Economic Data Watch and Market Outlook
The direction of global market prices last week was subject to a pitched battle between the positives of strong corporate earnings and economic data, versus the negatives including the spread of the Delta and Lambda variants and the China regulatory clampdown on the technology sector. The rise in coronavirus variant cases has prompted new lock-downs in countries such as China, Thailand, and Vietnam, plus the anti-monopoly and operating restrictions being imposed by the Chinese Community Party (CCP), has caused former highfliers such as Tencent to suffer a steep price drop (≈ 20.6%) in 2021. However, the much higher than expected rise in corporate earnings in Q2 have driven indexes such as the S&P 500 and NASDAQ Composite to new all-time highs. The US Non-Farm Payroll report which showed an increase of 943,000 jobs (estimate was 880,000), plus an upward revision to June’s report (850,000 to 938,000) also supported equity prices. The positive earnings and economic data sent the 10-year US Treasury yield to 1.302%, up from 1.228% the previous week’s close. At some point, the bond vigilantes will see higher yields, as US Treasury rates have been suppressed by various factors; short covering of curve steeping positions or outright shorts, bond buying by the Fed, lower than expected US debt refunding needs and the chase for yield (negative yield foreign debt is $16.5 trillion, nearing the record $18 trillion of December 2020). Above trend earnings and economic growth, rising inflation and eventual tapering (Fed Vice Chair Clarida stated last week the economy was on track to potentially justify monetary tightening in the coming months) should cause rates to rise into Q4 2021.
Heading into next week’s trading sessions, we will be coming into the tail end of corporate earnings season, with companies such as Walt Disney Co, Tyson Foods, and Sysco Corp. on tap to report. According to FactSet, 89.0% of the S&P 500 companies have reported, and the eps blended growth rate is 88.8%, versus the June 30 estimate of a 63.0% growth in earnings. To date, 87.0% of companies have beaten their quarterly estimates by an average of 17.1%. Earnings and economic data releases next week (July CPI and PPI) should drive asset prices, as the next seminal event on the calendar is the Jackson Hole Economic Policy Symposium but is three weeks away (August 26-28). As such, expect markets to remain choppy and perhaps consolidate around recent gains.
In looking ahead to the economic calendar next week, investors will be interest to see if the Fed’s proclamation that inflation is transitory will hold true, as we will get a reading on July’s CPI and PPI. We will also get the release preliminary report for consumer confidence. On Wednesday, the July Consumer Price Index (CPI) is projected to increase by 0.6%, with the core rising by 0.56%. On an annual basis, the headline measure would be up 5.5% (versus 5.4% in June) and the core index is 4.5% higher (unchanged versus June). The main drivers are used vehicle prices (3.0%), new vehicle prices (1.5%) and lodging (3.8%) as travel and tourism recover.
The Producer Price Index (PPI) out on Wednesday is estimated to increase 0.6% in July, 5.60% on an annual basis (versus 5.80% in June). Energy prices have moderated, but food PPI is showing a 0.7% increase for July.
Closing out the week on Friday, the preliminary August report for the University of Michigan consumer sentiment index is projected to rise 0.8 points to 82.0. The improvement is expected to be driver by the rise in higher frequency data that measures consumer mobility, which has firmed as COVID-19 restrictions have eased.
The Week In Review
U.S. Equities
US equity markets posted solid gains for the week as corporate earnings have beaten expectations and real interest rates continued to decline.
US Index Performance
- Dow Jones +0.79% MTD +0.79% YTD +16.22%
- S&P 500 +0.96% MTD +0.96% YTD +19.12%
- Russell 2000 +0.98% MTD +0.98% YTD +14.41%
- NASDAQ +1.25% MTD +1.25% YTD +15.11%
Drivers: I) The Non-Farm Payrolls jumped by 943,000 in July, exceeding the Street consensus estimate of 880,000. The solid rise in jobs suggests the growth in employment is accelerating and the shortage in labor is easing. The improvement in jobs was induced by the 380,000 increase in hospitality and leisure jobs. The increase of 261,000 jobs in public and private education employment, as well as jumps in transport and warehousing jobs added to the rise in July jobs.
II) The increase of jobs in July still has the overall labor force about 3.1 million short of the pre-pandemic levels. But the rise in jobs last month did push to unemployment rate lower from 5.9% to 5.4%. Another sign of inflation was seen in the increase in average hourly earnings of 0.4% in July, and the annual rate rose by 4.0%. This highlights the competition for workers and the upward pressure this is putting on wage and price inflation.
III) The headline result for June’s ISM Manufacturing Survey Composite fell by 1.1 points to 59.5, missing the consensus estimate which projected a rise of 0.9 points to 61.5. There was a weakening across several categories, including new orders, production, and supplier delivery times. On the plus side, there was a rise in the employment index. On the whole, the headline composite continues to show strength in manufacturing.
IV) In June, New Factory Goods Orders jumped by 1.5% while related shipments increased by 1.6% and inventories rose by 1.0%. The better than consensus result and the strong inventory data should boost GDP growth in Q3, after the sharp decline in inventories seen in March and April. In addition, equipment spending has been on a solid upward trajectory in Q3 based on the analysis of monthly data sources.
V) Equities Month to Date are mixed with Small-Cap, Value, Financial, and Utilities leading equity price performance. The laggards for the period are Mid-Cap, Growth, Consumer Staples, and Materials
Capitalization: Large Caps +0.92% (YTD +18.42%), Mid-Caps +0.76% (YTD +18.04%) and Small Caps +0.98% (YTD +14.41%). Style: Value +0.95% (YTD +24.56%) and Growth +0.45% (YTD +14.74%). Sector Groups: Energy +0.37% (YTD +33.39%), REITs +0.72% (YTD +29.80%), Financials +3.58% (YTD +29.48%), Communication Services +0.31% (YTD +21.05%), Technology +0.98% (YTD +19.42%), Information Technology +0.98% (YTD +18.96%), Healthcare +0.67% (YTD +18.00%), Industrials +0.18% (YTD +17.54%), Materials +0.16% (YTD +17.21%), Consumer Discretionary +0.33% (YTD +12.88%), Utilities +2.31% (YTD +9.19%) and Consumer Staples -0.68% (YTD +6.39%)
European Equities
The MSCI Europe Index rose for a third straight week on the back of strong earnings from the financial sector and better than expected jobs data out of the US.
Drivers: I) June Euro-zone Retail Sales increased by 1.5% m/m, bringing retail sales above pre-COVID-19 level. The quarterly rise came in at 14.4% q/q on a seasonally adjusted basis for Q2 2021. The lifting of coronavirus restrictions ignited a sizable increase in spending. The jump in spending during Q2 has been supported by the increase in bank deposits seen from households’, accumulated during the lockdown periods.
II) In July, the Euro-Zone PMI improved by 0.7 points to 60.2. The rise in the composite was helped by the 1.5-point rise in services activity, while manufacturing output fell by 1.6 points. But despite the decline, manufacturing remained at a solid level of 61.1, and services strengthened to 59.8. Report details show a rise
In employment and new orders, and a decline in future output from a heightened level (-3.6 points to 68.4).
III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was higher by +0.97% for the week (MTD +0.97% YTD +14.97%).
Asian Equities
Asian markets were higher as the Delta variant has been less virulent than COVID-19, but the anti-monopoly and data security crackdown by the Chinese government on tech companies were a negative The DJ Asia Index rose by +1.13% for the week, (MTD +1.13% YTD +1.76%).
Drivers: I) In Japan, Consumer Sentiment eked out a 0.1% increase to 37.5 in July, which exceeded estimates of a slight decline. The survey was taken after the recent government announcement of a new state of emergency, but the decision did not negatively impact consumer sentiment. Although the rise in infections is a risk, expectations call for solid consumption in Q3 and a strong recovery in Q4 as vaccination rates increase.
II) In China, July’s Caixin/Markit manufacturing PMI fell by 1.0 point to 50.3, which was below the consensus estimate of 51.0, and reached its lowest level since May 2020. The primary driver behind the drop in the Caixin/Market manufacturing PMI was the decline in new orders, which dropped by 2.4 points to 49.2. The decline in new orders below 50 for the first time since May 2020, shows weakening domestic demand.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei rose by +1.97% (MTD +1.97% YTD +2.21%), the Hang Seng Index was higher by +0.81% (MTD +0.81% YTD -4.16%) and the Shanghai Composite advanced by +1.79% (MTD +1.79% YTD -0.43%).
Fixed Income
Treasury yields rose last week as Non-Farm Payroll data came in at its highest level in over a year, suggesting the Delta Variant may not be impeding the economic rebound and growth.
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 fell by -0.42% last week, MTD -0.42% and YTD -0.92%. The Bloomberg Barclays US MBS TR was lower by -0.26% last week, MTD -0.26% and YTD -0.40%. The Bloomberg Barclay’s US Corporate HY Index declined by -0.19 for the week, MTD -0.19% and YTD +3.81%.
Commodities
The DJ Commodity Index fell last week by -1.50% and is lower month to date -1.50% (YTD +22.03%). Commodity prices dropped last week as the new lockdowns caused by the Delta Variant in countries such as China, Thailand, and Vietnam, could curb the demand for energy and industrial metals.
Performance: I) The price of oil declined last week by -8.09% to close at $67.84 and is lower month to date by -8.09% (YTD +39.81%). Oil suffered its worst weekly decline in nine months, as new lockdowns in China engendered fears of a decline in energy demand.
II) The ICE USD Index, a gauge of the U.S dollar’s movement against six other major currencies, was higher by +0.75% closing at 92.78 for the week (MTD +0.75% YTD +3.17%). The USD was higher on the week as the solid July jobs report and rising interest rates provided support for the dollar.
III) The price of gold declined last week as the strong US jobs report could provide the Fed with the impetuous to begin tapering and raise interest rates. Gold fell by -2.92% last week, dropping to $1763.7 (MTD -2.92% YTD -6.93%).
Hedge Funds
Hedge fund returns in August are mostly higher on the month with the core strategies Equity Hedge, Macro/CTA, Relative Value and Multi-Strategy higher, while Event Driven is lower.
Performance:
- The HFRX Global Hedge Fund Index is higher by +0.05% MTD (+3.33% YTD).
- Equity Hedge advanced by +0.13% MTD (+8.50% YTD).
- Event Driven is lower MTD -0.14% (+1.50% YTD).
- Macro/CTA has advanced by +0.24% MTD (+1.12% YTD).
- Relative Value Arbitrage is higher by +0.02% (+0.85% YTD).
- Multi-Strategy is up MTD by +0.00% (+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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