average GDP growth in Q1 and Q2 to get a better gauge of the economy. Even at just over 2%, actual GDP is growing faster than potential GDP, taking up slack and slowly pushing up wages/inflation. If this persists, the Fed is on track to do two more hikes this year; and, if growth is closer to 3% in H2 2016, even three more rate hikes could be in the cards.

• Week ahead. Jam-packed June kicks off next week. The May jobs report, the Fed’s Beige Book, an OPEC meeting, aEuropean Central Bank meeting, as well as May reports on vehicle sales, manufacturing, and the service sector Institute for Supply Management (ISM) are all on the docket next week as markets begin what is shaping up to be a critical month of June. Please see our Weekly Global Economic and Policy calendar for details.

Monitoring the Week Ahead

Friday

• Consumer Sentiment and Inflation Expectations (May)
• Yellen (Dove)
• G7 Leaders Summit in Japan

Sunday

• Bullard (Hawk)
• Japan: Retail Sales (Apr)

Click Here for our detailed Weekly Economic Calendar

 

Important Disclosures

Past performance is no guarantee of future results.

The economic forecasts set forth in the presentation may not develop as predicted.

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

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Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, political risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.

Treasury inflation-protected securities (TIPS) help eliminate inflation risk to your portfolio, as the principal is adjusted semiannually for inflation based on the Consumer Price Index (CPI)—while providing a real rate of return guaranteed by the U.S. government. However, a few things you need to be aware of is that the CPI might not accurately match the general inflation rate; so the principal balance on TIPS may not keep pace with the actual rate of inflation. The real interest yields on TIPS may rise, especially if there is a sharp spike in interest rates. If so, the rate of return on TIPS could lag behind other types of inflation-protected securities, like floating rate notes and T-bills. TIPs do not pay the inflation-adjusted balance until maturity, and the accrued principal on TIPS could decline, if there is deflation.

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