Stocks once again succumbed to the rising trade tension between the U.S. and China
That stocks have not declined further is evidence of an abiding belief in the underlying strength of the economy, and the expected salutary impact of first quarter earnings, which are expected to grow by 17.1 percent according to Factset, the best pace since 2011. Given the propensity of companies to exceed expectations on average, some think earnings in the quarter could grow by as much as 25 percent. Citigroup and J.P. Morgan Chase get things started before the bell on Friday.
Jobs and Manufacturing Remain Healthy; Bonds Buffeted by Trade
The March jobs report was ambiguous enough to offer little clarity on the question of the current strength of the economy. The headline new jobs number was certainly a disappointment, as just 103,000 jobs were created in contrast to the 185,000 that were anticipated. And the prior two-month total was revised lower by 50,000. Nevertheless, average monthly job growth in the first quarter was quite robust at 202,000 and more than enough to continue absorbing whatever slack remains in the labor market. Average hourly earnings rose a solid 0.3 percent, bringing the year-over-year increase to 2.7 percent, and the length of the workweek remained unchanged. The jobless rate remained at 4.1 percent, despite expectations of a decline to 4.0 percent, and the participation rate edged lower.
The March ISM report on manufacturing showed that activity moderated slightly, but remained at a healthy level. Activity overall in the first quarter is once again expected to be soft, as has been the prevailing pattern throughout most of this recovery. Our own forecast anticipates GDP growth of just 1.9 percent in the first quarter, before rebounding strongly in the second quarter and beyond.
Bond yields were also buffeted by the continuing angst surrounding the threat of trade troubles. The yield on the ten-year Treasury note rose as high as 2.83 percent on Thursday from its 2.74 percent close last week, before falling back to end the week at 2.77 percent, while the two-year was unchanged at 2.27 percent. And credit spreads narrowed last week, after two months of steady widening. The option-adjusted spread of the Bank of America Merrill Lynch High Yield index fell 15 basis points to 364. And the BBB spread narrowed two basis points to 142.
Investors Reach an Important Juncture for this Market
The economic calendar this week is headlined by the consumer price report on Wednesday. The year-over-year headline rate is expected to climb to 2.4 from 2.2 percent in February. The monthly increase is expected to be just 0.2 percent, but it will be replacing a -0.2 percent reading from last March. The twelve-month core rate is expected to climb to 2.1 percent from 1.8 in February as an expected 0.2 percent monthly rise will replace a -0.1 percent decline from last March. And in a development that may shed some light on regulatory sentiment regarding personal data privacy, Facebook CEO Mark Zuckerberg will testify before Congress on both Tuesday and Wednesday.
We arrived at an important juncture for this market. We will soon learn if, in fact, earnings are as strong as forecast, and whether that is enough to not only stabilize stock prices, but push them higher. That has been a popular narrative throughout this correction. And even if earnings turn out to be as strong as expected, will that be enough to overcome the uncertainty regarding trade policy and its impacts? We are about to find out.