Economic Data Watch and Market Outlook
US equities rallied last week as investor expectations for high earnings growth were actually exceeded, and the tsunami of global economic data showing an extraordinary acceleration of growth continued. Within the economic data reports, it was the March reading of US CPI that provided comfort to the markets. US CPI in March rose by an expected 2.6% annual rate, while core CPI (ex-food and energy) posted a moderate 1.6% rise. The muted inflation report made for strange bedfellows as US treasuries rose alongside equities, as the 10-year yield fell to their lowest level since March 11th (1.584%). The outpouring of transcendent economic data endured, as US Retail Sales in March rose by 9.8% bringing it to 17.0% above pre-pandemic levels, New York Fed’s Empire State Manufacturing Index climbed to its highest reading (26.3) since 2017, and Housing Starts for March reached its highest level (1.74 million units) since 2006. Equity prices have rallied tremendously since hitting their lows on March 23, 2020, but the current economic growth environment along with further fiscal and monetary stimulus can propel risk assets higher. We remain leery of an exogenous event that may cause a short-term correction (escalation of tensions between the US, Russia, China, and Iran), but it seems the mounds of cash on the sidelines are prompting investors to presently buy on any dip.
Heading into next week’s trading sessions, the US corporate earnings season will be in full swing as 15% of the S&P 500 companies will be reporting. Heading the list of corporations reporting are IBM, Intel, followed by consumer staples companies Coca-Cola, Proctor & Gamble, and Phillip Morris as well as communication stalwarts Netflix, Verizon Communications and AT&T. Thus far, S&P 500 earning with 9.0% of companies having reported (led by financials) have shown a yoy earnings increase of 30.2% versus the end of Q1 estimate of 23.8%. Revenue growth has also been strong, with companies achieving a 7.0% yoy growth rate versus the end of Q1 estimate of a rise of 6.3%. Investors will continue to have high expectations for outsized earnings growth from US companies, as the early release of Q2 2021 estimates from FactSet are calling for a substantial rise of 54.6%.
In looking ahead to the economic calendar next week, we enter the quiet period for the FOMC before its scheduled meeting beginning on April 28th. Data releases of note include US New Home Sales and the Markit US Manufacturing and Services PMI’s. US Existing Home Sales for March out on Thursday, is expected to show a decline of 5.1% to 5.90 million units saar. The drop in sales is a continuation of the February sales lag that was caused by severe winter weather.
On Friday, the Market Manufacturing PMI for April is projected to rise by 1.4 points to 60.5, with improvement seen across several regions in the US. The Markit Services PMI is estimated to have risen by 1.6 points to 62.0, led by a rise in activity in the New York Fed’s region.
Closing out the week is New Home Sales for March, which is expected to show an increase of 16.1% to 900,000 units saar. The jump in sales highlights the rebound from the drop in February sales caused by severe winter weather.
The Week In Review
U.S. Equities
US equity markets rallied for a fourth week in a row, sending the DJIA and S&P 500 to new all-time highs as equity prices were supported by strong corporate earnings and US economic data reports.
US Index Performance
- Dow Jones +1.18% MTD +3.73% YTD +12.33%
- S&P 500 +1.39% MTD +5.41% YTD +11.92%
- Russell 2000 +0.86% MTD +1.92% YTD +14.86%
- NASDAQ +1.09% MTD +6.11% YTD +9.03
Drivers: I) In March, the Consumer Price Index (CPI) rose by 0.6% while the core index increased by 0.3%. The inflation reading jumped from 1.7% in February to 2.6% on a yoy basis, and the core rose from 1.3% to 1.6%. Underneath the headline report, much of the inflation rise was caused by the 5.0% increase in energy prices, while food prices eked out a 0.1% increase. Another driver of inflation was the 3.8% upsurge in lodging prices, which are beginning to normalize after being depressed by COVID-19 travel restrictions.
II) US Retail Sales soared in March by 9.8%, easily beating the Wall Street estimate that called for a 6.1% jump. Sales rose across the broad categories, as an improvement in weather, a new round of stimulus checks and accelerated vaccine rollout all helped to lift sales. The sharp rise in sales brings the data set to just about 5.0% below pre-pandemic levels.
III) March Housing Starts in the US swelled by 19.4% to 1.739 million units saar, while permits rose by 2.7% to 1.766 million units. Once again, the sharp rise in housing data has been due to a rebound from the poor reports seen in February due to inclement weather conditions. Specifically, Housing Starts were lower by -11.3% and permits declined by -8.8%. It will be interesting to see how housing data will react to the recent rise in 30-year mortgage rates to above 3.0%.
IV) For April, the University of Michigan Consumer Sentiment Index improved to 86.5 from 84.9 seen in March. The current level is the highest during the pandemic, as consumer sentiment has risen along with the increase in COVID-19 vaccinations and receipt of new fiscal stimulus checks. The one item in the report to keep an eye on, is inflation expectations that rose from 3.1% to 3.7%, its highest levels in nine years.
V) Equities Month to Date are higher with Large-Cap, Growth, Tech, and Information Tech leading equity price performance. The laggards for the period are Small-Cap, Value, Energy, and Consumer Staples
Capitalization: Large Caps +5.51% (YTD +11.74%), Mid-Caps +4.75% (YTD +13.27%) and Small Caps +1.92% (YTD +14.86%). Style: Value +3.34% (YTD +24.15%) and Growth +4.02% (YTD +14.05%). Sector Groups: Energy -1.30% (YTD +28.94%), Financials +4.04% (YTD +20.60%), Industrials +2.76% (YTD +14.42%), REITs +4.91% (YTD +14.32%), Materials +4.87% (YTD +14.60%), Communication Services +5.16% (YTD +13.82%), Consumer Discretionary +7.10% (YTD +12.04%), Technology +8.01% (YTD +10.30%), Information Technology +7.83% (YTD +10.29%), Utilities +4.99% (YTD +7.90%), Healthcare +4.10% (YTD +7.37%), and Consumer Staples +2.43% (YTD +4.04%)
European Equities
The MSCI Europe Index was higher last week due to better-than-expected economic growth data out of China and very strong corporate earnings in the US.
Drivers: I) February Retail Sales in the euro-zone increased by 3.0% month over month, which offset some of the declines seen since last October. The rise brings the first two months of 2021 average in retail sales to about 16.0% below the Q4 2020 annualized rate. Retail sales have been adversely affected by ever changing social restrictions being caused by another wave of COVID-19 throughout the region. Online spending remained robust, as it saw a 38.0% year over year annualized jump in February.
II) The final March report on inflation in the euro-zone showed the headline index increased by 0.1% m/m, while core prices dropped by 0.2% m/m on a seasonally adjusted basis. On an annual basis, headline inflation rose by 4 % to 1.3% and the core inflation rate declined by 0.2% to 0.9%. The decline in core inflation was caused by a drop in clothing and footwear prices.
III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was higher by +2.01% for the week (MTD +5.06% YTD +9.35%).
Asian Equities
Asian markets were mix last week as the strong Q1 GDP report from China boosted equities, while rising tensions between the US and China put a damper on investor sentiment. The DJ Asia Index was higher by +1.07% for the week, (MTD +1.63% YTD +6.53%).
Drivers: I) In Japan, Machinery Order in February soared by 26.4% m/m on a seasonally adjusted basis, which was an improvement from the -1.7% pullback in January. The improvement was fueled by the upsurge in foreign orders of 76.2%, while domestic private core machinery orders fell by -8.5%. The outsized jumped in foreign orders reflects the recent rise in global capex.
II) In China, Q1 2021 GDP growth came in at a strong 3% rise on a year over year annualized basis, much of which was due to a rise versus depressed levels seen in 2020. On a seasonally adjusted basis, China’s economy grew by 4.3% quarter over quarter, compared to the 14.1% quarterly rise seen in Q4 2020. The Q1 deceleration was caused by travel restrictions implements during the Lunar New Year.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei fell by -0.28% (MTD +1.73% YTD +8.87%), the Hang Seng Index was higher by +1.07% (MTD +2.16% YTD +6.17%) and the Shanghai Composite declined by -0.70% (MTD -0.44% YTD -1.34%).
Fixed Income
Treasury yields reached their lowest level in over a month, as treasuries rallied on tame CPI data out of the US, increased tensions between the US, Russia and China, short covering from hedge funds and the rise in bond purchases by Japan.
Performance: I) The 10-year Treasury yield fell last week ending at 1.584% down from 1.662%. The 30-year yield declined last week finishing at 2.275% falling from 2.339%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index rose by +0.35% last week, MTD +0.84% and YTD -2.56%. The Bloomberg Barclays US MBS TR was higher by +0.25% last week, MTD +0.55% and YTD -0.56%. The Bloomberg Barclay’s US Corporate HY Index advanced by +0.20% for the week, MTD +0.91% and YTD +1.77%.
Commodities
The DJ Commodity Index rose last week by +3.28% and is higher month to date +3.90% (YTD +13.68%). Commodity prices jumped last week on the back of continued strong demand for the industrial metal aluminum, the building product lumber and oil as global economic data continued to show strong a strengthening recovery.
Performance: I) The price of oil rose last week by +6.30% to close at $63.07 and is higher month to date by +6.61% (YTD +29.99%). Oil jumped in price last week due to strong economic data from China and the US, and concerns over rising tensions between the US, Iran and Russia which could impact crude oil output.
II) The ICE USD Index, a gauge of the U.S dollar’s movement against six other major currencies, was lower by -0.67% closing at 91.54 for the week (MTD -1.81% YTD +1.79%). The USD fell last week as interest rates declined in the US and investor sentiment has vastly improved due to the accelerated rollout of the COVID-19 vaccine. III) Gold posted its best weekly gain of the year, as the precious metal was boosted by the decline in US rates and dollar. Gold rose in price by +1.94% last week, climbing to $1777.3 (MTD +3.60% YTD -6.21%).
Hedge Funds
Hedge fund returns in April are positive for the month with all core strategies Equity Hedge, Event Driven, Macro/CTA, Relative Value and Multi-Strategy higher.
Performance:
- The HFRX Global Hedge Fund Index is higher by +1.08% MTD (+2.38% YTD).
- Equity Hedge advanced by +2.12% MTD (+4.83% YTD).
- Event Driven is up MTD +0.95% (+2.67% YTD).
- Macro/CTA has advance by +0.31% MTD (+0.83% YTD).
- Relative Value Arbitrage is up by +0.49% (+0.40% YTD).
- Multi-Strategy is higher MTD by +0.44% (+0.13% YTD).
Data Source: Haver Economics, Standard & Poor’s, HFR, Bloomberg, Morningstar and FactSet
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