Markets slip when earnings are unimpressive

Dow dropped 99, decliners over advancers about 2-1 & NAZ was off 33.  The MLP index slipped another 1+ to 225 & the REIT index was even in the 371s.  Junk bond funds were weak & Treasuries saw selling, raising yields (more below).  Oil fell 1+ to the 79s & gold declined 14 to 2005.

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Investor pessimism surged to the highest level in 5 months in Apr as turmoil within the banking system threatens to ignite a credit crunch for consumers & businesses, according to Bank of America's global fund manager survey.  Fund managers indicated that worries over tighter credit conditions had driven up bond allocation to a net 10% overweight, the highest since 2009.  In total, nearly 2/3 of investors expect a weaker economy in the next 12 months, the highest since Dec & reversing 4 months of improvement.  It marked the most bearish survey of the year.  About 35% of participants in the survey identified the bank credit crunch & a global recession as the top risk to markets.  That compares to about 34% who highlighted sticky inflation that keeps central banks on a hawkish trajectory as the biggest threat.  Another 16% see a systemic credit event as the biggest risk, while just 11% are worried about geopolitics – such as the war in Ukraine or tensions between China & Taiwan – worsening.   The poll of 286 fund managers was conducted Apr 6-13, in the aftermath of the stunning implosion of Silicon Valley Bank & Signature Bank.  An overwhelming number of investors see a "stagflation" scenario, in which economic growth peters out, but inflation remains high, as very likely.  Roughly 86% of investors anticipate that a stagflation backdrop will linger into Q1-2024, up from 83% last month.  "Stagflation has become the dominant theme, as [fund manager] expectations for above-trend inflation and below-trend growth have remained above 80% for 11 months in a row," the survey said.  The survey comes amid growing fears among economists that the US is headed for, or already in, a recession after a wave of gloomy economic data pointed to a steady cooling in the labor market.  Despite growing fears of an economic slowdown, the investors surveyed anticipate the Federal Reserve will approve a final, qtr-percentage-point interest rate hike during its meeting next month.  However, the fund managers expect central bank policymakers to begin an "easing cycle" in Q1-2024, while 28% expect that to take place sometime in the final months of 2023.

Investors are the most bearish in 5 months as credit crunch hits growth

Today's homebuyers appear to be increasingly sensitive to weekly moves in mortgage rates.  While home prices are easing some, affordability is still a major hurdle, especially as more first-time buyers enter the market.  Last week, the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($726K or less) increased to 6.43% from 6.30% the previous week, with points rising to 0.63 from 0.55 (including the origination fee) for loans with a 20% down payment.  As a result, mortgage applications to purchase a home dropped 10% from the week before, according to the Mortgage Bankers Association's (MBA) seasonally adjusted index.  Buyer demand was 36% lower than the same week one year ago when the 30-year fixed-rate mortgage averaged 5.20%.  “Affordability challenges persist and there is limited for-sale inventory in many markets across the country, so buyers remain selective on when they act,” wrote Joel Kan, MBA's deputy chief economist.  “The 10-percent drop in FHA purchase applications, and the increase in the average purchase loan size to its highest level in a month, are other indications that first-time buyers have pulled back.”  But wealthier buyers may also be seeing new difficulties when it comes to credit.  Banks had been offering better rates on jumbo loans, but that spread between jumbo & conforming loans is much tighter now, compared with last year.  This has to do with recent regional bank failures that have rippled thru the industry.  “As banks reduce their willingness to hold jumbo loans, we expect this narrowing trend to continue,” Kan said.  Mortgage rates moved significantly higher to start this week, according to another rate survey from Mortgage News Daily.  Still, rates have been bouncing between 6% & 7% for several months.  Potential homebuyers may be getting used to seeing higher rates now, but home prices haven't corrected enough yet to bring affordability back to earth.

Mortgage demand from homebuyers drops 10% as interest rates jump

Treasury yields moved higher after another sticky inflation report in the UK heightened concerns that global central banks would need to stay the course with their tightening campaigns.  The yield on the 10-year Treasury was up by over 5 basis points to 3.625% & the yield on the 2-year Treasury was last trading at 4.273% after rising by 7 basis points.  Yields & prices have an inverted relationship.  One basis point equals 0.01%.  A reading of UK inflation rose 10.1% on annual basis, above expectations for it to slow below a double-digit increase.  UK CPI inflation increased 0.8% on a monthly basis, above the estimate of 0.5%.  Following the UK reading, traders increased their bets the Federal Reserve will have to raise rates at least one more time when it meets next month.  There's a more than 83% chance the Fed will raise rates by a qtr-point at its next meeting, according to CME Group's FedWatch tool.  Fed officials have suggested recently that rates could continue to rise.  That includes Atlanta Fed Pres Raphael Bostic, who yesterday said that he anticipated a further 25 basis point interest rate hike to be implemented after the central bank's next meeting.  After topping 5% in Mar, the 2-year Treasury yield fell below 3.5% during the regional bank crisis.  Since then, the yield has recovered a lot of that ground as traders bet the Fed keep hiking rates despite recession concerns.

Treasury yields rise on global inflation concerns

With a lack of exciting news & expectations for another rate hike in May, stocks are drifting lower.  The stock market needs a solid news story to change that thinking.

Dow Jones Industrials