Economic Data Watch and Market Outlook
The S&P 500 in baseball vernacular pitched a “perfect game” last week, as the index rose and reached a new all time high every day to close at 3508.01. By rallying for a fifth straight week, the index is on track for its best August performance since 1986. Not to be out done, the NASDAQ Composite reached an all-time high while the NASDAQ 100 was up for a fifth straight week. A confluence of factors drove markets higher, starting with the inexorable rise the technology sector. The “FAANG” stocks are now up 56.4% for the year, while the S&P 500 is higher by only 9.97%. The Trump Administration considered expediting the development of an AstraZeneca and Oxford University COVID-19 vaccine, and the FDA authorized blood plasma treatment for use in emergency patients. US and China high level trade officials via a Monday night video conference, re-affirmed China’s commitment to the “Phase One” deal and discussed intellectual property rights and the opening of China’s markets to US financial service and agricultural companies. Last but not least, Fed Reserve Chairperson Jerome Powell, announced at the virtual Jackson Hole monetary policy symposium the central bank will tolerate periods of inflation above its 2.0% target to support the labor market. Rates will also be “lower for longer”.
As we enter next week’s trading sessions, the economic calendar will be full of reports covering ISM manufacturing and services, factory orders and non-farm payrolls on display. We are also coming to the close of the Q2 earnings season, with 98.0% of the S&P500 having reported to date. Thus far, 84.0% of the index’s constituents have beaten their earnings estimates, the highest level since Q1 2009 and is above the five-year average of 72.0%. Quarterly earnings are lower by -31.9% which is better than the original early July estimate of -35.4%. Companies reporting next week include Macy’s, Campbell Soup, Broadcom, and Zoom Video Communications. But equity markets cannot continue to pitch a “perfect game” as the COVID pandemic still remains, geo-political tensions can rise at any moment, and we are now entering the important phase of the US Presidential election. The futures market is showing signs that volatility is expected to rise in the coming weeks, as the VIX futures are trading several points above the spot level. What goes up can eventually come down.
In turning to the coming week’s economic calendar, the heavy schedule will have markets fixated on US ISM data and the all-important Non-Farm Payroll report. On Tuesday, the ISM Manufacturing survey is expected to rise 0.8 points to 55.0 for August. Motor Vehicle sales out the same day, are projected to show sales in August of 15.0 million units. The would be the fourth consecutive month of increased sales, recovering from the sharp declines seen in March and April due to COVID-19.
The ISM Non-Manufacturing survey out on Thursday, is estimated to have slipped from 58.1 to 58.0 for August. As the economy continues to recover from the economic shock caused by the coronavirus, there has been a plateauing of the ISM growth rate and should be closely watched for signs of a slowdown.
Closing the week on Friday is the August Non-Farm Payroll report that is projected to show an increase of 1.4 million jobs, with the unemployment rate falling below 10.0% to 9.7%. The recovery in jobs has shown signs of slowing momentum, and this would be the softest month since job growth began in May. In addition, the participation rate is forecast to rise t0 61.6% from July’s reading of 61.4%.
The Week In Review
U.S. Equities
US equity markets led by the S&P 500, posted record highs as technology continued its rally, US/China tensions abated, Fed dovish comments and hopes rose for new COVID-19 vaccines and treatments.
- Dow Jones +2.64% MTD +8.71% YTD +2.03%
- S&P 500 +3.29% MTD +7.41% YTD +9.97%
- Russell 2000 +1.69% MTD +6.73% YTD -4.55%
Drivers: I) Fed Reserve Chairperson Jerome Powell, at the annual Jackson Hole monetary policy symposium announced the Fed has shifted from a flexible inflation target (≈ 2.0%) to an average inflation target. There was no announcement of any change in monetary policy ahead of the September FOMC meeting. In short, the Fed will permit inflation to rise above the original 2.0% target to help boost jobs to their “full employment” level.
II) Historically low mortgage rates in the US have supported a strong housing market, which is evident in July’s New Home Sales report which showed a rise of 901,000 (saar), the best showing since 2006. The solid rise highlights the pent-up demand after sales plunged during the outbreak of the pandemic. The housing data seen from the FHFA and Case-Shiller were also positive, as home values have also risen along with demand.
III) Durable Goods orders in July exceeded Street estimates, as the report showed a rise of 11.2%. Core capital goods orders which exclude defense and aircraft, saw orders and shipments increase by 1.9% and 2.4% respectively. Orders in July were up substantially from levels seen in the COVID-19 ravaged Q2, but are still below February levels. July orders are still 6.3% below pre-COVID levels, while core capital goods are down 0.5%.
IV) Consumer spending in July beat consensus expectations, jumping by 1.6%, though the indicator remained approximately 9.7% below its January level. Personal income increased by 0.4% last month, as unemployment benefits from the government made up 7.6% of disposable income. The majority of the benefits were related to the COVID-19 unemployment benefits. And the Core PCE price index rose by 0.35% in July, bringing the annual rate to 1.25%.
V) Equities Month to Date are higher with Large-Cap, Value, Technology, and Information Technology leading equity price performance. The laggards for the period are Mid-Cap, Growth, and Utilities.
Capitalization: Large Caps +7.42% (YTD +10.51%), Mid-Caps +4.07% (YTD +0.13%) and Small Caps +6.73% (YTD -4.55%). Style: Value +5.84% (YTD -15.29%) and Growth +4.06% (YTD +2.46%). Sector Groups: Technology +11.57% (YTD +35.36%), Information Technology +11.19% (YTD +33.60%), Consumer Discretionary +9.89% (YTD +20.86%), Communication Services +8.77% (YTD +16.05%), Healthcare +2.32% (YTD +6.92%), Consumer Staples +4.93% (YTD +5.87%), Materials +5.97% (YTD +5.40%), Industrials +9.85% (YTD -2.14%), REITs +0.88% (YTD -4.07%), Utilities -2.96% (YTD -6.97%), Financials +5.53% (YTD -16.29%) and Energy +1.26% (YTD -37.04%).
European Equities
The MSCI Europe Index rose last week on hopes the ECB will provide another round of stimulus and the improvement in the region’s economic sentiment.
Drivers: I) The ECB’s chief economist Philip Lane provided a road map as to the ECB’s response to the coronavirus pandemic. At Jackson Hole, Mr. Lane in a speech stated the euro-zone’s governments’ policy responses have stabilized markets and supported the supply of credit that was needed. These actions should boost GDP by 1.3% and inflation by 0.8% cumulatively over the next two years. However, the Street is expecting the ECB to improve the TLTRO-III conditions at its September meeting, and increase the PEPP program by another €750bn in 4Q20.
II) Country level data in the euro-zone is showing retail sales should see a further rise in July, following June’s increase which brought sales back to the pre-COVID-19 levels seen in January and February. The consumption of goods in France and retail sales in Spain rose further in July, with some of the peripheral countries following a similar pattern. Sales in July are 90% higher on an annualized basis than those seen in Q2 2020. Regional sales have also been boosted by the reduction of VAT in Germany.
III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was higher by +1.97% for the week (MTD +4.23% YTD -5.60%).
Asian Equities
Asian equity markets were higher on the week, as equities prices were boosted by dovish Fed comments and positive data out of China. The DJ Asia Index advanced by +1.46% for the week, (MTD +4.48% YTD -4.28%).
Drivers: I) The economic recovery in China entering Q3 has continued, as production activity seems to have normalized. This has led to solid growth in sales and profit revenues in the industrial sector. Specifically, July’s industrial profits soared at an annual growth rate of 19.6%, following the 11.5% rise in June. Industrial profits for the first seven months of 2020 fell by 8.1% annually, compared to the 12.8% fall in the January to June period.
II) In Japan, the August Tokyo CPI report showed a drop into deflation territory for the first time the three years. The CPI ex. Fresh food and energy after rising by 0.8% in July, fell by 0.1%. The core inflation rate finished at a -0.3% annual rate. The report fell below the Street estimate of a 0.2% decrease due to the impact of the government’s travel subsidy program, which supports 35.0% of domestic travel expenses. The disappointing inflation data reflects inflation’s slowing momentum which coincides with worsening economic conditions.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei fell by -0.11% (MTD +5.44% YTD -2.14%), the Hang Seng Index was higher by +1.23% (MTD +3.36% YTD -9.38%) and the Shanghai Composite advanced by +0.68% (MTD +2.83% YTD +11.60%).
Fixed Income
Treasury yields rose and the yield curve steepened the most in two months, as the Fed announced they would keep short term rates “lower for longer” and would permit inflation to run above 2.00% in order to fully support job growth.
Performance: I) The 10-year Treasury yield was higher last week ending at 0.719% up from 0.636%. The 30-year yield rose last week finishing at 1.501% climbing from 1.341%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index fell -0.51% last week, MTD -1.04% and YTD +6.60%. The Bloomberg Barclays US MBS TR was higher by +0.06% last week, MTD +0.05% and YTD +3.74%. The Bloomberg Barclay’s US Corporate HY Index was up by +0.75% for the week, MTD +0.89% and YTD +1.61%.
Commodities
The DJ Commodity Index was higher last week by +2.70% and is up month to date +7.61% (YTD -0.93%). Commodity prices rose as concerns over the global economic recovery pushed precious metals higher, while energy rallied due to the potential for production shortfalls caused by Hurricane Laura.
Performance: I) The price of oil rose last week by +1.61% to close at $42.93 and is higher month to date by +6.18% (YTD -29.70%). Oil prices were higher as Hurricane Laura caused the closer of major refineries in the US, prompting worries over a decline in production.
II) The ICE USD Index, a gauge of the U.S dollar’s movement against six other major currencies, was lower by -0.96% ending at 92.30 for the week (MTD -1.24% YTD -4.24%). The USD suffered its worst daily decline last week in over four months and fell to its lowest level since May 2018, as the Fed emphasized US rates would remain low for an extended period of time.
III) Gold was higher last week as the shift in Fed policy of keeping rates “lower for longer” and to permit inflation to run above its long-term target annual target of 2.0% were supportive of precious metal prices. Gold was higher by +1.29% last week, rising to $1972.6 (MTD -1.07% YTD +29.51%).
Hedge Funds
Hedge fund returns in August are higher with all of the core strategies Equity Hedge, Event Driven, Macro/CTA, Relative Value and Multi-Strategy in positive territory.
Performance:
- The HFRX Global Hedge Fund Index is higher at +1.40% MTD and up +1.65% YTD.
- Equity Hedge has advanced by +2.56% MTD and is lower by -3.11% YTD.
- Event Driven is up MTD +1.54% and is up YTD +4.10%.
- Macro/CTA has risen by +0.07% MTD and is higher by +1.12%
- Relative Value Arbitrage is higher by +0.99% and is up +4.18% YTD.
- Multi-Strategy is up MTD by +0.82% and has risen by +3.75% YTD
Data Source: Haver Economics