U.S. stocks and bonds were little changed during the week despite a series of news events – the American missile strike on Syria, Friday’s weak March jobs report, the Federal Reserve announcement on its plans to pare its balance sheet – that might normally have upset the financial markets.
For the week, the major U.S. equity indexes were down slightly while bond prices were up slightly, lowering yields by a few basis points. The March jobs report came in much weaker than expected, showing the economy added just 98,000 nonfarm jobs last month, less than half of February’s total of 219,000 – which was itself downwardly revised – and well below Street forecasts of a 175,000 gain. The Labor Department report was in strong contrast to Wednesday’s ADP report, which showed the private sector adding 263,000 jobs, well above forecasts. Many investors apparently preferred to focus on the unemployment rate, which fell to 4.5%, its lowest level in nearly 10 years.
The minutes of the Fed’s March 14-15 monetary policy meeting, released last week, focused on the Fed’s plans to start unwinding its massive $4.5 trillion balance sheet. The Fed said that starting to reduce its portfolio of both Treasury and mortgage-backed securities “would likely be appropriate later this year,” adding that the process “should be gradual and predictable, and accomplished primarily by phasing out reinvestments of principal received from those holdings,” as opposed to outright sales. It also said that its future intentions regarding its reinvestment policy “should be communicated to the public well in advance of an actual change.” On Thursday, John Williams, president of the San Francisco Fed, said it may take the Fed around five years for the balance sheet to shrink to a more normal size. Before the Fed began expanding its portfolio during the financial crisis, its balance sheet totaled less than $1 trillion.
European stocks finished narrowly mixed for the week, with the Stoxx Europe 600 ending fractionally higher. Despite more upbeat economic reports recently, European Central Bank President Mario Draghi threw cold water on the idea that the bank should follow the Fed’s example and start reducing monetary stimulus, including by raising interest rates and reducing its bond purchases, so as not to kill the euro zone’s nascent recovery. Sovereign bond yields fell for the fourth straight week, with the yield on the benchmark 10-year German bund falling 10 basis points to 0.23%, its lowest level since the end of February and down 26 bps from a recent high of 0.49% on March 10. The yield on the comparable Italian government bond slid to 2.04%, its lowest level since late January and down more than 30 bps in the past four weeks. Asian stocks were mostly higher except in Japan, where the Nikkei 225 fell for the fourth straight week; the index is down 2.4% so far this year.
In addition to Friday’s jobs report, there were several other important U.S. economic reports released last week. Factory orders rose 1.0% in February after climbing 1.5% in January. Leading economic indicators rose 0.6% for the second consecutive month. Construction spending rebounded 0.8% after falling a revised 0.4% the prior month. Moving into March, the ISM’s two indexes both fell but remained well within expansion territory: the non-manufacturing index fell more than two points to a five-month low of 55.2 from 57.6, well below expectations, while the manufacturing index fell a half-point to 57.2. Motor vehicle sales slowed unexpectedly last month. The seasonally-adjusted annual sales rate fell to 16.6 million vehicles, down sharply from February’s pace of 17.6 million and well below expectations of more than 17 million. March sales totaled 1.55 million vehicles, down 1.6% compared to a year ago.
Reports/dates/facts/links worth paying attention to over the next week:
1. April 12: U.S. Treasury budget report for March; 10-year note auction.
2. April 13: Weekly unemployment claims; producer price index for March; University of Michigan consumer sentiment index for April, first reading.
3. April 14: U.S. banks and bond market open, equity markets closed for Good Friday; consumer price index for March; retail sales for March.
