Bond volatility still on the MOVE
All major U.S. stock indexes green, Nasdaq out front
Nearly all S&P sectors advance, led by cons disc
STOXX Europe 600 closes up at 0.66%
Dollar, crude, bitcoin gain; gold ~flat
U.S. 10-year Treasury yield at 3.51%
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BOND VOLATILITY STILL ON THE MOVE (1400 EDT/1800 GMT)
March was defined by banking crises, and that meant it was a month of sharp bond and stock volatility.
While nervousness seems to be subsiding from stocks, bond markets are still jittery.
The U.S. bond volatility index .MOVE this month leapt to its highest point since the 2008 financial crisis, and while it has come down significantly from those levels, it remains around its highest since early December and above both its 200 and 50 day moving averages.
In contrast, stock volatility as measured by the VIX .VIX has dropped back to 18.61, aroundwhere it was at the start of March.
"The MOVE index is still at extremely worried levels, it tells you that a credit crisis is brewing," Danielle DiMartino Booth, chief strategist at Quill intelligence said.
Two-year yields US2YT=RR have fallen 66 basis points and the 10-year yield US10T=RR yield has dipped by about 50 bps in Q1, John Mousseau, CEO and director of fixed income at Cumberland Advisors, wrote in a note.
"With the volatility of Treasuries, it is almost impossible to hedge any position," Mousseau said.
U.S. investment grade and junk bond corporate spreads widened significantly in March and while they've narrowed as worries about a full scale banking crisis subsided, they're still wider than at the start of the month.
The yield spread on the ICE BofA U.S. High Yield Index .MERH0A0 is at 474 bps from 417 bps on March 1, while investment grade spreads .MERC0A0 widened to 146 bps from 129 bps.
Of course, that's offered opportunities - Warren Pierson, co-CIO at Baird Asset Management, said his firm took advantage of these wider spreads to "round up" exposure to U.S. investment grade financial credit, maintaining their overweight on the sector.
"It's a sector we've liked for a while ... though we stay in senior issues where we feel a little bit more protected," he told the Reuters Global Markets Forum.
END OF QUARTER, START OF EARNINGS (1332 EDT/1732 GMT)
Friday marks the last day of the first quarter, putting investors on notice that the next earnings period is about to begin.
Besides a heavy focus on reports from banks after the failure of two regional banks earlier in March and concerns about liquidity, market participants will be keen to hear from all companies about the health of the U.S. economy.
Concerns about the economy are still fresh, given the Federal Reserve is expected to continue to raise interest rates to cool inflation.
The first-quarter forecast continues to weaken. Based on Refinitiv data on Friday, analysts expect first-quarter earnings for S&P 500 .SPX companies to fall by an aggregate 5% from the year-ago period, which would mark a second straight decline.
By comparison, analysts at the start of 2023 had forecast first-quarter S&P 500 earnings would rise 1.4%.
Results from big banks in mid-April should kick off the season.
BEARS STILL KEEP BULLS AT BAY IN LATEST AAII SURVEY (1215 EDT/1615 GMT)
Pessimism decreased but remained above average for the sixth consecutive week, while optimism was still unusually low among individual investors in the latest AAII Sentiment Survey. Both neutral sentiment and bullish sentiment increased.
Bullish sentiment, expectations that stock prices will rise over the next six months, rose 1.6 percentage points to 22.5%, but optimism was still at an unusually low level for the sixth consecutive week and the 46th time out of the past 65 weeks.
Bullish sentiment was below its historical average of 37.5% for the 69th time out of the past 71 weeks.
Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, rose 1.7 percentage points to 31.9%. This small increase puts neutral sentiment above its historical average of 31.5%.
Bearish sentiment, expectations that stock prices will fall over the next six months, fell 2.8 percentage points to 45.6%. It was the fifth consecutive week and the 44th time out of the past 65 weeks that bearish sentiment is at an unusually high level. Bearish sentiment is also above its historical average of 31.0% for the 66th time out of the past 71 weeks.
The bull-bear spread (bullish minus bearish sentiment) rose by 4.8 percentage points to –23.1% but remains unusually low for the sixth consecutive week. The bull-bear spread is at an unusually low level for the 48th time out of the past 65 weeks.
Historically, the S&P 500 index has gone on to realize above-average and above-median returns during the six- and 12-month periods following unusually low readings for bullish sentiment and the bull-bear spread.
Similarly, the market benchmark has gone on to realize above-average and above-median returns during the six- and 12-month periods following unusually high readings for bearish sentiment.
FRIDAY DATA: PLAY IT COOL (11450 EDT/1545 GMT)
A data buffet on Friday delivered a Fed feast - each dish providing fresh evidence of a softening economy and cooling inflation.
The Commerce Department's broad-ranging personal consumption expenditures (PCE) report was the main course, so let's skip right to the meat of things: inflation USPCE=ECI is cooling at a faster pace than economists projected.
On a monthly basis, the headline and core (which excludes volatile food and energy prices) PCE price indexes both landed at 0.3%, dropping 30 and 20 basis points, respectively.
Year-on-year price growth cooled as well, with the headline shaving off 30 bps to an even 5% and core inching down 10 bps to 4.6%.
"Today's release sent a message to investors that inflation is steadily under control, with the Fed seemingly meeting its mandate of price stability," says Peter Essele, head of portfolio management at Commonwealth Financial Network.
The graphic below shows five major U.S. price indicators and how far most of them have yet to fall before Powell & Co will consider busting into the pivot dance:
Elsewhere in the PCE report, personal income USGPY=ECI grew by 0.3%, a tad warmer than consensus, but cleaving January's pace in half, while expenditures USGPCS=ECI plunged to a mere 0.2% from the prior months 2% - suggesting a significant deceleration of consumer demand.
"We think consumers will soon run out of runway as income growth softens, savings buffers fall, credit card usage declines and inflation stays high," says Oren Klachkin, lead U.S. economist at Oxford Economics.
The saving rate, or the percentage of disposable income left unspent - a favorite indicator of Treasury Secretary Janet Yellen as a barometer of consumer expectations - gained 20 bps to 4.6%, bringing it inline with the pre-pandemic "normal."
Speaking of consumers, who shoulder about 70% of the U.S. economy on their backs, their collective mood seems to have soured further than originally expected this month.
The University of Michigan's (UMich) final take on March consumer sentiment USUMSF=ECI was adjusted downward by 1.4 points to land at 66.3.
The "current conditions" component fell a nominal 0.1 point, while expectations - remember the saving rate? - headed further south, dropping by a meaningful 2.3 points.
"This month's turmoil in the banking sector had limited impact on consumer sentiment, which was already exhibiting downward momentum prior to the collapse of Silicon Valley Bank," says Joanne Hsu, director of UMich's surveys of consumers. "Overall, our data revealed multiple signs that consumers increasingly expect a recession ahead."
Regarding the "i-word," near- and long-term inflation expectations fell and rose, respectively, with consumers seeing inflation at 3.6% a year from now and 2.9% five years down the road.
Finally, Midwest factory activity contracted this month near a level commonly associated with recession.
MNI Indicators' Chicago PMI USCPMI=ECI, while a hair better than expected, was still rather dire at 43.8.
A PMI reading below 50 signifies monthly contraction, while a number south of 43 is a recession red flag.
"The outlook for manufacturing is uncertain; softer demand and higher borrowing costs are constraints on factory output," says Rubeela Farooqi, chief U.S. economist at High Frequency Economics. "And tighter credit conditions that reduce access to credit could be an additional hurdle going forward."
The proof will be in Monday's pudding, when the nationwide ISM PMI data is released. Analysts see that number inching lower to a contractive 47.5.
Investors appear to like the data, setting course for a third day in the green.
The bellwether S&P 500 is on track for weekly, monthly and quarterly gains.
S&P 500 SECTORS IN Q1: THE GOOD, THE BAD AND THE UGLY (1030 EDT/1430 GMT)
The S&P 500 index .SPX has had a decent run this quarter, given that markets weren't looking too hot entering 2023 in the face of both high inflation and interest rates.
But let's not forget the mini-banking crisis in the United States and Europe, fears of which seem to have subsided in recent trading sessions, yet were enough do some serious damage the U.S. market and inadvertently buttress some unloved candidates.
No surprises that the S&P 500 banks index .SPXBK was the top loser for the quarter, shedding some 14% during Q1, while the financials index .SPSY came in second with declines of 7%.
There were $600 million outflows from financial equity funds this week, according to BofA Global Research, though expectations the turmoil could lead to a slower pace of central bank rate hikes meant funds investing in tech stocks saw $400 million in inflows.
The S&P 500 technology index .SPLRCT jumped about 20% in Q1, and within the sector battered semiconductor stocks were the biggest winners, with the Philadelphia SE Semiconductor index .SOX surging some 27% after recording its worst performance last year since the Great Financial Crisis.
"Large cap tech stocks are leading the tape due to their dependable cash flows as we head into a slowing economic climate. Lower interest rates provide support for their elevated valuations," said Richard Saperstein, chief investment officer at Treasury Partners.
Also worth noting was certain high-dividend paying sectors, including energy .SPNY and utilities .SPLRCU, were also among top decliners for the quarter, clocking declines of about 6% and 5% each.
The PHLX Housing index .HGX rose about 8% in Q1, while the S&P 500 real estate index .SPLRCR, which houses many commercial real estate firms, fell 1.1%.
"We have been less concerned about this in housing because unemployment, which is usually the trigger for forced sales and collapsing house prices, is not expected to rise that sharply," Andrew Burrell, chief property economist at Capital Economics said last week.
"Commercial markets are more vulnerable, most notably offices where home working has changed long-term asset viability."
WALL STREET LIKES THE GOLDILOCKS PCE DATA (1010 EDT/1410 GMT)
March is going out like a lamb, with the core PCE index coming in slightly cooler than expected, and equity markets love it.
All major stock indexes on Wall Street were up on Friday, as were the major bourses in Europe, after a mostly in-line to slightly cooler reading
Consumer discretionary .SPLRCD led all 11 S&P 500 indices higher, with no sector in decline.
Small caps .RUT, Dow transports .DJT and semiconductors .SOX rose, as did growth .IGX and value .IVX stocks.
The personal consumption expenditures (PCE) price index for February increased 0.3% month over month after accelerating 0.6% in January. In the 12 months through February, the PCE price index advanced 5.0% after rising 5.3% in January.
Core PCE climbed 0.3% after increasing 0.5% in January, and on a year-on-year basis rose 4.6% last month after gaining 4.7% in January.
"Overall a lot of this would still line up with a soft landing. But the unequivocal issue is what's going to happen in credit, and that's uncertain at this point," said Dec Mullarkey, managing director of investment strategy and asset allocation at SLC Management in Boston.
"The Fed still goes ahead with a 25 basis point move when they meet in May," he said.
Here is a snapshot of market prices in early trading:
PUNCH BOWL OR PROHIBITION, THE FED DECIDES (0915 EDT/1315 GMT)
Is the Fed bringing back the punch bowl after inflation decelerated a bit more on Friday as many stock investors clamor for, or are policymakers going to declare an era of moderate Prohibition is in store - in line with glum bond investors?
The yield on two-year Treasury notes US2YT=RR, which move in step with interest rate expectations, slid 7 basis points after the personal consumption expenditures (PCE) price index for February was released. Stock futures were edging higher.
Boston Fed President Susan Collins told Bloomberg TV that PCE, which the U.S. central bank tracks for its 2% inflation target, was "about what was expected" and that the Fed "still has more work to do to lower inflation."
PCE increased 0.3% last month after accelerating 0.6%in January. In the 12 months through February, the PCE price index advanced 5.0% after rising 5.3% in January.
Core PCE climbed 0.3% after increasing 0.5% in January, and on a year-on-year basis rose 4.6% last month after gaining 4.7% in January.
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UMich inflation expectationshttps://tmsnrt.rs/42WmOVX
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