Economic Data Watch and Market Outlook
Global markets rang in the new year same as it ended 2020, rallying despite the mid-week mayhem in Washington DC and the record rise in new coronavirus cases worldwide. US equities closed 2000 at record highs, despite the worse global pandemic in over a century, and slowing economic growth. In January thus far, a broadening rally saw the S&P 500, DJIA and NASDAQ new record highs on Thursday, following the Democratic win of both Senate seats in Georgia. The Democrat “hat trick” of winning the White House, House of Representatives, and the Senate, fostered dreams of more and larger fiscal stimulus once President-elect Joe Biden assumes office. Stimulus expectations pushed up equity prices and ignored the new emergency lock-downs implemented in the UK, Japan and China, and a less smooth rollout of the COVID-19 vaccine. Markets also paid little attention to the disappointing non-farm payroll report which showed a drop of 140k jobs versus a projected 50k increase. Risk assets are being propelled by the mountains of cash that are awash in the system, and January tends to see an estimated 33.0% of all capital inflows that one expects for any given year.
As we enter next week’s trading sessions, investors should be turning their attention to a heavy economic calendar and prepare for the upcoming earnings season which begins in earnest the week after. JPMorgan, Citigroup and PNC Financial will kick off the earnings season, as S&P 500 earnings estimates are being revised higher by the Street. An upward revision is atypical, as over the past five years quarterly S&P 500 earnings estimates have seen an average -4.5% downward revision. At the beginning of Q4, the original eps estimate for the S&P 500 was -12.7% and a -1.1% drop in revenues according to FactSet. The current call is for a -8.8% and +0.4% change in earnings and revenues respectively. This is a positive earnings trend and bodes well for 2021, but the S&P 500 is currently trading at a frothy 22.6 forward P/E. With high expectations for more stimulus after the January 20 presidential inauguration, lock-downs slowing growth, troubling technicals (put/call ratios at extremes) and speculative fever (bitcoin), we should expect a pullback within the next few weeks.
In turning to the coming week’s economic calendar, US inflation and retail sales data will take center stage. We start off on Wednesday with December’s CPI report, which is estimated to have risen by 0.4%. The primary drivers of the CPI’s rise are expected to be energy (4.9%), lodging (3.9%) and airfares (0.9%), each rising on the re-opening of economies.
A busy Friday begins with the December Retail Sales which are projected to have fallen by 0.4%, which follows the 1.1% decline seen in November. The downward trend has been caused by the resurgence of new COVID-19 cases and the onset of colder weather.
Also, on Friday the PPI report for December, which is estimated to have risen by 0.3%. The increase in PPI is expected to be led by a rise in energy (2.5%) and food prices (0.4%). In turning to December Industrial Production, expectations are for a solid jump of 0.8%. Leading the way is a rise in manufacturing ex-autos of 0.7% and utilities output of 2.5%. And we end the week with the University of Michigan consumer sentiment index that is projected to drop by 3.7 points to 77.0 for January. The decline was expected to be influenced by the fall in consumer attitudes due to the rise of new coronavirus cases, and the recent unrest in Washington, DC.
The Week In Review
U.S. Equities
US equity markets began the new year by rallying to new record highs, as the political sweep by the Democratic party in the US government has led to expectations of more stimulus in the coming months.
US Index Performance
- Dow Jones +1.66% MTD +1.66% YTD +1.66%
- S&P 500 +1.88% MTD +1.88% YTD +1.88%
- Russell 2000 +5.93% MTD +5.93% YTD +5.93%
- NASDAQ +2.43% MTD +2.43% YTD +2.43
Drivers: I) US non-farm payroll disappointed, as jobs decline by -140k in December versus the projected rise of 50k. Much of the drop in jobs came from bars and restaurants, which saw 372k jobs lost due to the social distancing requirements taking its toll on employment due to the recent spike in new coronavirus cases. Outside of the food service industry, things were brighter as 61% of 258 industries reported job gains.
II) The US unemployment rate and participation rate were unchanged in December, at 6.7% and 61.5% respectively. Hourly earnings increased by 0.8%, but the strength was reflective of the job losses seen in the lower paying food service industry. The broad measure of labor force underutilization, U6, fell from 12.0% to 11.7% due to the drop-in part time workers who want to work full time jobs.
III) The December ISM manufacturing survey reported an increase from 57.5 in November to 60.7. The highest reading in several decades, the report beat expectations, as there were measurable increases in orders and employment. The December data is strong, but was boosted by the increase of supplier delivery times which was probably related to issues concerning COVID-19.
IV) The December ISM services survey rose from November’s 55.9 reading to 57.2. The report exceeded Street expectations, by COVID-19’s spread is still casting a pall over the service sector. The jump in the survey may have been COVID-19 related, as the virus has increased the delivery times for suppliers. The sub-indexes for activity showed new orders improved in December while the employment index dropped.
V) Equities Month to Date are higher with Small-Cap, Growth, Energy, and Materials leading equity price performance. The laggards for the period are Large-Cap, Value, REIT’s, and Consumer Staples.
Capitalization: Large Caps +2.06% (YTD +2.06%), Mid-Caps +3.19% (YTD +3.19%) and Small Caps +5.93% (YTD +5.93%). Style: Value +4.85% (YTD +4.85%) and Growth +5.65% (YTD +5.65%). Sector Groups: Energy +9.26% (YTD +9.26%), Materials +5.67% (YTD +5.67%), Consumer Discretionary +4.91% (YTD +4.91%), Financials +4.82% (YTD +4.82%), Healthcare +3.36% (YTD +3.36%), Industrials +1.10% (YTD +1.10%), Communication Services +0.84% (YTD +0.84%), Information Technology +0.80% (YTD +0.80%), Technology +0.48% (YTD +0.48%), Utilities -0.65% (YTD -0.65%), Consumer Staples -0.89% (YTD -0.89%), and REITs -2.53% (YTD -2.53%)
European Equities
The MSCI Europe Index rallied during the first week of the new year, as the unexpected Democratic win of control of the US government led to expectations of more stimulus and a boost to global economic growth.
Drivers: I) The Eurozone composite PMI for December increased by 3.7 points to 49.1, as tight COVID-19 contact restrictions were eased across countries with the exception of Germany. Economic activity growth was led by a rise in the employment index (0.8 points to 49.1), new orders sore (4.8 points to 49.0), and future output jumped (4.1 points to 64.5). The manufacturing sector rose by 0.4 points to 56.3, while services fell by 0.9 points to 46.4.
II) The flash estimate for December core inflation in the Eurozone remained muted at 0.2%, while headline inflation was stable at -0.3%. The small rise in inflation was prompted by the 0.7% increase in services price inflation, which core goods price inflation dropped by 0.2% to -0.5%. The decline in inflation in the Eurozone has been caused by the drop in cost of airfares and accommodation services, hit by the spread of COVID-19.
III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was higher by +3.33% for the week (MTD +3.33% YTD +3.33%).
Asian Equities
Asian equity markets rose as the US Congress confirmed Joe Biden as the next US President, prompting hopes for further US stimulus. The DJ Asia Index was higher by +3.10% for the week, (MTD +3.10% YTD +3.10%).
Drivers: I) In Japan, the Bank of Japan’s November Consumption Activity Index showed strong gains despite the recent rise of new COVID-19 infections. The Index rose by 0.6% month over months, which was the fourth consecutive month of gains, bringing the index to 3.9% below its pre-coronavirus level. Durable goods consumption jumped by 4.2% and services consumption grew by 0.6%.
II) In China, the NBS manufacturing PMI meet expectations by slipping 0.2 points to 51.9, following the 0.7-point increase to 52.1 in November. The November report was the highest reading since October 2017. On a forward-looking basis, demand is still improving led by new order, though it is expected new exports orders may see a small drop. Of note, the employment index is showing increases in input prices pressures.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei rose by +2.53% (MTD +2.53% YTD +2.53%), the Hang Seng Index was higher by +2.36% (MTD +2.36% YTD +2.36%) and the Shanghai Composite advanced by +2.79% (MTD +2.79% YTD +2.79%).
Fixed Income
Treasury yields soared higher on the week as the Democratic sweep of the White House and Congress increased the odds for more fiscal stimulus. The yield curve steepened dramatically from 3 years out, sending the 10-year Treasury above the psychological barrier of 1.0% for the first time since January 2020.
Performance: I) The 10-year Treasury yield soared last week ending at 1.120% up from 0.919%. The 30-year yield jumped last week finishing at 1.876% rising from 1.633%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index fell by -0.94% last week, MTD -0.94% and YTD -0.94%. The Bloomberg Barclays US MBS TR was lower at -0.11% last week, MTD -0.11% and YTD -0.11%. The Bloomberg Barclay’s US Corporate HY Index rallied higher by +0.23% for the week, MTD +0.23% and YTD +0.23%.
Commodities
The DJ Commodity Index rallied last week by +3.28% and is up month to date +3.28% (YTD +3.28%). Commodities prices were led by a strong rise in industrial metals and global industrial production continues to improve, and Saudi Arabia’s cut in daily production boosted the price of oil.
Performance: I) The price of oil rose last week by +8.68% to close at $52.73 and is higher month to date by +8.68% (YTD +8.68%). Oil prices were higher as Saudi Arabia unilaterally reduced its daily output of oil by 1 million barrels per day.
II) The ICE USD Index, a gauge of the U.S dollar’s movement against six other major currencies, was higher by +0.15% ending at 90.70 for the week (MTD +0.15% YTD +0.15%). The USD rose as US interest rates jumped on expectations of further US stimulus and due to the unrest mid-week in Washington, DC.
III) Gold was lower last week after falling by more than 4.0% on Friday, as US interest rates rose on projections of more US stimulus. Gold fell in price by -2.40% last week, dropping to $1849.7 (MTD -2.40% YTD -2.40%).
Hedge Funds
Hedge fund returns in January 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 +0.58% MTD (+0.58% YTD).
- Equity Hedge has advanced by +1.03% MTD (+1.03% YTD).
- Event Driven is up MTD +0.55% (YTD +0.55%).
- Macro/CTA has risen by +0.51% MTD (+0.51% YTD).
- Relative Value Arbitrage is higher by +0.16% (+0.16% YTD).
- Multi-Strategy is up MTD by +0.12% (+0.12% YTD).
Data Source: Haver Economics, Standard & Poor’s, HFR, Bloomberg, Morningstar and FactSet
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