The earnings report season has kickstarted this week. S&P500 was up 0.8% this week, led by the Materials sector. The market was quiet (aka low volume) as investors are still waiting for the earnings result of the banks. Oil prices rise for the fourth consecutive week as market was speculating the demand to grow more than expected.
Economic Data: Core consumer price index (CPI) is reported lower than expected and is at the low of this year. The cooldown is mainly driven by the drop in rent prices. Core producer price index (PPI) dropped as well. The data indicated a cooldown in both inflation and the economy, which is a sign for the Fed to be less aggressive on the rate hike.
CMBS: A recent default of a large portfolio in the Sun Belt region has increased the concerns in commercial mortgage-backed security (CMBS). Office properties are considered the main driver of credit risks in the commercial real estate market. More risks are suggested to add in AA tranches.
China Property: The property sector in China is recovering but in an unusual way. Secondary market outperformed the primary market substantially, indicating that buyers are cautious about the pre-sold uncomplete properties. Default risks in China property HY bonds remain high as the liquidity condition of the developers is still under pressure.
*Data as of market close. 5-day change ending on Friday.
VIEW FROM THE STREET
Goldman Sachs: Dividend stocks are expected to outperform growth stocks as economic growth slows. Historically, investors avoided investing in companies that make large capital investments (i.e. CapEx, R&D) during economic downturns. However, the effects have lagged, mainly attributed to the outperformance of mega-cap growth stocks.
Blackrock: We underweight Developed Market (DM) equities as they are not pricing the recession as we see ahead. The current recession is different from past recessions as rate cuts are not expected to happen in the near future to support risky assets like equities. In addition, corporate earnings expectations do not reflect even a modest recession.
Goldman Sachs: Short-dated bank bonds are recommended as the liquidity conditions are showing improvements. Price impact coefficient of short-dated treasury has dropped and bid-ask spreads of short-dated corporate bonds have narrowed, indicating the market depth for short-dated bonds has been improving.
Blackrock: Inflation-linked debts are more attractive since March’s crisis. It is time to take advantage when the market is pricing lower inflation, while we see structural trends supporting higher inflation.
Goldman Sachs: Market has been focusing on the recession risks after the bank failure in March. However, there is still no sign of recession after a month. By looking at the high-frequency activity data, consumer services remain resilient and there is limited impact on layoffs. With the declining risk of the outright banking crisis, the uncertainty of economic growth is reduced.
UBS: Although the inflation is cooling, it is still sticky and well above the Fed’s target. May could be the final hike of the cycle if the inflation and job market continues to cool down. If the Fed pauses hike after May and inflation stays above 2% of its target, it is possible for Fed to hike the rate again to bring down inflation.
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