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Weekly Market Update · 05.06.24
Stocks and Bonds Gain, Bank of England Expected to Stand Pat
A drop in Treasury yields last week across maturities boosted investment grade bonds. The Bank of England is expected this week to keep its policy rate unchanged.
- Markets & Economy
- Economic Insights & Trends
- Market & Investment Trends
- Central Banks
Key Points
What it is
We review how key events from last week affected markets and highlight what could impact markets this week.
Why it matters
Investors are closely following central bank rate moves, which may impact investment returns.
Where it's going
The Bank of England may hold off on changes to its policy rate until August as inflation remains firm.
Last Week Review
Global stocks rose 1.0% while investment grade bonds gained 1.2% as Treasury yields fell 0.15% to 0.20% across maturities. For April, a significant rise in interest rates coincided with losses across stocks and bonds. Gold (+3%), the U.S. dollar (+2%) and emerging market equities (+1%) led asset classes during the month.
Fed Leaves Rate Unchanged, Still Sees Eventual Rate Cut
The Federal Reserve left its policy rate unchanged. Fed Chair Jerome Powell underscored that recent indicators have not given the Fed greater confidence that inflation is moving sustainably down, and that rate cuts will take longer than initially expected. But he also outlined several of the most likely scenarios for the rate path from here, none of which included a rate hike.
U.S. Labor Market Eases
The U.S. jobs report reflected a labor market that’s coming into better balance. The U.S. added 175,000 jobs in April, well short of the expected 240,000. The total labor force participation rate was unchanged at 62.7%, but the that includes only people from 25 to 54 years old ticked up. The unemployment rate increased to 3.9% from 3.8% in March. Wage growth was slower than expected at 0.2% month-over-month, bringing the year-over-year change to 3.9%. This was likely welcomed news for the inflation-fighting Fed after the first quarter came in hotter than expected earlier in the week.
U.S. Economic Activity Inches Toward Contraction
The U.S. manufacturing and services measures eased, inching closer to contraction. The same indicator showed that China’s activity remained in expansion and a Politburo meeting raised hopes of policy flexibility moving forward.
Eurozone Turns the Corner from Recession
In the first quarter, the grew 0.3% annualized, a turn from slight recession. Core inflation eased to 2.8% year-over-year with lower services inflation.
Mega-Cap Technology Companies Support Earnings
Amazon delivered strong earnings results, while Apple was weaker. However, Apple’s earnings report wasn’t as bad as feared and the company authorized the largest share buyback ever. With only NVIDIA left to report, total first quarter earnings of the companies are expected to rise 47% year-over-year versus 5% for the broader S&P 500 Index.
This Week Preview
Bank of England Expected to Stand Pat
The Bank of England is scheduled to meet on Thursday and expected to keep its policy rate unchanged until August as recent inflation data has remained firm.
China May Report Higher Imports and Exports
Several key China economic reports are scheduled to be released this week. Imports are projected to grow 4.6% year-over-year versus a decline of 1.9% in the prior report. Exports are also projected to improve to 1.5% from a decline of 7.5% prior. The China Consumer Price Index is expected to remain low at 0.2%, and the Producer Price Index is expected to decline 2.3%. We think investors will also assess credit data to gauge consumer and business willingness to spend.
Berkshire Hathaway, Disney to Report Earnings
Among this week’s notable companies set to report are Berkshire Hathaway (BRK) and Disney (DIS). With the bulk of companies having reported, aggregate first quarter earnings of companies in the S&P 500 Index are projected to grow 5% year-over-year on a 4% rise in sales. Earnings surprises for first-quarter earnings reports have been stronger than the historical average.
Source: Bloomberg for data, news developments and schedule of economic releases. Data as of May 5, 2024.
Magnificent Seven
The “Magnificent Seven” companies are Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla, which drove the sharp rise in U.S. stocks in 2023.
Purchasing Managers Index (PMI)
The PMI provides insights into the current trends and future direction of economic activity in the manufacturing and service sectors. It sets the federal funds rate target, which is achieved through open market purchases by the Federal Reserve and has a broad impact on interest rates in the financial system and the economy. The committee consists of 12 members from regional reserve banks
U.S. prime age labor force participation rate
This labor participation rate variation, compiled by the U.S. Bureau of Labor Statistics, represents the percentage of people in the U.S. from 25 to 54 years old who are working. Compared to the labor participation rate that counts all people 16 years and older, the prime-age rate is less sensitive to demographic effects because retirement-age adults aren’t included.
U.S. Employment Cost Index
The Employment Cost Index measures the change in the hourly labor cost to employers over time, as measured by the U.S. Bureau of Labor Statistics.
Main Point
Central Banks on Hold
The early-2024 excitement of a potential series of interest rate cuts by central banks has subsided as inflation stays stubborn. The Federal Reserve kept its policy rate unchanged last week while the Bank of England is expected to stand pat this week.
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