Coming data on same-store sales will help illuminate whether the modest upward tick in prices is something that is being replicated throughout the economy and signalling a stronger overall economy or perhaps one that remains more weighted to the most wealthy in the United States. According to Thomson Reuters data, Costco is poised to post the strongest same-store sales figures among the retail chains, though its 4.6 percent estimated increase would fall short of the 5 percent rise a year ago. The figures have a bit less utility than in the past given the likes of Wal-Mart stopped supplying this data years ago, but you work with what you have. Either way, it’s notable that the discounters have been weak this year – a sign of lackluster spending outlooks for lower income Americans.
The lower-income sector has seen its share of economic growth diminish over recent years, a trend that has been accelerated in part by the weakness in housing prices in most parts of the economy, poor overall demand and lack of spending among all but the upper tier of consumers, and no real growth in wages — though this morning’s data on productivity and labor costs does show finally some wage growth.
Discerning where the bond market is headed next has been the primary occupation of investors in the last several days. The selloff seen in the Treasury market after the Institute for Supply Management fixed, re-fixed and then officially re-fixed its manufacturing survey shows that perhaps long-dated yields have come about as far as they’re going to go for some time here – moving back above the 2.55 percent level after dipping down to around 2.44 percent on Friday. We’ve been over this before, but it’s instructive to look at just what’s forced yields this low and take a measure of the various factors involved, and what it might tell us about where we’re going from here.
A number of strategists notably believe the expectations for a lot of monetary helicopters over Europe has something to do with it – noting that the sharp dive in Euro-zone yields has contributed both to a shift in institutional funds to the comparatively high yielding U.S. debt market, as they see the German bund 10-year dropping to about 1.40 percent while Italy sits at 2.96 percent and Spain is at about 2.84 percent at this time.
Sometimes the biggest pain trade is not being in the market at all, and that’s certainly the case in 2014. We’re in something of a Goldilocks environment when it comes to major markets: Bank of America-Merrill Lynch laid this out pretty well in a note yesterday, noting that global equities, US stocks, emerging markets, government bonds, gold, high yield bonds and investment grade corporate are all up between 3.9 and 5.2 percent so far this year.
One way or another now, there are a lot of people waiting for something to go wrong in the market and as a result it’s more or less caused people to freeze in place. Recent investor surveys in the stock market have more people neutral than has been seen in a long time, because while they don’t see equities falling dramatically any time soon, they also are confounded as to how the equity market can keep rallying.
There’s nothing dull these days about the bond market, which is exhibiting an unforeseen, profound level of strength that’s spread through the various asset classes on the fixed income side, and that continues to remain unexpected for the most part.
As of Wednesday the Barclays US Aggregate Index had notched a year-to-date return of 3.62 percent; the 10-year-plus index was up a crazy 9.39 percent, and the Barclays Intermediate High Yield Index was up 4.05 percent. Looking at one of their competitors, the Bank of America/Merrill Lynch Corporate Index has so far netted a 5.39 percent return year-to-date while the Merrill High Yield CCC and Lower Index is up 4.45 percent. So that’s pretty solid returns across the board – comparing favorably with the S&P 500’s total return of 4.3 percent so far this year. Explaining how it’s all happening in the bond market is the more difficult task, but let’s give it a whirl.
NEW YORK (Reuters) – U.S. and European bond markets rallied and benchmark yields fell to multi-month lows on Wednesday in expectations of stimulus from the European Central Bank next week and on month-end buying from U.S. funds.
Stock markets were largely flat. Wall Street dipped slightly after the benchmark S&P 500 .SPX set a closing record on Tuesday. The MSCI World Index .MIWD00000PUS was up fractionally to 420.27 points, less than 2 percent from its lifetime high.
There are a million cliches people lean on to explain some aspect of the market that’s otherwise baffling, and the key one this week – the cliche du semaine – is something along the lines of, “You don’t want to short a dull market.”
And indeed this has been a bit of a dull one lately. The S&P 500 grinds to new highs, accompanied by the Dow transports, with the industrials not that far off.
Shares of Hewlett-Packard fell late in Thursday’s session after the company inadvertently released results just before the closing bell, but the year hasn’t been so bad for HPQ at least where its stock is concerned – shares are up about 13.6 percent so far in 2014, part of solid performance by a group of stocks Goldman Sachs identifies as “weak balance sheet” companies, the kind of phenomena that occurs when the economy seems to be in recovery and financial conditions are favorable, which they are right now – low rates, high levels of borrowing, reduced covenants in loans and further appetite for risk.
That may change as financial conditions tighten -if Treasury rates start to rise, for instance, or if banks throttle back on lending – but at least HPQ has something going for it right now. The company is cutting 16,000 jobs as it tries to revive its moribund profit margins and reverse what is now 11 straight quarters of sales declines. Companies with weak balance sheets in Goldman’s screen such as HPQ, Time Warner, Norfolk Southern and Delta Airlines generally post lower per-share earnings growth and weak sales growth – often companies in more mature industries or that find themselves left behind one way or another.
Investors will get a look at the Federal Reserve’s thinking later on Wednesday in an otherwise quiet week when the Fed releases minutes from its April get-together. There may be a bit in the way of more up-to-date thinking in some of the scheduled Fed speeches, notably Bill Dudley of the New York Fed, along with Fed Chair Janet Yellen later in the week.
The minutes from February’s meeting were instructive – they clung to the Fed’s typical modus operandi in suggesting that economic difficulty early in the year was largely due to weather-related issues and pointed to improved outlooks in various areas, while still noting weakness in housing and consumer spending.
The markets are in a bit of an odd spot right now, with the biggest quandary that of the bond market, where U.S. yields have gone into a dive in recent days to touch their lowest levels since October.
What’s unclear is how much to attribute to fears of a slowing economy, changing dynamics like reduced mortgage securities issuance or increased pension fund liability-driven purchases. There are also technical factors like the rallies in sovereign debt markets like Spain, Italy and Ireland, none of which have the credit profile of the United States, big short positions among those who still believe this can’t continue much longer, and the overarching “quantitative easing forever” stance out of the European Central Bank and Bank of Japan, to say nothing of a few other central banks that are still on an easing path. (Really, it’s not as if the U.S. Fed is all that stingy right now when it comes to stimulus. Yes, it’s pulling back, but it’s pulling back from negative territory, basically.)
Who had the mo-mo mojo and who was crushed by the steamroller becomes evident late in the day Thursday when filings from major hedge fund managers – those things known as 13-Fs – are released.
Hedge funds were hit hard by the decline in the likes of Twitter, Tesla, Netflix and a lot of other names that long/short investors had favored throughout 2013 and early 2014, but their substantial decline cut the legs out of a lot of leveraged managers looking to continue to profit on the big run-up in that sector.