April 2023 Market Update for the Stock, Bond and Real Estate Markets
After three consecutive weekly gains for the S&P 500, major U.S. stock indexes were little changed for the start of Q2 and the holiday-shortened trading week. Softer economic data in manufacturing and services led the quiet market narrative. March jobs data released last Friday came in near expectations while U.S. equity markets were closed in observance of Good Friday. There has been soft economic data recently.
Overall, the S&P 500 decreased by 0.10%, the Nasdaq 100 fell by 0.90%, and the Dow Jones Industrial Average was higher by 0.63%.
ISM Manufacturing PMI
The Institute for Supply Management’s March manufacturing index, also known as PMI, showed a reading of 46.3, down from 47.7 in February and below the 47.5 consensus expectation.
When the reading is above 50, it indicates growth. The trend has been lower in recent months, and interpretations seem to be that U.S. manufacturing is decelerating sharply.
This reading was near a three-year low.
ISM Services PMI
Services, which have been showing strength recently, showed unexpected weakness in March. Expectations were for a reading of 54.3, and data showed 51.2.
Above 50 indicates growth in services, too, but the number was well below expectations and could represent the economic slowing that many have been waiting for in recent months.
New orders seem to be a key culprit in the weak services data.
Labor Market: Steady with Softer Signals
The March jobs report came out on Friday while U.S. stock exchanges were closed for the Good Friday holiday.
Nonfarm payrolls grew by 236,000 in March, close to the final expectations for 238,000 by Dow Jones economists.
While near expectations, the number is much lower than the upwardly revised 326,000 additions in February and is the smallest gain since December 2020. The data could represent an early sign of slowing in the hot labor market.
The unemployment rate edged lower to 3.5% versus expectations for it to remain steady at 3.6%, while the labor force participation rate rose to 62.6% versus 62.5% in February.
Should there be further signs of a cooling labor market, the narrative that the Fed is close to being done with rate hikes could further solidify.
Treasury Yields Lower
Investors bought treasuries heavily last week, driving yields lower even while equity markets were on the quiet side. 10-year yields fell for the fifth week out of the last six, settling near 3.287% last week.
10-year yields have fallen sharply from their recent peak near 4.07% on March 2nd. 2-year note yields fell, too, settling near 3.993%. Declining yield curves tend to signal that investors are looking for safer investments.
The yield curve between 2-year and 10-year notes remains inverted and settled at a negative spread of 58 basis points to close out last week.
Current Fed Meeting Probabilities
Per the CME FedWatch tool, bond markets factored in a 71.2% probability of a 25-basis-point hike at the May 3rd Fed meeting and a 28.8% chance of no hike at the close of last week. Probabilities tilted further in the direction of a 25-basis-point versus the 51.6% chance one week prior on March 31st.
U.S. Dollar, Gold Eyed
There’s been lots of chatter about the U.S. dollar losing its position as the world’s reserve currency. Recent actions by China and Russia have created the narrative.
However, looking at the historical weekly data, it’s clear that the U.S. Dollar Index has traded at much lower levels in the past versus other global currencies. There are several reasons why the dollar’s dominant role as the world’s reserve currency is unlikely to end.
Fueled by talk about the weakening dollar, banking turmoil, and a potentially easing Fed, investors have piled into gold in recent weeks. June gold settled at $2,026.40 per ounce last week, up 2.02% on a weekly basis.
CPI This Week
With the March jobs report out of the way, attention turns to the March Consumer Price Index (CPI) data slated for release on Wednesday morning.
The bar is set low expectation-wise for March CPI, with estimates being of a 5.2% rise year-over-year for headline CPI and a 0.4% monthly rise in Core CPI.
February data showed us 6% yearly headline CPI and 0.5% Core CPI. The low expectations and last week’s rise in probability for a 25-basis-point hike at the May Fed meeting could provide the backdrop for an eventful trading week.
Build For Rent (BFR)
Many millennials are starting families but are in a tough position when it comes to home ownership. It is increasingly difficult for young families to buy a home since interest rates have priced many out of the market. With a 7% mortgage and a hefty required down payment, millennials have no other choice than to continue to rent.
Build For Rent communities are drawing a lot of attention, especially from big time investors. Rather than going up to build like in an apartment complex, BFRs are townhome style housing with individual, standalone units. The privacy and home-like feel is attracting higher quality, family oriented renters, thus making the asset class that much more alluring. With more than a 6.5 million shortfall of housing in the US, investors in housing may be well positioned for the next decade.
Conclusion
The consensus is that the Fed is nearing the end of the hiking cycle, but exactly when that happens is up for interpretation. Last week’s economic data has shown signs of a softening economy—and perhaps early signs of a shift in labor market conditions.
If we get more encouraging inflation data this week, the bond markets should give us a clearer picture of the Fed’s future intentions.