“Cooling down”

The Week Ending Friday March 30 2018

Last week saw notable volatility in equities and a revised NGDP release. Other data included Personal Income and the PCE price index, some regional Fed indices and pending home sales. Friday-to-Friday, the S&P 500 rose 2%, with a swing of -2.3% intraweek, bottoming on Wednesday the 28th.

The Crypto markets have taken an interesting turn. We were intrigued by Bitcoin due to the high price achieved in early 2018. That price has since fallen considerably, from $16k to $7k. Bitcoin has risen in relative value against the other blockchain-based tokens with the Ethereum currency trading at October 2017 levels vs Bitcoin. In any case, the air certainly has come out of Cryptos, make of this what you will, markets are often mysterious.

To round out the standard market basket, the internationally significant copper price is holding a bit above $3 per pound, this is back to 2014 prices, even if it is lower than prices from a week or two ago by about $0.10. Dollar index futures rose 0.7% Friday-to-Friday, though the benchmark futures have been in a narrow trading band since mid-February, no real news here.

Overall, this week looked better than last week, but the basic market outlook is decidedly “down” over the past month.

Yields

In general, yields fell for the week. US Treasury yields are at or just below post-recession highs for the 5-year (2.56%), 2-year (2.28%) and three-month bonds (1.73%), the 10-year yield (2.74%) is however trending lower over the past few weeks, the market having apparently reappraised the “point-estimate” for the long-term Fed policy rate. Notably, 5-year TIPS spreads (a 5-year average market forecast of CPI inflation) have fallen from 2.1% on March 6th, to 1.9% on March 29th.

Hard Data and the outlook

The (N)GDP forecast update was a mixed bag last week. We got a revision to the Q4 of 2017 NGDP level, moving the quarter-on-quarter growth rate up from a yearly pace of 4.9% to 5.3%, which puts upward pressure on the forecast through our models. However, we also got the first print of Gross Domestic Income, an equally valid but independent measure of NGDP, which we average into our process.

The Quarter-on-quarter growth rate for NGDI was a tepid annualized 3.2% which more than offsets the “gain” in the NGDP growth rate. The net result, along with market moves through Wednesday, is an outlook dip to about 4.15% expected NGDP growth over the next year. Disappointing.

We can now at least look forward to the first estimate of Q1 GDP, which will be forthcoming at the end of this month and could plausibly lift the outlook.

The coming week will see the jobs report for March (Friday), as well as vehicle sales on Monday, Trade Balance and Consumer Credit on Thursday.

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