Markets Blog
David Matzko, LPL Research
U.S. equity indexes came under a bit of pressure this week with the Russell 2000 down over 3% and the S&P 500 and Nasdaq Composite finishing off around 1%. Rising bond yields and renewed geopolitical risk in the Middle East weighed on sentiment. The energy sector was a beneficiary of the geopolitical apprehension and ended the week at new all-time highs.
Growing concerns that the Fed will further delay interest rate cuts following stronger than expected economic data and cautious commentary from Fed officials weighed on the fixed income market as the benchmark Bloomberg Aggregate Index finished the week near the lowest levels of the year.
Index Performance
U.S. and International Equities
Markets: The backup in bond yields and rising geopolitical threats in the Mideast combined this week to knock about 1% off the broad stock market averages. It could have been worse if not for Friday’s rally after the strong March jobs report, despite the resulting backup in yields. The geopolitical threat pushed oil higher, which – along with hawkish Fed-speak – contributed to increasing concerns about inflation and higher rates. Small caps bore the brunt of the pain as the Russell 2000 fell a little under 3% for the week compared to the 1% dip for the S&P 500 and Nasdaq Composite.
Perhaps not surprisingly, energy topped the weekly sector rankings as oil prices jumped about 4% and even embattled natural gas moved higher. Communication services was the only sector in the green thanks in large part to surging Meta (META) and Netflix (NFLX) shares which rallied 8% and 4%, respectively. On the other end of the spectrum, healthcare suffered the largest decline for the week due amid disappointing reimbursement rates announced for private Medicare plans. Income-oriented consumer staples and real estate sectors lagged due, at least in part, to sensitivity to rising interest rates, though utilities hung in there and slightly outpaced the market.
Fixed Income: U.S. government bond yields traded at their highest levels of the year this week, with the benchmark 10-year rate reaching as high as 4.42% before stalling. This rise reflects growing concerns about the Federal Reserve further delaying interest rate cuts due to stronger-than-anticipated economic data, including Friday’s jobs report and comments from Fed official Kashkari. Additionally, rising oil and gas prices are fueling renewed inflation fears, making next week's CPI data an important event for the bond market, especially as key resistance levels in yields come under threat.
After bouncing off support from the rising 50- and 200-day moving averages (dma). The advance in 10-year yields is now facing key resistance at 4.35%–4.40%, an established range based on the October 2022 highs and a key Fibonacci retracement level. A clear breakout above this level would not only be technically significant, leaving 4.55% and 4.70% as the next areas of overhead resistance, but it could also mark a major tipping point for risk appetite, as was the case last summer.
Commodities: Commodities rallied this week as escalating geopolitical tensions underpinned risk premiums in oil and gold. The Bloomberg Commodity Index rose over 3%, reversing a downtrend and recapturing its 200-day moving average for the first time since November. West Texas Intermediate jumped a little over 4% and surpassed key resistance at $83, leaving $95 as the next resistance hurdle to clear. Improving factory activity in the U.S. and China helped support the demand outlook. Gold climbed over 4% as a downtick in the dollar counterbalanced rising real yields. Industrial metals were also higher on the back of better global manufacturing data and copper supply risk.
Economic Weekly Highlights
Payrolls exceed expectations. The much-anticipated March payroll employment report released on Friday was no doubt the economic highlight of the week. Some highlights:
The top three sectors contributing most to the strong jobs report were healthcare, government, and construction. The construction sector deserves a callout because of the demand for new homes amid low inventories.
Leisure and hospitality payrolls finally returned to pre-pandemic levels after several years of sluggish job growth.
The unemployment rate has been in a range between 3.7% and 3.9% since August 2023. The job market remains tight.
Average hourly earnings rose 4.1% from a year ago, rising faster than inflation and giving consumers the ability to keep up with spending activity.
Bottom line, payrolls continue to expand, giving consumers the ability to keep spending, and a tight labor market implies wage growth should remain solid.
The odds of the Fed cutting rates in June are still over 50%, but traders should process the possibility that the European Central Bank may cut rates before the Fed. Investors should pay special attention to the dollar during this period of flux.
Manufacturing picks up some speed. Highlights from the ISM Manufacturing Report on Business for March:
The ISM Manufacturing Index, reported on Monday, April 1, beat economists’ expectations and moved into expansionary territory for the first time since September 2022.
Businesses experienced an uptick in new orders as the economy overlooked shocks from supply constraints, geopolitical tensions, and interest rate uncertainty.
Employment in the manufacturing sector contracted for the sixth consecutive month. Many firms are reducing headcount and implementing hiring freezes as they try to protect margins.
Raw material prices rose for the third month in a row after shrinking for eight consecutive months. Inflation risks are declining, and this should be good news for investors.
The Week Ahead
The following economic data is slated for the week ahead:
Monday: NY Fed 1-yr Inflation Expectations (Mar)
Tuesday: NFIB Small Business Optimism (Mar)
Wednesday: MBA Mortgage Applications (Apr 5th), CPI (Mar), Wholesale Inventories (Feb), FOMC Minutes (Mar 20), Monthly Budget Statement (Mar)
Thursday: PPI (Mar), Initial Jobless Claims (Apr 6)
Friday: Import Price Index (Mar), Univ. of Michigan Sentiment (Apr)
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