US Global Markets Update

Market Retreat from Record Highs Amid Manufacturing Optimism

U.S. equities retreated from recent record highs as investors grappled with signs of a manufacturing sector revival. Major stock indexes pulled back, influenced in part by an uptick in U.S. Treasury yields, driven by indications of potential growth in manufacturing activities. The market's performance showcased a preference for growth stocks over value shares, with larger companies weathering the decline better than their smaller counterparts. Notably, energy stocks surged as oil prices reached their highest level since October, fuelled by escalating tensions between Israel and Iran and decisions by major exporters to maintain production limits in the face of tight market conditions. Consequentially delaying the Biden administration’s ability to refill the strategic petroleum reserves.

Impact of ISM Reports on Market Sentiment: Mixed Signals

The Institute for Supply Management's (ISM) reports on both manufacturing and service sector activities played a pivotal role in shaping market sentiment throughout the week. The March ISM manufacturing index, surpassing expectations and signalling expansion for the first time in 16 months, contributed to a downward movement in stock prices. Concerns regarding inflation were further heightened by the ISM prices paid index, which exceeded forecasts and corroborated recent data showing a rebound in input prices.

Conversely, the ISM services report released later in the week presented a more nuanced picture. While still indicating expansion, the services index declined for the second consecutive month. More significantly, the prices paid index fell to its lowest level since the onset of pandemic-related lockdowns in March 2020. This data alleviated some market apprehensions and bolstered expectations for a potential Federal Reserve rate cut in June, as reflected in futures prices.

Reassurance from Friday Jobs Report Amid Wage Pressure

The Friday jobs report from the Labour Department provided further reassurance to investors. Employers added 303,000 jobs in March, surpassing expectations and marking the highest increase in nearly a year. Despite concerns about wage pressures, the solid job gains came with only a modest uptick in average hourly wages, rising from 0.2% in February to 0.3% in March. Notably, the increase in the labour force participation rate suggested that employers might be experiencing less difficulty filling vacant positions.

Divergent Reactions in Bond Markets: Yield Surge and Municipal Resilience

While equity investors responded positively to the robust economic indicators, bond markets exhibited divergent reactions. The yield on the 10-year U.S. Treasury note surged sharply following the strong jobs report, reaching its highest intraday level since late November. In contrast, municipal bond yields experienced a broad increase, driven by weakness in the Treasury market. Despite market volatility, high-yield municipal bonds continued to hold up well relative to investment-grade bonds, showcasing their resilience amidst fluctuating conditions.