Indices flat, Gold shines as we wait for a rate rise in May

Stocks recovered by lunchtime after initial weakness on weaker economic data. The Federal Reserve’s Beige Book of current conditions, rising weekly jobless claims, weak manufacturing data and a disappointing Tesla earnings report didn’t change the market’s view that the economy is finally slowing. The VIX, Wall Street’s fear index, fell again to reflect a calm market outlook.

Beige Book changes little

The Fed’s Beige Book assesses economic activity over the past six weeks, providing an overview for use in making policy decisions at its early May meeting. Five members of the Federal Open Market will be making public speaking appearances today, which might also impact market sentiment.

There were few indications of a worsening outlook in the Beige Book: nine reported little change, three indicated modest growth, and two projected deterioration. Consumer spending was flat to down slightly amid reports of moderate price increases; auto sales were steady; Travel and tourism increased across most districts; and Manufacturing activity, transportation and freight volumes were generally flat to down.

Residential real estate sales and new construction activity softened modestly, although nonresidential construction was little changed, even while sales and leasing activity was flat to weaker. Both consumer and business loans saw lower demand and volumes. Several districts reported that banks were tightening loan requirements in the shadows of last month’s headline bank failures.

Employment growth moderated somewhat in the latest period, with a small number of larger firms reporting significant layoffs. The overall labor market was seen as becoming “less tight,” with several districts noting an increase to the labor supply.

A quarter point rate hike is odds-on

Fed Fund futures continue to show 86% odds of another 25-basis-point rate hike in two weeks, pushing it just above 5.0%, while traders expect a 25 to 50 basis points reduction in the last half of this year.

Markets calm

• At the time of writing, the broad S&P 500 index and tech-heavy NASDAQ were both off 0.3% at 4,142 and 12,127
• The VIX, Wall Street’s fear index, was unchanged at 16.5, an eighteen month low
• The dollar index was flat at 101.8, with major cross rates unchanged
• Yields on 2- and 10-year Treasuries fell back to 4.18% and 3.53%, respectively

Gold up, oil down

• Gold prices were up 0.5%, to $2,016 per ounce
• Crude oil prices fell again, down 2.1%, at $77
• Grain and oilseed markets were lower on recession worries

Weak manufacturing survey and leading indicators

• A sharp contraction in the manufacturing sector was reported in the Philadelphia area, in sharp contrast to the improvement reported a few days ago in the New York district
• The Philadelphia Fed manufacturing index fell to -31.3 in April, below analyst expectations that it would come in at -19.4, and down from -23.2 in March
• More firms reported a reduction in activity than did an increase in activity this month, although the indices for new orders and shipments both rose, similar to the New York region
• The employment index was steady overall, while prices continued to decline

• Economic weakness was also highlighted in today’s index of leading economic indicators (LEI) index, a composite of 10 forward-looking indicators, contrasting with yesterday's benign outlook in the Federal Reserve Beige Book
• The index of leading economic indicators fell to -1.2% in March, down from -0.5% in February and below analyst expectations of -0.4%

Home sales still contracting

• Home sales continue to contract, down 22% year-on-year
• Existing home sales fell 2.4% to an annualized rate of 4.44 million units in March, below analyst expectations of 4.50 million, and down from 4.55 million in February

Unemployment claims rising

• The Fed is watching for an increase in unemployment benefit claims to provide evidence of softening in the jobs market
•  First-time benefit claims rose to 245,000 in the week ending April 15, above analyst expectations of 242,000, and up from 240,000 the previous week
• Continuing claims for the week ending April 8 rose by a hefty 61,000 to 1.865 million

Analysis by Arlan Suderman, Chief Commodities Economist

Contact: Arlan.Suderman@StoneX.com