Economic Data Watch and Market Outlook
The US equity market indexes started off last week on a positive note as the DJIA and NASDAQ hit record highs on the back of strong corporate earnings and ample investor liquidity. However, the positive sentiment was soon reversed due to a confluence of concerns including the rise in new Delta variant coronavirus cases, and China’s regulatory crackdown on businesses in the country. The Delta variant as reported by the US Centers for Disease Control (CDC) is highly contagious and is causing the agency and Washington to modify their message. The CDC and President Biden are calling for vaccinations for all federal and healthcare workers, otherwise you will need to wear a mask and be tested regularly for the coronavirus. China has clamped down and/or increased the regulatory oversight on the technology, education, and food delivery sectors. Markets got some support mid -week as the Fed Chair Powell affirmed that the economy was making progress towards its growth goals, and tapering was not being considered until there is further improvement in the employment picture. But markets ended lower at week’s end as we were reminded again that stock prices are driven by not what you have done, but what will you be doing? Downside market pressure came from earnings reports from the mega techs such as Apple, Microsoft, and Facebook who report either record earnings or sales, but forecast a slowdown in growth for 2H 2021. The final hit came from Amazon who missed on revenues and the company’s forward guidance for growth was below consensus.
Heading into next week’s trading sessions, investors will fixate on the corporate earnings being reported by 148 S&P 500 constituents. In the travel sector, earnings will be reported by Marriott, Expedia and MGM Resorts International. Kraft Heinz, Kellogg, and Clorox will represent the consumer staples sector, while information technology will be led by Microchip Technology and NXP Semiconductors. Thus far, Q2 2021 earnings with 59.0% of the S&P 500 companies having reported, have grown by 85.1%, which would been highest growth rate since Q4 2009. The number of companies beating their earnings estimates is 88.0% (a record), with the average beat coming in at 17.2%. The highest earnings growth rates have come from the financial, information technology, and consumer services sectors. With the S&P 500 up six months in a row, we hope the trend will continue into the dog days of August, with strong earnings and massive cash hordes providing the support.
In looking ahead to the economic calendar next week, the reports of importance will be ISM Manufacturing and Services, and Friday’s Non-Farm Payroll. We start off on Monday with July’s ISM Manufacturing Survey which is expected to rise by 0.9 points to 61.5. The report would be in line with the increases in manufacturing we have been seeing in the regional surveys.
The ISM Services Survey out on Wednesday is expected to decline by 0.6 points to 59.5 for July. The drop is being caused by projected declines in business activity (pickup in Delta variant cases) and incoming new business (supply chain bottlenecks).
The July Nonfarm Payroll report is expected to increase by 900,000 in July, with the UE rate dropping by 0.3 points to 5.6%. Seasonal factors typically come into play as in a normal school year, educators lose jobs in the summer. But due to COVID-19 the unusual school year is causing the hire of education related workers for the coming school year. The labor force participation rate is projected to increase from 61.6% to 61.8% , as special unemployment benefits ended in several states.
The Week In Review
U.S. Equities
US equity markets closed mostly lower for the week on concerns over the spread of the delta variant, and disappointing results from Amazon.com that missed sales expectations.
US Index Performance
- Dow Jones -0.36% MTD +1.34% YTD +15.31%
- S&P 500 -0.35% MTD +2.38% YTD +17.99%
- Russell 2000 +0.76% MTD -3.61% YTD +13.29%
- NASDAQ -0.22% MTD +2.08% YTD +13.85%
Drivers: I) The FOMC last week stated the economy was making headway towards the goals the Fed had set up to begin the process of tapering. Specifically, the FOMC said “since last December the economy has made progress toward these goals, and the Committee will continue to assess progress in the coming meetings.” Chair Powell’s tone was less hawkish, and said the labor market is still “some way away” from justifying tapering.
II) Consumer Spending for June rose by 0.5% in real terms, while nominal spending increased by 1.0%, but the path for spending may slow based on early Q3 data. The Core PCE Price Index was up 0.4% in June, below the expected 0.6% rise, and is up 3.5% year over year on an annual basis. The headline reading was up 4.0% yoy just slightly ahead of the 3.9% estimate. The June report showed the recent increase in inflation may be transitory.
III) The Q2 2021 GDP report showed a rise of 6.5% on an annual basis, but was 2.0% below Street consensus. Though the report came in lower than lofty expectations, growth is solid and should remain strong. Real domestic demand jumped by a strong 7.9%, while the trade deficit and inventory build were drags. However, the inventory build should support Q3 growth as supply chain issues recede. Domestic demand was robust, as real consumer spending soared by 11.8%, as service spending accelerated during the quarter.
IV) In June, New Durable Goods Orders rose by 0.8%, far below the Street estimate of a 3.2% increase. The more modest increase in orders can be blamed on below expected orders for defense goods and civilian aircraft. Core capital goods orders in June jumped by 0.5% and has soared by 16.0% on an annual basis over the past three months. Core capital goods shipments advanced by 0.6% in June, or about 10.0% on an annualized basis.
V) Equities Month to Date are mixed with Large-Cap, Growth, Healthcare, and REITs leading equity price performance. The laggards for the period are Small-Cap, Value, Energy, and Financials
Capitalization: Large Caps +2.08% (YTD +17.34%), Mid-Caps +0.77% (YTD +17.14%) and Small Caps -3.61% (YTD +13.29%). Style: Value –1.49% (YTD +23.38%) and Growth +0.63% (YTD +14.22%). Sector Groups: Energy -8.37% (YTD +32.90%), REITs +4.62% (YTD +28.87%), Financials -0.44% (YTD +25.00%), Communication Services +0.54% (YTD +20.74%), Technology +3.85% (YTD +18.27%), Information Technology +3.65% (YTD +17.81%), Industrials +0.88% (YTD +17.33%), Healthcare +4.88% (YTD +17.22%), Materials +2.04% (YTD +17.02%), Consumer Discretionary +1.02% (YTD +12.52%), Consumer Staples +2.13% (YTD +7.12%) and Utilities +4.31% (YTD +6.73%)
European Equities
The MSCI Europe Index posted a gain for the week and month of July, as Q2 GDP growth exceeded expectations and the jobless rate continued to show improvement.
Drivers: I) The Euro-zone flash estimate for Q2 GDP jumped by 8.3% q/q, exceeding the Street estimate increase of 6.5%. The rebound was helped by the easing of restrictions during the quarter. Strong gains were seen across the region with Germany growing at 6.1%, France 3.8%, Italy 11.1%, and Spain 11.5%. The solid results were bolstered by an increase in domestic final sales and improvements in trade.
II) In July, the economic Sentiment Index for the Euro-zone rose by 1.1 points to 119.0, which is the highest level on record since the index began in 1985. The data release follows the strong showing from the flash Euro-zone composite PMI, and was propelled by rising business and consumer confidence. The manufacturing sector saw strong output gains and expectations, as current inventory levels hover around record lows.
III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was higher by +0.88% for the week (MTD +1.85% YTD +13.87%).
Asian Equities
Asian markets continued their recent decline as markets have reacted negatively to China’s government crackdown on technology, internet, education, and food delivery companies. The DJ Asia Index declined by -0.73% for the week, (MTD -3.45% YTD +0.42%).
Drivers: I) In Japan, the Flash Composite PMI in July dropped by 1.2 points to 47.7 from June’s reading of 48.9.
The decrease was caused by the pullback in the services activity index which declined by 1.6 points, due to the renewed state of emergency. Supply chain bottlenecks persisted, causing a 0.2 points decrease in manufacturing. New restrictions took a toll on Business Sentiment which fell by 4.3 points to 54.0, the lowest level since January.
II) In China, industrial profits in June grew at a 0% yoy annualized basis, versus the 36.4% increase in May. The National Bureau of Statistics (NBS) announcement does show the slowdown in the rate of profit growth reflects a decline in the low base effect. As such, industrial profits during 1H 2021 was 45.5% higher than the same period in 2019, implying a strong average annual growth rate of 20.6% yoy.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei fell by -0.95% (MTD -5.23% YTD +0.23%), the Hang Seng Index was lower by -5.01% (MTD -10.05% YTD -4.93%) and the Shanghai Composite declined by -4.31% (MTD -5.40% YTD -2.18%).
Fixed Income
Treasury yields fell to their lowest level in five months and experienced their sharpest one month decline since March 2020, due to concerns over the delta variant.
Performance: I) The 10-year Treasury yield fell last week ending at 1.228% down from 1.276%. The 30-year yield declined last week finishing at 1.895% dropping from 1.920%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index rose by +0.25% last week, MTD +1.12% and YTD -0.50%. The Bloomberg Barclays US MBS TR was higher by +0.14% last week, MTD +0.63% and YTD -0.15%. The Bloomberg Barclay’s US Corporate HY Index advanced by +0.06% for the week, MTD +0.38% and YTD +4.01%.
Commodities
The DJ Commodity Index rose last week by +0.95% and is higher month to date +1.16% (YTD +23.90%). Commodity prices rose last week as unusually cold weather in Brazil threatened the production of coffee and energy increased on tightening supply.
Performance: I) The price of oil climbed higher last week by +2.27% to close at $73.81 and is higher month to date by +0.46% (YTD +52.12%). Oil jumped last week and climbed higher for a fourth consecutive month, as US supplies tightened, and global demand continued to increase.
II) The ICE USD Index, a gauge of the U.S dollar’s movement against six other major currencies, was lower by -0.88% closing at 92.09 for the week (MTD -0.38% YTD +2.40%). The USD declined last week as US interest rates fell to multi-month lows and GDP growth came in lower than expected.
III) The price of gold increased last week and reached its highest level in six week, driven by a drop in interest rates and rise in inflation. Gold advanced in by +0.82% last week, rising to $1816.9 (MTD +2.55% YTD -4.12%).
Hedge Funds
Hedge fund returns in July are mostly lower on the month with the core strategies Event Driven and Macro/CTA, Relative Value and Multi-Strategy lower, while Equity Hedge is up.
Performance:
- The HFRX Global Hedge Fund Index is lower by -0.37% MTD (+3.35% YTD).
- Equity Hedge advanced by +0.62% MTD (+8.52% YTD).
- Event Driven is lower MTD -1.61% (+1.74% YTD).
- Macro/CTA has declined by -0.65% MTD (+0.89% YTD).
- Relative Value Arbitrage is down by -0.02% (+0.83% YTD).
- Multi-Strategy is lower MTD by -0.01% (+0.59% YTD).
Data Source: Haver Economics, Standard & Poor’s, HFR (returns have a two-day lag), Bloomberg, Morningstar and FactSet
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