Higher for Longer

April 19, 2024

Here are the economic and market highlights for the week: 

• Retail sales jumped 0.70% in March, topping estimates for a 0.30% rise. Excluding autos, retail sales were up a robust 1.10%. Online and miscellaneous store sales drove much of the increase, up 2.70% and 2.10%, respectively.

• Existing Home sales fell 4.30% to a seasonally adjusted annual rate of 4.19 million units in March. Home prices continued to rise despite the drop in sales with the median sales price hitting a record high of $393,500, up 4.80% from a year ago. The record high came as the supply of homes on the market remains tight at just 3.2 months which is far below the six to seven months considered a healthy balance between supply and demand.

• Ten and 30-year Treasury yields hit their highest levels since mid-November earlier in the week on the hot retail sales report and Fed Chair Jerome Powell signaled higher for longer interest rates on the back of persistent inflation. The ten and 3-year Treasury yields ended the week above the 4.50% level.

Higher for Longer

Rising yields and geopolitical tensions continued to pressure markets this week, despite the data that was released being a net positive for the economy. Equities tried to rally at various points throughout the week, but the overriding risk-off mood resulted in those efforts fizzling. While an Iranian/Israeli conflict was certainly on traders’ minds, the real story was the fact that the economic data continues to pare expectations for a rate cut in the immediate future. Presently, expectations are that cuts will begin in September, having been bumped out from June following Powell’s comments on Tuesday that the persistence in inflation is likely to keep the Fed on hold for a few months more. This week’s blowout retail sales and benign jobless claims only served to support that view. With virtually no storm clouds on the horizon for the economy outside of interest sensitive sectors and housing, attention turned back to earnings.

Netflix reported blowout earnings after the close on Thursday. Propelled by 9.3 million new subscribers following its password sharing crackdown, Netflix handily beat analysts’ revenue and earnings expectations. Netflix’s strong performance didn’t shield it from a -8%+ selloff on Friday, hinting at just how high expectations are baked into many of tech’s most notable names. With nearly 10% of the S&P 500 companies having now reported, aggregate earnings are presently on track for a 1% gain year-over-year (YOY) relative to the same quarter last year, however expectations remain that full year earnings growth will still clock in at 10% YOY. A big part of that thesis has been that rates will fall throughout 2024, easing interest expenses for households and corporations. “Higher for longer” obviously puts valuations based on lower rates in question, which is something that the market seems to have awakened to this quarter.

The Week Ahead

Next week, we will take a look at the following data: 

• Q1 2024 GDP
• PCE Index
• Consumer Sentiment

Brood Awakening

A massive co-emergence of more than a trillion cicadas is set to occur this spring – a rare event that hasn’t happened in more than 200 years. Different populations or broods of cicadas called “periodical” cicadas have highly synchronized life cycles. They spend 13 or 17 years underground where they burrow beneath the soil in larval form and feed on fluids from plant roots. When soil temperatures consistently reach above 64 degrees, they emerge from the earth and complete their final molt into adulthood before mating and then dying after spending only a little over a month above ground. Parts of the U.S. can expect to see an emergence as early as late April up to mid-May and early June

This year, two of these groups that are part of a 13-year and a 17-year brood — called Brood XIII and Brood XIX — will emerge simultaneously for the first time in 221 years, an event last seen in 1803 when Thomas Jefferson was president. They will emerge in geographically adjacent areas with minimal overlap. After this spring, it will be another 221 years before these two broods appear together again, called a dual emergence or twin emergence.

Scientists began tracking cicada emergences in the 1800s. There are fifteen different periodical cicadas that emerge in distinct geographical regions during specific years. To put into perspective just how many of these bugs could emerge, one trillion cicadas would cover more than 15 million miles if they were placed end to end, according to Floyd W. Shockley, an entomologist at the Smithsonian National Museum of Natural History. “That cicada train would reach to the moon and back 33 times,” Dr. Shockley said. People can expect to see millions of cicadas per acre depending on where they live, but the bugs do not bite or carry disease.

A roughly 16-state area will be center stage for these periodical cicadas, which differ from those that appear annually in smaller numbers. Annual cicadas have green bodies and black eyes, and periodical cicadas have red eyes and black and orange bodies and are a little bigger. Areas that will witness the emergence include Alabama, northwest Arkansas, northwest Georgia, southeast Iowa, southern Illinois, southwest Indiana, western Kentucky, northern Louisiana, Maryland, Mississippi, Missouri, central North Carolina, eastern Oklahoma, western South Carolina, Tennessee, eastern Virginia.

The emergence can’t be missed not only due to the sheer numbers but also due to the noise. Cicadas are loud. Male cicadas can reach decibels similar to a lawn mower or passing jet, so when all of these cicadas are together, it can be deafening, especially in forested areas. When cicada nymphs come out of the ground, they climb the nearest tree or other tall structure and shed their skin. After mating, the female makes slits in tree branches and lays eggs there. The eggs hatch six to seven weeks later, the nymphs fall to the ground and go into the soil, and the cycle begins again.

During a cicada emergence in 2021, researchers found that over 80 species of birds shifted their diets primarily to cicadas. Surprisingly, there are a number of other animals who will also eat cicadas, including foxes, snakes, and bears. Brave humans will also take advantage of this abundant food source. The Food and Drug Administration, however, has warned that cicadas, which share “a family relation to shrimp and lobster,” should not be consumed by anyone allergic to shellfish.