What happened last week
- Equities sank as the 10-year Treasury yield surged above 4.5%.
- Third consecutive upside CPI surprise pushed rate cuts out of market pricing, pushing up Treasury yields.
- Elevated geopolitical risk in the Middle East also weighed on risk sentiment ahead of the weekend’s attack.
What we’re watching this week
- Economic data: Retail sales, China 1Q GDP, and Federal Reserve messaging following hot CPI print are the highlights.
- Earnings: Financials earnings continue with a few large healthcare companies also reporting throughout the week.
- Geopolitics: Monitoring for signs of an Israeli response on Iranian soil – absent that, we think investors continue to price out escalation risks and focus instead on the Fed, inflation, and earnings.
Horizon’s Investment Management Views
Last week was a difficult one for stock and bond markets, made all the more complicated by the weekend’s events in the Middle East. Despite oil’s modest losses last week (likely positioning related), increasing geopolitical tensions were almost certainly behind some of the 1.5% fall in the S&P 500. The situation remains incredibly fluid, with focus turning to Israel’s response to the direct attack by Iran on Saturday. This uncertainty is likely to weigh on risk appetite, biasing stocks lower, the dollar higher, and yields lower in the near term.
But last week was not all about geopolitics – that old scourge, inflation, and the start of earnings season, also both played significant roles in the price action. The March CPI print in the U.S. surprised to the upside for the third time in a row with somewhat troubling internals. Rates markets rerated the number of rate cuts expected this year lower, pushing the 10-year to close above 4.5%. Importantly, Fed officials still think the next move is a cut – it is just a matter of timing. Last week’s inflation data also impacted equity internals as growth and mega-cap tech outperformed while small-caps were the standout laggard. On Friday, the official start to first quarter earnings saw some of the largest banks report. Price action reinforced our view that, in the context of two straight double digit quarters for the S&P 500, the bar to surprise positively has been raised appreciably.
With the highly telegraphed Iranian attack on Israel over and done with, tail risk could be reintroduced if signs emerge of an imminent Israeli military response on Iranian territory. Outside of geopolitics, there is much more for markets to digest: on the earnings front, we continue with banks (large banks and regionals) and some large healthcare companies as ~11% of the S&P 500 reports this week. Monday morning’s U.S. retail sales were stronger than expected, highlighting the resilience of the consumer; China’s GDP on Tuesday is also important for global growth dynamics.
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