GDP, Earnings, and the Fed
Markets have been skittish this week in anticipation of some key earnings releases and dissecting language from the Fed. Meanwhile, Treasury Yields are up this week. The yield on the 10-year opened the week at 1.57% and, as of this writing, the bell-weather bond yield is up to 1.65%. This has added to some short-term choppy trading this week. Here's what we're seeing so far:
Economic Data Solid. It would appear that we have largely left behind the days of soft patches in economic data. While we could see some releases disappoint from time-to-time, the data has become more consistent over the past few weeks. Today, while Weekly Jobless Claims disappointed, it remained below last week and dropped for the 3rd consecutive week. This is the first period of 3-week declines we've seen since November of last year. While Pending Home Sales disappointed, likely from a continued lack of supply, all of the other releases this week have either met or exceeded expectations. The first print of GDP for the 1st quarter came in at 6.4% vs. 6.1% expected. This is nearly 200 bps higher than 4th quarter GDP. Consumer Confidence came in much higher than expected (121.7 vs 113.0). This morning, Personal Spending exceeded expectations by 0.1% and the Employment Cost Index rose higher than expected by 0.2%. Personal Income came out this morning and jumped higher than expected, 21.1% vs 20.3%. This is a considerable move as last month's reading on Personal Income was -7.0%. The releases this morning are bullish for the economy going forward. Later today we'll get Chicago PMI and the University of Michigan's Consumer Sentiment. We expect economic data to continue to come in improved in the weeks ahead as more states re-open (NY announced today that it will fully re-open by July 1st). That being said, two things we're closely watching - Continued COVID Benefits and Supply Chain Issues. While jobless claims have dropped, more than 6 million people (represented by the green, blue, and yellow bars in the graph below) continue to receive employment benefits from COVID relief. This is putting a strain on the labor force as certain segments of the population would rather stay home than receive job earnings in the same amount of compensation. In addition, there continue to be issues with the Supply Chain, partially affected by the continued COVID benefits, but also due to an increase in demand and a bottleneck in the supply chain. These issues could exacerbate the dreaded inflationary pressures by causing the prices of goods to increase faster. Speaking of inflation, the PCE Index (Personal Consumption) rose 0.5% compared to last month's reading of +0.2%.
Fed Speak & Earnings. Earnings are probably not getting the attention they deserve, as most companies are beating expectations. Amazon announced earnings yesterday of $15.79/share vs. $9.55/share expected. The stock was is up more than 2% in overnight trading. Apple reported after the Bell on Wednesday and beat expected earnings by $0.42. On Tuesday, Google blew out expectations by reporting Q1 earnings of 26.26/share vs. $15.64/share expected. Overall, from a Net Profit Margin perspective, S&P 500 companies are having their best quarter since the 3rd quarter of 2018 - and yet, the market seems to be yawning. Yesterday, trading was all over the map as the yield on the 10yr Treasury Bond was volatile. The Bell-weather bond yield rose as high at 1.68% and dropped as low as 1.63%, only to settle at 1.65%. Stocks traded nearly in lock-step, but finished the day higher. On Wednesday, the Fed voted to leave rates unchanged and continue its dovish stance. During his press conference, Fed Chairman Powell used some new language to define "string" of good jobs data. Powell has stated in early April that he wanted to see a "string" of good jobs data rather than a single good month's worth of data. When pressed what he meant by "string," he stated, "We don't have to get all the way to our goals to taper asset purchases - we just need to make substantial further progress." We are currently 8 million jobs shy of where were before the pandemic began in February of 2020. Analysts believe that we could get halfway to filling those jobs by the end of this Summer is we stay on March's pace.
An Ending to the Pandemic. While certain states are still in the throws of a third-wave of Daily Cases, the number of people with antibodies (those vaccinated and with natural immunity) has grown exponentially since the first vaccines were rolled out at the end of 2020. Some doctors have estimated that we are at or near herd immunity already. That hypothesis might explain why daily cases, deaths, hospitalizations, and ICU visits have plummeted from their peaks (see table below). However, we have seen a decline in those getting vaccinated and those getting their second shots. The recent decline in the J&J vaccine doses due to the pause could likely backfire on CDC officials who are urging the public to get vaccinated. While no direct link was established between the vaccines and blood clots, confidence in the J&J vaccine could be permanently damaged. Meanwhile, there is enough evidence out there to no longer support schools being shut down or to prolong virtual learning. Children in the U.S. have suffered more deaths from other causes than COVID, as have other age groups. With the precautions people can take and the vaccinations continuing, COVID is nearly at the stage where we can look at it in the rearview mirror.