Week in Review

From TRowePrice:

"Stocks recorded their third consecutive week of broad losses, as concerns over tensions in the Middle East and the possibility of U.S. interest rates remaining “higher for longer” appeared to weigh on sentiment. Mega-cap technology shares lagged as rising rates placed a higher theoretical discount on future earnings. A first-quarter revenue miss from advanced chipmaker supplier ASML Holdings also seemed to weigh on the sector and on general optimism toward companies with artificial intelligence (AI)-related earnings, according to T. Rowe Price traders. Small-caps continued to struggle, pushing the small-cap Russell 2000 Index further into negative territory for the year-to-date period.

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The trading week started off on a strong note, which our traders believed to be driven by relief that Iran’s well-telegraphed retaliatory strike on Israel did not result in worst-case scenarios, with nearly all missiles fired into the country intercepted by air defenses. However, hopes that Israel would carry out a measured response faded alongside stock prices as reports surfaced that the Israeli war cabinet had decided to retaliate “clearly and forcefully.” On Friday, stocks headed lower again, after Israel conducted strikes on air defense facilities within Iran, as well as on Iran-backed groups in Iran and Iraq (see below).

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Some strong economic data appeared to increase worries that the Federal Reserve would push back any interest rates cuts to the fall, if not to 2025. On Monday, the Commerce Department reported that retail sales rose 0.7% in March, well above consensus expectations of around 0.3%, while February’s gain was revised upward to 0.9%. Rising gas prices were partly at work (the data are not adjusted for inflation), but the strength was broad-based and included healthy gains in discretionary categories, such as restaurants and bars and online retailers.

As was the case the previous week, Fed officials expressed their concern with recent economic data. On Tuesday, Fed Chair Jerome Powell stated at an economic conference that “recent data have clearly not given us greater confidence and instead indicate that it’s likely to take longer than expected to achieve that confidence.” On Thursday, New York Fed President John Williams warned that a rate hike is not the baseline, but that one is possible if the data warrants. Atlanta Fed President Raphael Bostic said that policymakers would not be in a position to cut rates until the end of the year.

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The retail sales data helped push the yield on the benchmark 10-year U.S. Treasury note to its highest intraday level since early November. (Bond prices and yields move in opposite directions.) Municipal bond yields also increased in the first half of the week alongside a flood of new issuance, but they held in well relative to Treasuries later in the week as most of the new deals were met with strong demand.

In the investment-grade corporate bond market, issuance was relatively light but met expectations, and most issues were oversubscribed. However, the higher-for-longer rates narrative and geopolitical tensions weighed on the high yield bond market, and our traders noted that trade volumes were somewhat above average as more sellers appeared to be active and high yield funds industrywide reported negative flows."