Economic Data Watch and Market Outlook
US equity markets started off on Monday with a positive tone, as the DJIA posted a fifth straight record close (best streak since November 2017), and the S&P 500 reached its 49th all-time high in 2021, while officially doubling its value after bottoming on March 23, 2020. However, strong headwinds such as those expected from hurricane Henri in the US New England region this weekend, sent equity indices lower for the week. These foreboding signs included the spread of the delta and lambda variants causing regional lock-downs, further regulatory crackdowns in China (new data and privacy laws for on-line prescriptions and liquor industry), geo-political upheaval in Afghanistan and disappointing US economic data (lower than expected results in real sales, housing starts and consumer sentiment). The “risk-off” sentiment also spread to commodities as copper fell to its lowest level since April, and oil declined for a seventh consecutive session (worse streak since 2019). Wading through the “noise” the primary concern is the potential of a global economic slowdown prompted by a negative factor or event. At least for now, Street economists still see above trend growth into 2022. Goldman Sachs has pegged Q3 and Q4 US GDP growth at 8.5% and 5.00% respectively. JPMorgan projects the Euro-zone to grow at 10.5% and 4.0% for Q3 and Q4. Though subject to revision, these outsized growth projections should support risk assets in Q3 and Q4. But that does not preclude as I mentioned last week, a potential correction at any moment.
Heading into next week’s trading sessions, investors will be watching out for any clues as to the future of tapering and interest rates, as the highly anticipated Kansas City Fed’s annual Jackson Hole economic policy symposium begins on Thursday and will stretch throughout the weekend. Several Fed officials over the past few weeks have stated the US economy has made “substantial further progress” towards price stability and labor market goals. However, Dallas Fed President Kapan last week stated that he would adjust this view based on the “path of the virus and Delta variant which is unfolding rapidly” and how it may slow demand and GDP growth. In the background, we come to the close of earning season with retailers and technology dominating the headlines. With 95.0% of the S&P 500 having reports, earnings have soared by 93.8% yoy (original estimate 62.0%) with 85.0% of companies having beaten their earnings estimates.
In looking ahead to the economic calendar next week, the key data releases will be July Personal Income and Spending, and the Fed’s preferred measure of inflation the PCE Price Index. We begin on Monday with the Markit Manufacturing PMI for August which is projected to drop by 0.9 points to 62.5. The Markit Services PMI in August is estimated to have declined by 0.4 points to 59.5.
Durable Goods new orders in July is expected to fall by 0.4%, while related shipments rose by 2.5%. The decline is due to a drop in aircraft orders, however ex-transportation new orders are projected to rise by 1.3%.
Finishing the week on Friday, real Consumer Spending in July is estimated to decline by 0.2%, caused by a drop in goods spending, however services continue to recover helping nominal spending to rise by 0.3% for the month. Personal Income in projected to increase by 1.1% in July, boosted by higher employee compensation and the increase in transfer payments (childcare tax credit) sent out in mid-July. Finally, the PCE price index is expected to increase by 0.5% in July and the core PCE rose by 0.38%. From a year ago, the PCE headline index is up 4.2% and the core index is higher by 3.6%.
The Week In Review
U.S. Equities
US equities closed lower on the week due to the spread of the Delta variant, anxiety over potential Fed tapering and the continued increase in China restrictions across its economy
US Index Performance
- Dow Jones -1.01% MTD +0.71% YTD +16.13%
- S&P 500 -0.55% MTD +1.16% YTD +19.36%
- Russell 2000 -2.47% MTD -2.56% YTD +10.39%
- NASDAQ -0.84% MTD +0.31% YTD +14.17%
Drivers: I) US Industrial Production in July surprised to the upside, rising by 0.9% versus the consensus estimate of 0.5%. A sharp increase in motor vehicle and parts production of 11.2% helped IP, while manufacturing output also gained 0.7%. The strong auto production data lead us to believe the supply chain issues are easing. The report saw a drop in utilities output of 2.1% (easing temperatures), while mining rose by 1.2% continuing its strong run.
II) July’s Retail Sales dropped by 1.0% m/m, below the forecast of a 0.3% decline. Goods spending was a primary driver of the fall in sales, but services spending continued to claw back from the COVID-19 related lows. Overall sales seem to have been negatively impacted by a resurgence in coronavirus cases, and the continued waning influence of stimulus checks that were paid in Q1.
III) The Conference Board reported July’s Leading Economic Indicators (LEI) expanded by 0.9%, which followed solid increases of 0.5% and 1.2% in June and May respectively. All of the components (e.g., manufacturers’ new orders, building permits, consumer expectations for business) provided positive contributions. And despite the Delta variant and inflation fears, the Conference Board expects real GDP to reach 6.0% yoy.
IV) The July FOMC meeting minutes reaffirmed market expectations that the first announcement of tapering will occur some time in Q4. Opinion at the FOMC varied, as some participants believed conditions for tapering would be met “relatively soon”, inferring a potential September meeting announcement. “Several” other Committee members thought the conditions would not be met until early next year. When tapering does occur, Committee members mostly favored reducing Treasuries and mortgages proportionally at the same time.
V) Equities Month to Date are mixed with Large-Cap, Value, Utilities, and Financials leading equity price performance. The laggards for the period are Small-Cap, Growth, Energy, and Industrials.
Capitalization: Large Caps +0.82% (YTD +18.31%), Mid-Caps -0.28% (YTD +16.81%) and Small Caps -2.56% (YTD +10.39%). Style: Value –0.63% (YTD +22.60%) and Growth -1.62% (YTD +12.38%). Sector Groups: REITs +1.33% (YTD +30.59%), Financials +3.14% (YTD +28.92%), Energy -7.03% (YTD +23.56%), Healthcare +3.03% (YTD +20.76%), Communication Services -0.52% (YTD +20.12%), Technology +1.56% (YTD +20.11%), Information Technology +1.40% (YTD +19.46%), Materials -0.25% (YTD +16.73%), Industrials -0.69% (YTD +16.51%), Utilities +6.02% (YTD +13.15%) Consumer Discretionary -1.52% (YTD +10.81%), and Consumer Staples +1.82% (YTD +9.07%)
European Equities
The MSCI Europe Index declined last week as the shortage of semiconductor chips caused cuts in auto production across the region
Drivers: I) The July Harmonised Index of Consumer Prices (HICP) was finalized at a 2.2% on an annualized basis, while core inflation posted a 0.7% level, which is a drop of 0.2% from June. At the sub-category level, durable goods inflation rose by 1.9% led by increases in the cost of furniture and autos. Services saw an uptick in inflation with increases in airfares and hotel prices.
II) In July, UK Retail Sales dropped by 2.5% m/m, prompted by heavy rains during the month and a natural pullback from increased sales supported by the Euro 2020 tournament in June. A positive in sales has been the resilience in mobility and credit card spending data despite the rise in Delta variant cases. Even with the July decline, retail sales have rebounded to a 5.8% higher level than seen in February 2020.
III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was lower by -2.49% for the week (MTD +0.06% YTD +13.94%).
Asian Equities
Asian markets fell last week as the Delta variant spread across the region, causing a complete lockdown in countries such as New Zealand. The DJ Asia Index fell by -2.36% for the week, (MTD -1.96% YTD -1.54%).
Drivers: I) In Japan, GDP for Q2 2021 rose by 1.3% quarter/quarter (q/q), versus a Street estimate of a 0.5% increase. The better than expected result is a partial recovery of the 3.7% decline in Q1. Growth was still impeded in Q2 due to COVID restrictions imposed on restaurants and bars. Overall domestic demand was solid as private consumption jumped by 3.4% q/q and business capital investment rose by 7.0%, as global demand was strong.
II) In Taiwan, export orders in July declined by 1.0% m/m, led by the drop in technology orders which fell 1.6% m/m during the month. Non-technology orders which had grown steadily since Q3 2020, softened as well, falling by 3.1% m/m for July. Specifically, a contraction of 12.7% has been seen in machinery exports orders, which brings into question near term expectations for the global capex recovery.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei fell by -3.45% (MTD -0.99% YTD -0.75%), the Hang Seng Index was lower by -5.93% (MTD -4.49% YTD -9.20%) and the Shanghai Composite declined by -2.53% (MTD +0.88% YTD -1.32%).
Fixed Income
Treasury yields fell on the week as the spread of the Delta and Lambda variants have caused a slowdown in China, and lockdowns in Australia and New Zealand could worsen a decline in global growth.
Performance: I) The 10-year Treasury yield fell last week ending at 1.259% down from 1.286%. The 30-year yield declined last week finishing at 1.869% declining from 1.929%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index rose by +0.16% last week, MTD -0.15% and YTD -0.65%. The Bloomberg Barclays US MBS TR was lower by -0.05% last week, MTD -0.25% and YTD -0.40%. The Bloomberg Barclay’s US Corporate HY Index declined by -0.06 for the week, MTD -0.41% and YTD +3.59%.
Commodities
The DJ Commodity Index fell last week by -3.67% and is lower month to date -5.05% (YTD +17.63%). Commodity prices led by oil and industrial metals declined as worsening hospitalization rates in the US and new lockdowns in Asia, could hamper the recovery and demand for commodities.
Performance: I) The price of oil declined last week by -8.49% to close at $62.25 and is lower month to date by -15.66% (YTD +28.29%). Oil declined for seven consecutive trading sessions as global economic data was mixed and the continued spread of COVID engendered fears regarding future demand.
II) The ICE USD Index, a gauge of the U.S dollar’s movement against six other major currencies, was higher by +0.99% closing at 93.44 for the week (MTD +1.46% YTD +3.90%). The USD rallied as the decline in risk assets and fears over Fed tapering caused investors to rush to the safety of the dollar.
III) The price of gold edged up last week as global equities fell and concerns what effect the spread of the Delta variant will have on global growth. Gold rose by +0.06% last week, rising to $1782.6 (MTD -1.88% YTD -5.93%).
Hedge Funds
Hedge fund returns in August are mostly negative on the month with the core strategies Equity Hedge, Event Driven, Relative Value and Multi-Strategy lower, while Macro/CTA is higher.
Performance:
- The HFRX Global Hedge Fund Index is lower by -0.13% MTD (+3.13% YTD).
- Equity Hedge declined by -0.13% MTD (+8.22% YTD).
- Event Driven is down MTD -0.30% (+1.34% YTD).
- Macro/CTA has advanced by +0.16% MTD (+1.04% YTD).
- Relative Value Arbitrage is lower by -0.15% (+0.68% YTD).
- Multi-Strategy is down MTD by -0.15% (+0.43% YTD)
Data Source: Haver Economics, Standard & Poor’s, HFR (returns have a two-day lag), Bloomberg, Morningstar and FactSet