Economic Data Watch and Market Outlook
The rally in US equities last week reminded me of English lessons long forgotten from upper school, that adjectives are an important part of language.This was never more apparent, as the S&P 500 rallied for a third week in a row, its “best” streak since October. The index rise was driven by superlative US economic data releases that started with the non-farm payroll rise of 916k jobs in March, the “highest” in seven months, the ISM Services Survey hit an “all-time” high and the ISM Manufacturing Survey reported its “best” level in 38 years. Markets were also boosted by a parade of statements from Federal Reserve officials led by Chairman Powell, who stated at the IMF Spring meeting that the Fed was “keeping a close eye on inflation expectations and they had the tools to react to price pressures if necessary.” The FOMC minutes released mid-week also reiterated it would likely take “some time” before conditions were met to warrant policy tightening. The dovish tone sent 10-year Treasury yields down to 1.662% at Friday’s close, after topping out at 1.745% on March 31 (10-year Treasury yield began the year at 0.917%). The stabilization in rates led to a sharp rally in technology which has lagged value and cyclicals over the past six months. The tech sector is up 6.88% in April, with Apple (+6.0%), Microsoft and Amazon (both +5%) leading the pack.
Heading into next week’s trading sessions, we will see if the spate of recent and expected positive economic and earnings news will be enough to propel risk assets higher. The litmus test will start next week as US earnings season begins with reports from the major financial companies Goldman Sachs, JPMorgan, followed by Bank of America, Citigroup, and Morgan Stanley. The expectations bar has been raised as Q1 earnings projection for the S&P 500 are expected to show a 26.3% jump yoy according to FactSet, above the December 31st estimate rise of 15.8%. Revenues are estimated to have grown by 6.4%, far above the five-year average growth rate of 3.5%. More importantly, this will be a ‘show-me” moment, as investors will be more interested in the forward earnings and revenue guidance from these companies. Investors will not be kind if they are disappointed, if they are, the markets will follow the time-tested forward-looking trend of buy on the rumor and sell on the news.
In looking ahead to the economic calendar next week, the markets will be fixated on the release of inflation and retail sales data. To begin, the March reading for the Consumer Price Index (CPI) is estimated to have risen by 0.6%. The jump was prompted by the rise of 8.1% in energy prices. The headline rate will rise from 1.7% in February to 2.7% in March oya, but the core CPI rate year over year is projected to rise only from 1.3% to 1.5%.
On Thursday, March Retail Sales are projected to soar by 7.7% after activity was muted in February due to severe winter weather. Retail sales are being supported by the expansion of the vaccine rollout and receipt of stimulus checks mid-month.
US Housing Starts out on Friday, are estimated to have jumped by 15.1% in March to 1.635 mm units, while Housing Permits also rose by 8.7% to 1.870 mm units. The recovery in housing data highlights the rebound from the poor weather conditions experienced in February.
The Week In Review
U.S. Equities
US equity markets were higher last week, boosted by rising inoculation rates in the US and sharp improvements being seen in consumer mobility data which should accelerate economic growth.
US Index Performance
- Dow Jones +1.99% MTD +2.52% YTD +11.02%
- S&P 500 +2.76% MTD +3.97% YTD +10.39%
- Russell 2000 -0.46% MTD +1.04% YTD +13.87%
- NASDAQ +3.12% MTD +4.93% YTD +7.85
Drivers: I) The minutes from the March FOMC gave no indications of any thoughts about “tightening”, as Chair Powell stated, “it wasn’t yet time to start talking about talking about tapering.” The minutes supported this stance by repeating the phrase from Powell’s press conference that it will be “some time until substantial further progress” is achieved, and that “asset purchases would continue at the current pace until then.” The minutes also recast the outlook that the economy remains “far from” the Fed’s employment and inflation targets.
II) The Producer Price Index (PPI) for March came in stronger than expected, as the headline index rose by 1.0% while the core index (ex. Food and energy) was up 0.7%. A strengthening trend in PPI has been seen over the past few months, sending the headline result up 4.2% over the year annualized, and the up core by 3.1%. The primary driver to the PPI’s rise was the 9% jump in energy prices.
III) The ISM Services Survey in March soared from 55.2 in February to 63.7, which beat expectations and reached its all-time highest level since the survey began in 1997. The strong results were supported by strength in business activity and new orders. The bounce was aided by the rebound from the unexpected drop in the February data due to poor winter weather and a re-opening of the virus ravaged sector.
IV) Following the trend of other disappointing February data releases, New Factory Orders dropped by 0.8% on month while shipments declined by 2.0%. Once again, the ubiquitous cause of “severe winter weather” was seen as the primary culprit behind the decline in orders. A review of February inventory data showed a 0.8% rise in nominal manufacturing inventories during the month.
V) Equities Month to Date are higher with Large-Cap, Growth, Tech, and Info. Tech leading equity price performance. The laggards for the period are Small-Cap, Growth, Energy, and Utilities
Capitalization: Large Caps +3.95% (YTD +10.10%), Mid-Caps +3.00% (YTD +11.38%) and Small Caps +1.04% (YTD +13.87%). Style: Value +1.84% (YTD +22.34%) and Growth +2.17% (YTD +12.01%). Sector Groups: Energy -1.51% (YTD +28.66%), Financials +3.28% (YTD +19.73%), Communication Services +5.33% (YTD +14.01%), Industrials +2.17% (YTD +13.76%), REITs +2.15% (YTD +11.32%), Materials +1.59% (YTD +11.02%), Consumer Discretionary +4.79% (YTD +9.62%), Technology +6.88% (YTD +9.15%), Information Technology +6.70% (YTD +9.14%), Healthcare +1.12% (YTD +4.30%), Utilities +1.30% (YTD +4.10%), and Consumer Staples +1.11% (YTD +2.70%)
European Equities
The MSCI Europe Index rose on the week as dovish comments from Fed Chair Powell helped push rates lower, and the IMF raising global GDP expectations from 5.5% to 6.0% for 2021.
Drivers: I) The minutes from the ECB’s March meeting showed disparate views across council members. While growth projections were upgraded, and medium-term risks were seen as “more balance”, this impacted member views on financing conditions in the Euro-zone. There was also a spirited debate on whether the rise in bond yields were caused by fundamentals or “unwarranted” factors. In the end, the Governing Council agreed to a “significant” increase in PEPP purchases to help support the economic recovery.
II) Next week, the Euro-zone is expected to report February Retail Sales rose by 2.9% during the month. This rise will be a partial recovery of the 5.9% plunge in January, as COVID-19 restrictions posed a strong deterrent to consumer spending. However, the outlook for sales should improve as the vaccination rate increases and the government lifts restrictions in May. Sales should also be boosted by huge excess savings held by households.
III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was higher by +2.33% for the week (MTD +2.99% YTD +7.20%).
Asian Equities
Asian markets were mostly lower last week as China’s CPI surprised on the upside, leading to worries over potential monetary tightening. DJ Asia Index was lower by -0.55% for the week, (MTD +0.60% YTD +5.46%).
Drivers: I) In Japan, the recent improvement in mobility helped Consumer Sentiment to increase by 2.2 points to 36.1 in March. The second consecutive monthly rise in sentiment brings the indicator to just 2.3 points below the pre-pandemic level seen in February 2020. The largest gains were seen in labor market conditions, which saw the largest monthly rise of 3.3 points, which follows a 6.2-point surge in February. Labor conditions are expected to normalize further due to an acceleration of the vaccine rollout.
II) In China, the March CPI reading increased by 0.4% m/m, following a 0.3% rise in February. Food prices fell during the month, led by the 0.7% decline in pork prices, which has bolstered the CPI inflation rise since 2019 as a swine flu greatly reduce the country’s pig population. On the flip side, gasoline and diesel prices jumped by 11.9% and 12.8% m/m respectively, due to the recovery in global oil prices.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei fell by -0.29% (MTD +2.02% YTD +9.18%), the Hang Seng Index was lower by -0.87% (MTD +1.08% YTD +5.05%) and the Shanghai Composite declined by -0.97% (MTD +0.25% YTD -0.64%).
Fixed Income
Treasury yields were lower as several Fed officials and Treasury Secretary Yellen reiterated their positions that rates will remain lower for longer, and the increase in COVID-19 vaccine distribution has boosted market sentiment.
Performance: I) The 10-year Treasury yield fell last week ending at 1.662% down from 1.719%. The 30-year yield declined last week finishing at 2.339% falling from 2.358%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index rose by +0.40% last week, MTD +0.49% and YTD -2.90%. The Bloomberg Barclays US MBS TR was higher by +0.37% last week, MTD +0.29% and YTD -0.81%. The Bloomberg Barclay’s US Corporate HY Index advanced by +0.53% for the week, MTD +0.71% and YTD +1.57%.
Commodities
The DJ Commodity Index rose last week by +0.9% and is higher month to date +0.62% (YTD +10.09%). Commodity prices were essentially flat last week as lower energy prices were offset by a rise in corn and soybeans, as a US government report showed the seeding of these crops were lower than expected.
Performance: I) The price of oil declined last week by -3.12% to close at $59.33 and is higher month to date by +0.29% (YTD +22.28%). Oil dropped on the week as market participants were worried over the sharp spike in new COVID-19 cases in India, at present the largest importer of oil.
II) The ICE USD Index, a gauge of the U.S dollar’s movement against six other major currencies, was lower by -0.91% closing at 92.16 for the week (MTD -1.14% YTD +2.50%). The USD was weaker last week as interest rates fell on dovish comments from several Fed officials and the stabilization of equity markets.
III) The price of gold rose on the week, as a weaker USD, falling interest rates and dovish comments from the Fed were supportive. Gold rose in price by +0.75% last week, climbing to $1743.4 (MTD +1.62% YTD -8.00%).
Hedge Funds
Hedge fund returns in April are positive for the month with all of the core strategies Equity Hedge, Event Driven, Macro/CTA , Relative Value and Multi-Strategy higher.
Performance:
- The HFRX Global Hedge Fund Index is higher by +0.77% MTD (+2.07% YTD).
- Equity Hedge advanced by +1.34% MTD (+4.03% YTD).
- Event Driven is up MTD +0.87% (+2.59% YTD).
- Macro/CTA has advance by +0.09% MTD (+0.61% YTD).
- Relative Value Arbitrage is up by +0.45% (+0.35% YTD).
- Multi-Strategy is higher MTD by +0.41% (+0.11% YTD)
Data Source: Haver Economics, Standard & Poor’s, HFR, Bloomberg, Morningstar and FactSet
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