A very busy week as many bell weather companies reported earnings. We also received GDP data for the first quarter of the year from both the UK and US economies. 10-year US treasury yields finally hit 3%, if only briefly, before falling back on Friday. The Vix index finished the week a fraction lower, despite some weakness in the broader market. Where to start? If we start with the UK for a change, the likelihood of an interest rate rise in May reduced even further as the Office for National Statistics reported that in their opinion the economy grew just 0.1% in the first quarter. Sterling fell, not unsurprisingly, as the possibility of the rate risess virtually disappeared. The probability is that this estimate will be revised upwards in the coming months, but not to the previous expectation of 0.4%. Sterling is likely to remain under pressure.
The US also reported their first estimate for economic growth which did reach forecasts but did confirm a slow down from the previous quarter. The first estimate is the US economy grew at 2.3% against 2.9% in the final quarter of 2017. Much of the data had pointed to a slowdown in the first quarter and economists had anticipated this, however studying the Citi economic surprise index this would suggest that economic that data is once again picking up. The US dollar had a good week.
Turning to results, it was a good week for the new as companies such as Microsoft and Amazon reported strong earnings and the more traditional companies such as Caterpillar missed, and MMM lowered the top end of its guidance. With more than half of the S&P 500 having reported, at present Factset estimate earnings have grown 23% year on year in the first quarter.
Fund flow data would continue to suggest euphoria continues to leave stocks. According to a Wall Street report based on findings from the Investment Company Institute, funds are flowing out at some of the fastest rates in a decade. From the start of the year 67 billion dollars have been withdrawn from stock funds. The long-awaited rekindling of the love affair with equities seems to have hit the emotional rocks.
Looking to the week ahead, the main event is likely to be the Federal Reserve’s interest rate decision post the meeting on Wednesday. There are no expectations the Federal Reserve will raise interest rates at this meeting, what will be of greater interest will be the accompanying statement. The start of the month is also dominated by Purchasing Manager surveys for the previous month. Analysts are forecasting a stabilising in the data after the recent modest slowdown. This could be a big week for bond markets as the jobs data on Friday could well impact interest rate sentiment.
It is Europe’s turn to report first estimates for growth in the euro area economy for the first quarter. Post Mario Draghi’s slightly dovish comments this past week, it would not be an entire surprise if growth in the euro area economy did not meet expectations.