MARKET HIGHLIGHTS
The impact of the rate hikes is creeping in. The economy and hiring are showing signs of slowing.
A slew of economic data released this month points towards a faster slowdown. Numerous releases missed the forecast. US Manufacturing PMI, JOLTs Job Openings, nonfarm payrolls, retail sales, and Q1 2023 GDP estimate all came in lower than expected this month. However, the labor participation rate went up and the unemployment rate fell presenting a more mixed picture.
Headline inflation is down, but core inflation remains sticky.
Headline inflation cooled more than expected but that was largely driven by a fall in energy and food prices. The central bankers are more interested in the core inflation. While core inflation did come down slightly in line with expectations, it is still at an uncomfortably high level of 5.6% yoy. And to add to the headwind, early this month, OPEC cut its oil production in a surprise move, likely in anticipation of a slumping demand should a recession hit, and that sends crude oil surging at that point in time.
The market is pricing in one more hike in May and then cuts to start in the last quarter of 2023.
Based on where the Fed Fund futures are trading, the market is pricing in more than 80% probability of a 0.25% hike in the coming May FOMC to 5.25%. And they expect this to be the final hike after which the Fed will pause till Sep before cutting rates down to 4.75% by the end of the year. Just a month ago when the SVB, Signature Bank, and Credit Suisse saga stirs up a banking crisis, the market was expecting Fed to pause and cut rates as soon as mid-year. But keep watch as these market expectations are prone to huge moves especially with the May FOMC coming up.
Every asset class is up this month except small caps and commodities.
The US stock market continued its rally from last month driven by upbeat earnings surprises from large caps such as META, GOOG, and MSFT. Thus far, stock market participants are taking the economic slowdown in good stride. They are probably also anticipating the US Fed to relax its stance on rate hikes. Gold finally responds this year and continued its run after delivering a less-than-satisfactory performance in 2022 despite its reputation as an inflation hedge. Small caps and commodities fell this month, defensive sectors outperformed, and long-term Treasuries edged up, suggesting recessionary plays continuing.
PORTFOLIO UPDATES
The model portfolio is tilted towards equity for the month following a good recovery after the bank fallout in March 2023. In terms of allocation, equity represented 39% of the portfolio which is on the higher end historically. And as a group, it drove most of the returns this month. The model's volatility trades are another big contributor. It has been shorting Volatility since late last year and it remains the most profitable trade till now. At the moment, the volatility risk premium remains rich. This means the market is pricing higher volatility than what was realized. And while implied volatility has come down quite a bit, it is still operating within historical norms. So until there is a shift, the model is maintaining the shorts. It also benefitted from Gold which it has held since the start of the year.
Overall, the model portfolio is up +2.3% for the month and +6.4% YTD.
* This is the model performance of portfolios constructed using more advanced strategies than those taught in our courses. They can be implemented with the assistance of an iFAST Global Markets (Singapore) senior investment adviser. Note that live performance may vary due to execution price slippage, the difference in sizing precisions, etc.
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