U.S. GDP estimates released in May showed the economy grew 6.4% in the first quarter, unchanged from the prior estimate and modestly below expectations. Consumer spending and business investment grew 11.3% and 10.8% respectively each were revised higher from the prior estimate, while inventory reduction deducted 2.8% vs the 2.6% previously reported inventory reduction is typically viewed as positive for future GDP reports as inventories will need to be rebuilt.
First quarter earnings data has continued to improve. With 95% of companies reporting, first quarter corporate profits have grown 51.9% year over year (vs 45.8% as of the end of April). These results have meaningfully exceeded expectations for the first quarter profits growth, which as of March 31 was for 23.8%. The second quarter is expected to be even stronger with profit growth of 59.9% and revenue growth of 18.9%. For the full year 2021 corporate earnings are projected to grow 33.7% with revenue growth of 11.8%.
As of the end of May, 51% of the U.S. population has received at least one dose, with 41% of the population fully vaccinated, up from 43% and 30% respectively, at the end of April. Along with the increased vaccination of the population, COVID related restrictions continue to ease in the U.S.
At the end of the month, President Biden proposed a $6 trillion budget for next year, which includes spending for his proposed infrastructure plan and American Families Plan as well as tax increases for both individuals and corporations. Even with the tax hikes included, the budget would result in a $1.8 trillion deficit next year and deficits of at least 1.3 trillion through 2029.
Minutes from the April 27-28 meeting of the Federal Open Market Committee were released in May. Markets were looking for hints regarding prospective tapering of asset purchases at the April meeting the minutes revealed that some members believed that “if the economy continued to make rapid progress toward the Committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases.” Regarding inflation, the minutes noted that “after the transitory effects of these factors fade, participants generally expected measured inflation to ease.” The next FOMC meeting is scheduled for June 15-16.
May was a conundrum for those seeking clarity on the post COVID recovery. In May we witnessed significantly higher inflation than expected, including the highest monthly core inflation print in four decades, as well as a jobs report that underwhelmed projections so badly it shifted the narrative on unemployment policy. Despite these significant data points, however, it felt as though markets took no notice Treasury rates, credit spreads and equities were nearly unchanged, with sentiment improving modestly even with these developments. The Fed minutes suggested a touch more flexibility on policy than had been interpreted from the prior meeting, though Fed members took pains to address and calm the burgeoning inflation concerns. The inflation and jobs reports created the potential for a disruption to sentiment, but other factors such as strong GDP numbers and corporate profits suggest the robust recovery carries on. Though overall spreads continue to look tight in both credit and securitized sectors, we do continue to see opportunities at the sub sector and quality level as well as in security selection.
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The option adjusted spread (OAS) is the measurement of the spread of a fixed income security rate and the risk free rate of return, which is adjusted to take into account an embedded option. Basis points represent 1/100th of a percent (for example 50 bps equals 0.50%).
The Bloomberg Barclays US Aggregate Bond Index is a broad based flagship benchmark that measures the investment grade, US dollar denominated, fixed rate taxable bond market. The Bloomberg Barclays US Mortgage Backed Securities (MBS) Index tracks fixed rate agency mortgage backed pass through securities guaranteed by Ginnie Mae (GNMA) Fannie Mae (FNMA) and Freddie Mac (FHLMC)/ Bloomberg Barclays U.S Credit Index measures the investment grade, US dollar denominated, fixed rate, taxable corporate and government related bond markets. It is composed of the US Corporate Index and a non corporate component that includes foreign agencies, sovereigns, supra nationals and local authorities.
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