Economic Data Watch and Market Outlook
The technical indicators as I wrote last week, were correct in signaling a pullback from over-bought conditions in global equity markets. Like a marathon runner, markets hit the wall last week due to record surges in new US coronavirus cases and deaths, and the stalemate in Congress over a new stimulus bill. Daily new cases rose above 200,000, deaths exceeded 3,000 per day and hospitalizations hit a milestone of over 100,000. House Speak Pelosi and Senate Majority Leader McConnell, after early signs of a potential year end stimulus bill, remained at an impasse over state and local government aid and liability protect for businesses. Markets also dealt with disappointing reports regarding US non-farm payroll (245,000 versus Street estimate of 440,000) and the 137,000 surge in weekly jobless claims, to 853,000, the strongest weekly rise since March. As we are in the holiday season, we should be thankful for the early gifts we received in November, with the DJIA (11.84%), S&P 500 (10.75%), NASDAQ Composite (11.80%) and Russell 2000 (18.29%) posting some of their strongest monthly gains in recent memory. Will the markets into year end keep on giving positive returns? Historical precedent shows that since 1928, the months of December (1.3%) and January (1.2%) for the S&P 500 provide the highest consecutive two-month cumulative returns versus any other monthly series. We suspect that any further gains will be closely tied to a hopeful peaking and decline of new coronavirus cases.
As we enter next week’s trading sessions, markets will be closely examining the data from a heavy economic calendar, look for any positive signs concerning the fight against COVID-19 and progress on the stimulus front. As to COVID-19, the US FDA granted emergency use authorization (EMU) last Thursday to Pfizer’s coronavirus vaccine and is expected to start distribution early this week. With an estimation that up to 20 million Americans could be inoculated by year end, positive results in deterring the spread of COVID-19 would be a great boost to overall sentiment and outlook. In Washington, there should be a sense of urgency to agree on a new stimulus package, as several components of the earlier rescue plans expire on Friday, December 11th, and the remainder on December 31st. With uncertainty at heightened levels, we would expect markets to be volatile and trade up or down on every bit of COVID-19 and stimulus news. In turning to the coming week’s economic calendar, a full slate of data releases will be dominated by housing and retail sales. We kick off on Tuesday with November’s reports for Industrial Production, which is projected to have risen by 0.5%. The increase in production is expected to be led by a monthly increase in motor vehicle and parts production of 5.7%.
Retail sales for November are estimated to have declined by 1.0%, with the recent spike in new COVID-19 cases the primary cause for the drop in consumer spending. The onset of colder weather may have also depressed sales as various categories of spending have moved outdoors (urban restaurant dining) due to the coronavirus.
Housing data on Wednesday begins with the NAHB housing market index which is projected to remain steady at 90 between November and December. The indicator remaining at this all-time high indicates homebuilder sentiment remains positive. On Thursday, November Housing Starts is estimated to have dropped by 0.6% to 1.52 million units on a seasonally adjusted annual rate. Starts are cooling a bit after a strong run, but housing permits are still rising, as November’s reading is expected to increase by 1.7% to 1.57 million units.
The Week In Review
U.S. Equities
US equity markets retreated on a lack of progress on a new stimulus package from Washington, uncertainty regarding “Brexit” and the record surge in new COVID-19 cases and deaths.
- Dow Jones -0.54% MTD +1.50% YTD +7.70%
- S&P 500 -0.95% MTD +1.21% YTD +15.39%
- Russell 2000 +1.03% MTD +5.08% YTD +16.02%
Drivers: I) Senate Majority Leader McConnell backed off his call for liability business protection, but remained firm on providing no state and local government aid in any new stimulus package. Senate Minority Leader Schumer said Democrats would not support any stimulus bill without any state and local government aid. This unsolvable impasse has led to a last-ditch effort to pass a bill with only non-controversial items such as small business aid.
II) Evidence that the current record surge in new COVID-19 cases is weighting on the economy, was seen in the worse than expected jump in jobless claims. Initial claims filings for the week ending December 5, jumped from 716,000 to 853,000. Continuing claims also jumped by 5.5 million to 5.8 million during the week-end November 28. Though holiday season data can be volatile, these increases broke a multi-month drop for both categories.
III) November’s CPI data exceeded expectations, as prices rose by 0.2% and the core increased by 0.2% as well.
Despite the upside surprises, the overall trend for inflation has moderated since the beginning of the pandemic. The headline CPI is up 1.2% on an annual basis, while the core was up 1.6% over the same time frame. The upticks were driven primarily by firmer apparel (0.9%) and personal computer prices (2.2%).
IV) The University of Michigan consumer sentiment index in December rose from 76.9 to 81.4, which was counter to expectations for a decline. The improvement in sentiment was a surprise given the dramatic increase in new coronavirus cases and the recent slowdown seen in recent economic data releases. The current conditions index in hitting its highest level since March, is still well below the sentiment readings pre-pandemic.
V) Equities Month to Date are higher with Small-Cap, Value, Energy, and Communication Services leading equity price performance. The laggards for the period are Large-Cap, Growth, Utilities and REITs.
Capitalization: Large Caps +1.46% (YTD +17.75%), Mid-Caps +2.21% (YTD +14.33%) and Small Caps +5.08% (YTD +16.02%). Style: Value +4.58% (YTD +1.10%) and Growth +3.24% (YTD +17.41%). Sector Groups: Technology +0.67% (YTD +36.83%), Information Technology +0.85% (YTD +36.25%), Communication Services +3.55% (YTD +27.79%), Consumer Discretionary -0.62% (YTD +25.75%), Materials -0.21% (YTD +17.40%), Healthcare +1.77% (YTD +11.02%), Industrials +0.93% (YTD +10.71%), Consumer Staples +0.65% (YTD +9.03%), Utilities -0.97% (YTD -1.15%), REITs -0.70% (YTD -4.27%), Financials +2.09% (YTD -5.53%) and Energy +11.79% (YTD -27.84%).
European Equities
The MSCI Europe Index declined last week on uncertainty over the final outcome of “Brexit” and the derailment of talks regarding the next round of US fiscal stimulus.
Drivers: I) A “no-deal” Brexit was the most probable outcome in the UK and EC negotiations, according to statements made by UK Prime Minister Boris Johnson and President of the EC, Ursula von der Leyen. This scenario would have the UK leaving the European single market, and break trade and economic ties with its largest market. With current ties set to expire on January 1, the main issues remain fishing rights and business competition rules.
II) The ECB increased its easing program which focused on more PEPP (asset purchase program) and TLTROs (facility to support bank lending to small and medium sized enterprises affected by COVID-19). The ECB raised the limit of its PEPP purchases by €500bn to €1,850bn, and extended the purchase period till end of March 2022. The time period over which PEPP holdings will be reinvested was extended by one year to the end of 2023.
III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was lower by -1.22% for the week (MTD +1.54% YTD +2.19%).
Asian Equities
Asian equity markets mostly declined due to stalled stimulus talks in Washington, and planned US action to levy economic sanctions on several Chinese Community party members in response to Beijing’s crack down on Hong Kong dissidents. DJ Asia Index was higher by +0.82% for the week, (MTD +2.85% YTD +6.93%).
Drivers: I) In China, the November trade report showed a sizable increase in exports. Merchandise exports soared in November by 21.2% year over year, following the sharp 11.4% jump in October. Total exports posted a gain of 5.1% month over month last month, sending the sequential growth trend up to 26.2% over the last three months on a seasonally adjusted annual basis. Not surprisingly, the trade surplus with the US increased to $74.5 billion.
II) In Japan, October’s private core machinery orders exceeded expectations by jumping 17.1% month over month, the strongest monthly increase in over a decade. Manufacturer and non-manufacturer orders posted double digit monthly gains, increasing by 11.4% and 13.8% respectively. The solid gains were widespread across both sectors, which is projecting an overall increase in capex.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei fell by -0.37% (MTD +0.83% YTD +14.70%), the Hang Seng Index was lower by -1.24% (MTD +0.62% YTD -5.54%) and the Shanghai Composite declined by -2.83% (MTD -1.31% YTD +9.74%).
Fixed Income
Treasury yields fell last week as negotiations for a new stimulus bill stalled in Washington and markets were concerned about a hard “Brexit”, prompting a safe haven bid for treasuries.
Performance: I) The 10-year Treasury yield was lower last week ending at 0.897% down from 0.970%. The 30-year yield fell last week finishing at 1.625% dropping from 1.740%.
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 -0.14% and YTD +7.21%. The Bloomberg Barclays US MBS TR was higher at +0.04% last week, MTD -0.06% and YTD +3.58%. The Bloomberg Barclay’s US Corporate HY Index rallied higher by +0.18% for the week, MTD +0.97% and YTD +6.15%.
Commodities
The DJ Commodity Index advanced last week by +1.00% and is up month to date +0.55% (YTD +8.08%). Commodities prices were higher, as industrial metals led by a rally in iron ore and copper were boosted by the continued recovery in China’s PMI and overall economy which are now approaching pre-pandemic levels.
Performance: I) The price of oil rose last week by +1.02% to close at $46.56 and is higher month to date by +2.70% (YTD -23.74%). Oil prices rallied on hopes that a COVID-19 vaccine to lead to an acceleration in economic growth and demand for energy.
II) The ICE USD Index, a gauge of the U.S dollar’s movement against six other major currencies, was higher by +0.19% ending at 90.98 for the week (MTD -0.97% YTD -5.61%). The USD was slightly higher on the week due to the sharp rise in new global COVID-19 and continuing tensions between the US and China.
III) Gold was higher last week, due uncertainty over “Brexit” and the breakdown in stimulus talks in Washington. Gold rose in price by +0.08% last week, climbing to $1843.5 (MTD +3.51% YTD +21.04%).
Hedge Funds
Hedge fund returns in December are higher with all of the core strategies Equity Hedge, Event Driven, Macro/CTA, Relative Value and Multi-Strategy positive for the month.
Performance:
- The HFRX Global Hedge Fund Index is higher at +0.83% MTD (+5.12% YTD).
- Equity Hedge has advanced by +1.07% MTD (+2.04% YTD).
- Event Driven is up MTD +0.85% (YTD +7.48%).
- Macro/CTA has risen by +0.87% MTD (+2.17% YTD).
- Relative Value Arbitrage is higher by +0.52% (+7.49% YTD).
- Multi-Strategy is up MTD by +0.49% (+6.89% YTD).
Data Source: Haver Economics, Standard & Poor’s, HFR, Bloomberg, Morningstar and FactSet.
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