Global bonds have sold off recently, partly because oil prices have jumped $20 from their January lows suggesting deflation isn’t in the cards and we are seeing a rebound in European economies (growth was +1.6% in Q1 – faster than the US and UK). Yields were (still are) unsustainably low. The 10 year German bund rose from a low of 0.05% several weeks ago to 0.78% on May 7, before slipping back to 0.62% at the Friday close.
Fed watchers in the US are wondering when “lift off” will occur. The Feds projections for higher rates (the “dot plot”) are much more aggressive than the markets as measured by fed fund futures. APCM’s Bill Lierman believes September is the most likely date when the Fed will hike the federal funds rate.
Ten year Treasury yields jumped early in the week but recovered later on weak economic news. They closed Friday at 2.14%, unchanged for the week. Stocks drifted higher. The S&P 500 ended the week at a new high of 2123. It was up 0.3% for the week and is up 3.1% year to date and closer to 4% when dividends are added.
The dollar has weakened on FX markets and is now adding to foreign equity market returns when they are translated back to dollars. The Stoxx 50 lost 2.1% (euros) this week but that return was flat in dollars. The euro sold for $1.05 mid-March but now it fetches $1.14.
Real GDP growth in 1Q will probably be revised down next week. It was originally reported as an anemic +0.2% to begin with. ISI estimates a -0.6% rate and perhaps lower. While they believe 2Q real GDP growth should be robust, the high-frequency data to date for 2Q are pulling those estimates down.
As an example, retail sales were flat in April, reflecting consumers’ preference to save their windfall from lower gas prices. The y/y sales gain slowed to +0.9%, a disappointing number, no question. The consumer confidence index unexpectedly fell from 95.9 to 88.6 last month. Housing starts out next Monday are expected to rebound sharply. Recent data does point to lackluster growth in the US.
Gas at the pump is now $2.63 a gallon nationwide according to AAA. That’s up from a 6 year low of $2.03 in January. Last year at this time gas was $3.64.
While there are increasing signs that consumer inflation is on the upswing (gas/oil is up), April’s -0.1% drop in producer prices belies those fears. The headline PPI was down -1.3% y/y.
A VERY interesting comment by the ECB’s Mario Draghi: “for pensioners, and for those saving ahead of retirement, low interest rates may not be an inducement to bring consumption forward. They may on the contrary become an inducement to save more, to compensate for a slower rate of accumulation of pension assets.”
China’s central bank cut its benchmark interest rate by 0.25%, its third reduction since November last year amid slowing economic growth. Analysts think more stimulus is coming, including fiscal.
Moody’s downgraded Chicago GO debt to Ba1 – junk. Generous pension benefits are killing the state and municipalities. Just last week the Illinois Supreme court ruled that promised pension benefits can’t be changed, thus the downgrade. S&P also cut its rating from A+ to A-. Needless to say, APCM portfolios own no Chicago debt.
Three years ago Warren Buffett made a charity bet that a low cost index fund would beat a portfolio of hedge funds chosen by Protégé Partners over a 10 year investment horizon. Through March, the index fund is up 63.5% and the hedge funds…only 19.6%.
WSJ: Pablo Picasso set a record Monday when his 1955 painting, “Women of Algiers”, sold for $179.4 million at Christie’s–the most ever paid for a work of art at auction. The price surpasses the $120 million for Edward Munch’s tortured “Scream.” A sign of a bubble?
The Perm Fund has their quarterly Board meeting in Anchorage next week. It’s May 19-20 at the Sheraton hotel.
Legendary banker Dan Cuddy died Thursday at the age of 94. He was the Chairman of First National Bank Alaska for decades. His contributions to the community and state were many. He served in WWll and fought at the Battle of the Bulge. Quite a life.
Jeff Pantages, CFA®
Chief Investment Officer