U.S. stocks inched up this week despite a volatile market whipsawed by economic data releases and the FOMC meeting. The Fed’s more dovish than anticipated stance, coupled with mixed economic signals, kept hopes alive for more than one rate cut this year, which buoyed the broader indexes. Strong earnings reports from a few key companies also further bolstered sentiment. The interest rate sensitive utilities sector remained the frontrunner for the second week running. The bond market mirrored the positive sentiment in stocks, with issues across the curve strengthening on the Fed’s dovish tone and a tame Quarterly Refunding Announcement from Treasury. Notably, the benchmark Bloomberg Bond Aggregate Index traded to its highest level since early April and even briefly broke above the 200-day moving average.

Stock Index Performance

S&P 500 Index Sectors

Fixed Income and Commodities

Source: LPL Research, Bloomberg 05/03/24
Disclosures: Indexes are unmanaged and cannot be invested in directly.

U.S. and International Equities

U.S. Equities: Courtesy of a dovish message from Fed Chair Jerome (Jay) Powell that helped give stocks a jolt on Thursday and a Fed-friendly jobs report that drove another stock rally on Friday, the S&P 500 ended the week in the green. Well-received earnings reports certainly deserve an assist for the late-week rally, with Amazon (AMZN), Apple (AAPL), and Qualcomm (QCOM) up strongly on their results. Tuesday’s losses were attributable in large part to a hotter-than-expected Employment Cost Index that put some upward pressure on yields before the Fed and the jobs report helped reverse the jump in yields.

Small caps enjoyed a solid week relative to large caps despite strong performance by large cap technology stocks this week. Small caps tend to be sensitive to the Fed and rates, so the more dovish message and data late in the week that dragged Treasury yields lower were bullish. At the sector level, biotech and banks were solid contributors to the small cap index.

The utilities sector continued its impressive run atop the sector rankings with a solid gain of over 3% for the week. Lower yields helped late in the week, but the sector’s leadership in April as rates rose suggests that power demand for artificial intelligence (AI) applications likely played a role, along with the sector’s defensive characteristics.

Growth stocks beat value despite utilities’ strength outperformance, as outperformance by the consumer discretionary and technology sectors gave the Russell 1000 Growth Index a boost. Energy losses weighed on the Russell 1000 Index as oil prices fell more than 6% for the week (more on oil below).

International Equities: The big story in international equity markets this week was the yen. Japan’s Ministry of Finance and the Bank of Japan which surged on government intervention and propelled the Japanese indexes to strong gains in U.S. dollar terms. The MSCI Japan Index gained 4.7% for the week, enough for the broad developed equity benchmark, the MSCI EAFE, to outperform U.S. equities for the week with a 1.7% gain. The MSCI emerging markets (EM) Index fared even better, gaining just shy of 2% amid strength in Chinese equities, which gained about 4% for the week.

Fixed Income: The Bloomberg Aggregate Bond Index was higher on the week after the Fed effectively ruled out additional rate hikes. The bond market had started to price in the probability of a rate hike due to the recent stubbornly high inflation prints, so the pushback was enough to cause Treasury yields to fall. The decline in Treasury yields was the first decline in over a month.

Treasury’s second quarter refunding announcement contained no major surprises. Treasury announced privately held marketable borrowing of $243 billion for the second quarter and $847 billion for third quarter, while coupon auction sizes largely remained unchanged from the previous refunding cycle, except for slight increases in TIPS auction sizes, in line with market expectations. Going forward, we continue to expect Treasury to maintain the current nominal coupon auction sizes for some time and slightly raise TIPS auction sizes over time in line with previous guidance, while managing any variation in financing needs via bills issuance. This should reduce uncertainty around the duration supply outlook.

At the Fed meeting, it said it will shrink its balance sheet at a slower place beginning in June, reducing the amount of Treasuries it lets roll off every month, a step meant in part to ease potential strain on short term funding markets. The Fed said it will lower the monthly cap on the amount of Treasuries it will allow to mature without being reinvested, to $25 billion from $60 billion, while keeping the cap for mortgage-backed securities unchanged at $35 billion.

Bottom line: While the Treasury announcement was roughly in line with market expectations, the Fed’s decision to slow the pace of Treasury runoff was slightly more dovish than markets were expecting. As such, the Fed will provide more support to the Treasury market, which should help alleviate some concerns about elevated Treasury supply.

Commodities: The broader commodities complex traded lower this week amid widespread selling pressure. The 1.6% drop left the Bloomberg Commodity Index sandwiched between its 50- and 200-day moving averages. The move lower surprisingly overlapped with a weaker U.S. dollar. The greenback followed Treasury yields lower and closed down around 1%. Outside of a less hawkish-than-feared Fed policy meeting, BOJ intervention also contributed to dollar weakness as suspected intervention pulled the dollar/yen pair down 3.5%.

Industrial metals traded flat and outpaced precious metals, which continued to pull back from their April highs. Gold slid around 1.8% before finding support near its late-April low ($2,285).

Energy underperformed as West Texas Intermediate (WTI) fell for five straight days. Easing tensions in the Middle East have diminished oil’s risk premium, while a surprise surge in weekly inventory data weighed on the supply side. Natural gas dodged the selling pressure as a relief rally drove futures up over 30% and back above support from the 2023 lows. Forecasts for increased cooling demand and ramped up activity at the Freeport liquefied natural gas export plant in Texas helped fuel the rally.

Livestock and agricultural markets were broadly lower, with cocoa capturing most of the spotlight. Futures dropped over 20% during a wild week of trading. Profit-taking pressures amid cocoa’s still 100%-plus year-to-date gain were primarily blamed for the decline.

Economic Weekly Roundup

Employment Cost Index Caused Rate Jitters Early in the Week. The rise in government wages and salaries drove the upside surprise in the headline employment cost index for the first quarter. Markets should focus on the private sector, however. Government wages rose 5.0% in Q1, much faster than the 4.3% increase in the private sector.

Core services inflation should ease this year as private labor costs decelerate. In recent years, governments have increased wages faster than the private sector to attract workers and fill open positions. Investors should focus on the private sector since that’s what drives business activity.

Bottom Line, investors should expect core services inflation to cool as labor costs decelerate. The real problem for the Fed is that it could take some time for changes in labor costs to impact consumer pricing, and markets are getting increasingly frustrated with the Fed’s decision-making process.

Has Goldilocks Returned? Payrolls increased by 175,000 in April, well below consensus forecasts calling for 240,000. The unemployment rate rose to 3.9% from 3.8% the previous month, while job totals from the two prior months were revised downward. Job gains were concentrated in healthcare, transportation and warehousing.

Average hourly earnings rose by 0.2% from a month ago, pulling the annual rate down to 3.9% from 4.1% in March. The average workweek for private payrolls declined to 34.3 hours, suggesting weaker labor demand.

Bottom Line, the demand for labor is slowing, which will eventually ease inflation pressures, giving the Fed some leeway to cut rates later this year. Slower payroll growth and fewer hours worked imply the economy is slowing at a measured pace. This jobs report is consistent with the soft-landing narrative.

The Week Ahead

The following economic data is slated for the week ahead:

• Monday: Senior Loan Officer Opinion Survey
• Tuesday: Consumer Credit (Mar)
• Wednesday: MBA Mortgage Applications (May 3), Wholesale Inventories (Mar)
• Thursday: Initial Claims (May 4)
• Friday: University of Michigan Sentiment (May), Monthly Budget Statement (Apr)