Friday May 6

Stocks rise however still finish lower for the second consecutive week. The S&P 500 rose 0.3% to 2,057 and the Dow Jones rose 0.5% to 17,740. Stocks were driven higher by a disappointing non-farm payrolls report which led investors to believe that the Fed may opt not to raise interest rates as much as was previously expected. The April report showed that payrolls rose by 160,000 last month compared to expectations which called for a 2,000 gain. Additionally readings for the previous two months were revised down by a total of 19,000. The unemployment rate was unchanged at 5.0% and the labor force participation rate fell. On the positive side average hourly earnings rose by 0.3% on the month (annual growth rate now 2.5%) and average hours worked rose a tenth of a percent to 34.5. The two year yield fell to 0.69% after the release of the report before rising to finished 2 basis points higher at 0.74%. The two year fell 3 basis points over the week. The ten year yield also rose 3 basis points to 1.78%, and was lower by 10 basis points over the week. The Fed is looking for consistently strong labor and inflation reports before raising rates again. In spite of the increase in average hourly earnings the April report was not strong across the board, and if there is to be any chance of a rate hike in June economic data over the next month will have to be decisively strong. Additionally political uncertainty and uncertainty surrounding the Brexit will also cloud the Fed’s decision. The dollar fell 0.1% against the yen to Y107.10 and the euro was flat at $1.1401 in spite of rising to $1.15 after the release of the data. Oil prices rose however still finished the week lower. WTI rose 0.5% to $44.56 and Brent rose 0.6% to $45.3.

Analysts are in consensus that today’s economic data makes it less likely that the Fed will raise interest rates in June. The probability of a rate hike on the June 14-15 meeting was already slim, however it fell further after the April non-farm payrolls report missed expectations. As mentioned earlier less jobs were added than expected and the labor force participation rate fell from 63% to 62.8%. Many Fed officials including Robert Kaplan of Dallas, James Bullard of St. Louis, Eric Rosengren of Boston, and Dennis Lockhart of Atlanta in recent weeks have suggested that they are open to a June rate hike if economic data continues to improve and suggest that the US economy is in the clear from the slow growth in the first quarter. This data casts doubt on that hope. Before the data was released the market for fed funds futures reflected just a 4% chance of tightening in June, and the probability fell even further after the data was released.

Stock indices have drifted back over the last two weeks after a strong March and early April. The reversal in trend shows that the rally did not have much conviction. Indices have fallen as investors have lost confidence in the temporary upswing in momentum. Risk assets such as industrial metals, emerging market currencies and stocks all fell this week in a change of fortune from March and April. Lingering concerns regarding a prolonged period of slow economic growth or even a recession may be the source of the angst in markets. With first quarter earnings season just coming to a close, revenues fell 1.9% from the previous year and earnings fell by 5.1%. Similar results in Europe suggest that both regions are experiencing economic difficulties. Additional uncertainty regarding the outcome of the Brexit and the US presidential election may be pushing some investors to the sideline temporarily.

Low volatility funds have become increasingly popular with investors as they shift towards a more risk-off attitude. These low beta funds have received around $10bn in inflows so far this year, and they have outperformed the market. This new popularity has increased the P/E ratios of companies in these portfolios. Over the last year low volatility funds run by iShares and PowerShares have outperfomed the S&P 500 by more than 9%. At the same time they take around 30% less risk. Due to the increase in demand for these strategies, companies in low volatility portfolios now trade at a premium to the P/E ratio of the broader market. This reflects higher prices for investors.

Friday May 6

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