In the past week, U.S. markets made fresh all-time highs, while equity markets in Europe, and particularly the United Kingdom, have touched six and 14-year highs respectively. But stocks came under pressure last Thursday after Treasury yields sunk to fresh 2014 lows – taking out the important technical February low of 2.57% on the 10-year Treasury. The consensus expectation was that yields would rise this year as the economy picked up steam, and the U.S. Federal Reserve purchased fewer government and mortgage-backed bonds each month under its gradual taper strategy. But that has not yet come to pass.
Despite signs of slowing growth, Wednesday’s Producer Price Index provided some additional evidence that inflationary pressures may be quietly building in the U.S. economy, rising 0.6% in April. This represented the biggest monthly increase since January 2010.
For the week, the S&P 500 dropped -0.03%, the Dow lost -0.55%, and the MSCI EAFE (developed international) gained +0.35%.
Here are the 3 stories this week that rose above the noise:
Interest Rates: Low for Long
Despite the year-to-date decline in the yield of the 10-year Treasury, many pundits believe that interest rates are poised to reverse course and rise back above 3 percent based on the slowly improving U.S. economy. Oppenheimer provides a contrarian view that interest rates may remain low for much longer than anticipated based on their more muted growth outlook.
Historically, U.S. gross domestic product (GDP) and interest rates tend to track each other very closely. Oppenheimer notes that policy changes in China will likely lead to slower Chinese domestic consumption which will be a drag on global growth and they do not expect interest rates to rise until global GDP does.
Pinch Me! Europe Grew Faster than U.S.
The European economy grew at a faster pace than the United States’ for the first time in three years during the first quarter, as Europe experienced 0.9 percent annualized growth and the U.S. economy grew at a 0.1 percent annualized rate. European economic growth was below consensus expectations in the first quarter, however, it was the second consecutive quarter of positive economic growth in Europe and provided further evidence that Europe’s post-debt-crisis recovery remains on track.
Despite the strong start to 2014, growth in Europe is likely to trail the U.S. in the second quarter. Europe had a mild winter, which provided a boost to economic activity and that factor will likely fade in the second quarter. Conversely, U.S. economic activity is likely to rebound after a historically cold winter. Additionally, the crisis in Ukraine is likely to negatively impact consumer and business confidence throughout the Eurozone and negatively impact economic activity.
Lackluster Earnings Leave Stocks on Thin Ice
Behind the stock market’s anxious ups and downs of late lies the fear that a weakening U.S. and global economy could dash hopes for an uptick in corporate earnings. For the first quarter, earnings season is nearly done. More than 90 percent of big companies have reported results and they are lackluster. Profit gains for the S&P 500 were 2.1 percent overall compared with a year earlier, well below the previous quarter’s 8.5 percent rise, according to FactSet.
An article from The Wall Street Journal discusses some of the risks to earnings going forward, which include an uncertain economic backdrop due to recent soft reports on industrial production, housing starts, consumer sentiment and European economic growth.
Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team.
