Upbeat Earnings and Stimulus Bets Spur Risk Rally

US stocks are rallying while Treasurys are selling off across the curve as upbeat corporate earnings and central bank stimulus optimism boosted risk appetite.  Corporate earnings are generally expected to disappoint in the second-quarter (analysts expect S&P 500 profits will drop by 5.7%), so JPMorgan’s outperformance was well received by equity investors.  Not only did profit and revenue numbers beat expectations, but loan growth jumped 16%, which is an indicator of a resilient US economy and consumer.  Bank stocks in general are outperforming today, with Citigroup and Wells Fargo set to report quarterly earnings tomorrow.
 
The Bank of England met this week for the first time since the Brexit decision and shocked markets by keeping its benchmark interest rate unchanged at 0.50% for the 88th straight meeting.  Despite the BoE’s unexpected no rate change decision this month, they all but announced they will be loosening monetary policy in August, likely via a combination of a rate cut and enhanced stimulus program.  The BoE’s justification for their inaction is that there hasn’t been enough time or incoming UK economic prints to gauge the effect the Brexit decision will have on the economy.  That being said, there have already been signs of distress on the British housing market, and several forecasters including Credit Suisse and Barclays suggest the UK is headed towards a Brexit-induced recession.
 
In terms of new US data releases, weekly jobless claims held close to the 43-year low reached in mid-April, while a separate report showed producer prices recorded their largest gain in a year last month.  While inflation still lags the Fed’s desired target, the days of falling prices appear to be over.  A strengthening labor market combined with signs of inflation and a robust stock market rally should get the Fed’s attention leading up to the July FOMC meeting, although holding off on a rate hike until September at the earliest is the most likely outcome. 

All three major US stock indexes are currently up close to 0.75%, while Treasury yields and swap rates are 1-9 bps higher across the curve in a bear steepening pattern.  Oil prices also rebounded, with both WTI and Brent crude currently trading up nearly 2%.