BofA trims S&P 500 target to 4,500

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BOFA TRIMS S&P 500 TARGET TO 4,500 (1215 EDT/1615 GMT)

Bank of America Merrill Lynch equity and quant strategist Savita Subramanian trimmed her target for the S&P 500 from 4,600 to 4,500 on Friday, based on the current lower trading price against a reduction in the firm’s equity risk premium assumption.

While the firm is cutting its target, Subramanian says a likely peak in rates and rates volatility could lower the S&P 500 discount rate. That would be a positive for the equity risk premium this year, which has jumped 31 basis points to 457 basis points. The firm has lowered their view for year end to 425 basis points, which is below the post-financial crisis average of 508 basis points and indicates elevated risk appetite, per Subramanian.

With an average peak-to-trough drop in the S&P 500 during recessions at about 32%, Subramanian said the current year-to-date fall of 10% in the benchmark index “can be very roughly interpreted as discounting a one-third chance of a recession,” and more downside risk would be expected if the recession probability climbs.

Against a recession backdrop, the firm has shifted defensive on a sector basis, boosting consumer staples two notches from “underweight” to an “overweight” rating, while cutting materials to an “underweight” from “market weight” rating.

(Chuck Mikolajczak)

EUROPE FINISHES HIGHER, BUT APRIL ENDS WITH LOSSES (1142 EDT/1542 GMT)

European shares finished a choppy month on positive footing, ending the day with gains following generally upbeat earnings.

The pan-European STOXX 600 ended the session higher by 0.7%. Germany’s DAX jumped 0.8% and France’s CAC 40 rose 0.4%.

Shares in Johnson Matthey rose by over 30% at one stage before ending the day higher by 18% after the investment arm of Standard Industries announced it had bought a roughly 5% stake in the British industrials company.

Deutsche Bank shares pared early gains and ended Friday’s trading session flat after prosecutors, federal police and other officials searched the firm’s HQ as part of a money laundering investigation.

For the month, the STOXX 600 ended lower by 1.8%.

Britain’s resources heavy FTSE 100 marginally outperformed other European bourses by eking out a 0.1% gain while the DAX fell 2.4%.

The CAC 40 had a presidential election to deal with during April but failed to see any notable divergence from other indices, ending the month lower by 2.3%.

(Samuel Indyk)

FRIDAY ECONOMIC DATA: THE SOUND OF PIGGY BANKS BREAKING (1115 EDT/1515 GMT) A data deluge drenched market watchers on Friday with assurances that the American consumer will continue to do the economic heavy lifting even as inflationary pressures weigh on their savings and mood.

Consumers, who account for about 70% of the U.S. economy, got a dose of spring fever in March.

Adjusted personal consumption expenditures (PCE) rose 1.1%, accelerating from February’s upwardly revised 0.6% growth and breezing past the 0.7% consensus.

Meanwhile, personal income increased at a more modest 0.5%, a slowdown from the prior month’s 0.7% advance but 0.1% warmer than expected.

Taken together, the saving rate – often seen as a barometer of consumer expectations – inched lower, to 6.2% of disposable income. Consumers are less likely to raid the piggy bank in times of economic uncertainty.

But while consumer expectations are improving (see UMich, below), inflation appears to be the heavier drag on savings.

“Inflation continued to erode households’ purchasing power as real disposable income fell 0.4%,” writes Lydia Boussour, Chief U.S. financial economist at Oxford Economics. “As a result, households dipped into their savings to finance their spending as the personal savings fell to 6.2% in March – the lowest level since December 2013.”

Speaking of the “I” word, the PCE price index, the Fed’s preferred inflation yardstick, indeed suggests at spending acceleration and savings depletion can be at least partly attributed to the rising cost of essentials, such as gasoline and food.

Stripping away food and energy, the so-called “core” PCE index steadied, growing at 0.3% from last month and 5.2% year-on-year.

But headline PCE reflects real life, which includes gassing up the Dodge and putting meatloaf on the table. Those prices headed up, jumping to 0.9% on a monthly basis and to 6.6% from March 2021.

So does this report budge the expectations needle regarding the Fed’s actions at the conclusion of next week’s policy pow-wow?

“With inflation clearly in focus for policymakers, these data do not impact the Fed’s rate hike plans next week,” says Rubeela Farooqi, chief economist at High Frequency Economics. “We continue to expect a 50 basis point hike at the meeting.”

The graphic below shows core PCE along with other indicators, and how altitude at which they continue to fly above Powell & Co’s average annual 2% inflation target:

A major piece of the larger inflation puzzle is, of course, wage growth.

Employment costs accelerated at a faster-than-expected pace in the first three months of the year, according to the Labor Department.

A 1.8% jump in the cost of benefits and a 1.2% rise in wages resulted in a net increase of 1.4%, coming in well above the even 1% average projection and gaining speed from the fourth quarter of last year.

While this report also does little to budge Fed rate hike bets, “at the margin it makes a second 50 (basis point) hike in June more likely,” says Ian Shepherdson, chief economist at Pantheon Macroeconomics. “After that, all bets are off, and the pace of tightening could easily be slowed by the meltdown in the housing market, now in its early stages, and the coming rapid decline in inflation.”

Separately, midwest factory activity has lost steam this month.

The Chicago purchasing managers’ index (PMI) slid by 6.5 points in April to deliver a reading of 56.4, disappointing consensus by 5.6 points.

A PMI reading over 50 indicates monthly expansion.

While this series is more volatile than the national average, it nevertheless bodes ill for the Institute for Supply Management’s U.S. PMI report due on Monday, which analysts expect will show a nominal increase to 57.8.

“Overall, manufacturing output continues to expand but supply network dislocations and input shortages, which may intensify in the near term, are a downside risk for the sector,” Farooqi adds.

Lastly, the University of Michigan released its final take on Consumer Sentiment for April, which was a bit less sunny than originally reported, having risen to 65.2 from March’s 59.4 print, a shade lower than the 65.7 “advance” reading.

Still, it should be noted that both “current conditions” and “expectations” components are below their lowest point immediately following the pandemic shutdowns.

The monthly increase can be attributed almost entirely to greater expectations, “with gains of 21.6% in the year-ahead outlook for the economy and an 18.3% jump in personal financial expectations,” says Richard Curtin, chief economist at UMich’s Surveys of Consumers.

Short- and long-term inflation expectations held steady, at 5.4%, and 3.0%, respectively.

Regarding the Fed, it’s on thin ice as far as consumers are concerned.

The central bank’s “monetary policy now aims at tempering the strong labor market and trimming wage gains, the only factors that now support optimism,” Curtain writes.

“The goal of a soft landing will be more difficult to achieve given the uncertainties that now prevail.”

Wall Street was chasing Thursday’s rally with a steep and broad sell-off.

The S&P 500 was queueing up for its fourth straight weekly decline.

U.S. STOCKS FALL EARLY WITH AMAZON.COM (1010 EDT/1410 GMT)

Major U.S. stock indexes are lower in early trading Friday, led by drop in shares of Amazon.com, a day after it gave a disappointing forecast.

Amazon’s shares are down more than 11% early and are the biggest drag on the S&P 500 and Nasdaq, while the consumer discretionary sector led declines among major S&P 500 sectors.

Data earlier in the day added to the case for an aggressive monetary policy approach from the Federal Reserve. U.S. consumer spending rose more than expected in March amid strong demand for services, while monthly inflation surged by the most in 16-1/2 years.

Stock investors have been worried about how fast interest rates will rise.

Apple shares are near flat early on Friday despite the company’s disappointing outlook after the bell Thursday.

Here is the early market snapshot:

(Caroline Valetkevitch)

BEARS HIGHEST SINCE FINANCIAL CRISIS LOWS (0905 EDT/1305 GMT)

Pessimism over the short-term direction of the U.S. stock market surged to its highest level since 2009 in the latest American Association of Individual Investors Sentiment Survey (AAII). With this, optimism remains at an “unusually low level.”

AAII reported that bearish sentiment, or expectations that stock prices will fall over the next six months, jumped by 15.5 percentage points to 59.4%. Pessimism was last higher on March 5, 2009 (70.3%). (Of note, the S&P 500’s Financial Crisis closing low occurred on March 9, 2009). This is the fourth consecutive week and the 22nd time out of the last 23 that bearish sentiment is above its historical average of 30.5%. “It is also the 12th time out of the last 15 weeks with an unusually high level of pessimism.”

Bullish sentiment, or expectations that stock prices will rise over the next six months, fell by 2.4 percentage points to 16.4%. This is just the 35th time in the history of the survey that bullish sentiment is below 20%. (The survey was started in 1987.) Optimism is below its historical average of 38.0% for the 23rd consecutive week and is at an “unusually low level (below 27.9%) for the 13th time out of the last 16 weeks.”

Neutral sentiment, or expectations that stock prices will stay essentially unchanged over the next six months, collapsed by 13.1 percentage points to 24.2%. The drop puts neutral sentiment below its historical average of 31.5% for the first time six weeks.

With these changes, the bull-bear spread widened to -43.0% from -25.0% last week :

AAII noted that this week’s bearish sentiment reading ranks among the 10th highest in the history of the survey. With this, the bull-bear spread is the sixth most negative it has ever been.

AAII added that “historically, the S&P 500 index has gone on to realize above-average and above-median returns during the six- and 12-month periods following unusually low readings for bullish sentiment and for the bull-bear spread. Unusually high bearish sentiment readings historically have also been followed by above-average and above-median six-month returns in the S&P 500.”

(Terence Gabriel)

U.S. STOCK FUTURES RED AFTER WEAK RESULTS, INFLATION DATA (0845 EDT/1245 GMT)

U.S. equity index futures are negative after the release of 0830 EDT inflation data in the form of the U.S. March core PCE price index.

Month-over-month and year-over-year core PCE readings came in at 0.3% and 5.2% vs Reuters Poll numbers calling for 0.3% and 5.3%.

That said, the futures were already under pressure given premarket losses in Apple, Amazon.com and Intel. After the close on Thursday, AAPL warned on supply constraints, while AMZN and INTC delivered disappointing outlooks.

Meanwhile, the U.S. 10-Year Treasury yield, now around 2.89%, is attempting to end April above its 200-month moving average, now around 2.66%, for the first time since March 1989. A monthly resistance line from September 1981 is now around 2.85% – click here:

Of note, with April trading drawing to a close, the S&P 500 and Nasdaq Composite both ended Thursday on track for their biggest monthly percentage declines since March 2020. Meanwhile, the U.S. Dollar is posting its biggest monthly rise since January 2015.

Additionally, the SPX is on pace for its worst April since April 2002, while the Nasdaq is seeing its sharpest April loss since April 2000.

Here is your premarket snapshot:

(Terence Gabriel)

FOR FRIDAY’S LIVE MARKETS’ POSTS PRIOR TO 0845 EDT/1245 GMT – CLICK HERE:

(Terence Gabriel is a Reuters market analyst. The views expressed are his own)