Economic Data Watch and Market Outlook
Global equities saw developed markets in the US and Europe mostly lower, while gains were seen in EM and Asia. Markets were virtually trading on every news release, as the airwaves were dominated slowing US economic data, the unveiling of President-elect Biden’s stimulus plan and the true kickoff of the corporate earnings season. The recent spike in new COVID-19 cases has sparked new stringent lock-downs, stretching from the US, Europe to China and Japan. The emergency measures prompted an unexpected decline of -0.7% in December US retail sales, while weekly jobless claims jumped to 965,000 from 795,00, the highest level since March. The highly anticipated Biden stimulus plan announced on Thursday evening, called for $1.9 trillion in new aid, including $1400 in direct stimulus checks and a 33% increase in supplemental UE benefits. Equity markets traded lower on the stimulus news, as the Street expects increases to individual (top 1% of wage earners) and corporate taxes (21% to 28%) sometime in last 2021 or early 2022 to offset the massive spending. On Friday, the earnings season began with mixed results from banking giants JPMorgan, Citigroup, and Wells Fargo. But it was the digital platforms Facebook (-6%), Twitter (-12%), Apple (-3%) and Alphabet (-4%) that garnered the most attention by banning President Trump from their platform and blocking Parler from their app-stores.
As we enter next week’s trading sessions, the US corporate earnings season will be in full swing with 40 S&P 500 companies reporting. Leading the earnings parade will be financial titans Goldman Sachs, Bank of America, and Morgan Stanley, while industrials will see results from Fastenal, CSX Corp, and Union Pacific. The main themes to the earnings season are crystalizing around earnings and revenue beats, improving outlooks and positive revisions. Thus far according to FactSet, Q4 earnings outlook have improved since the beginning of the quarter from -12.7% to -8.8% and the most recent -6.8%. This follows the pattern seen in Q2 and Q3 2020, as 84% of companies beat expectations by an average of 21.3%. If earnings and revenue projections hold at current levels, the 2021 full year estimates call for a rise in earnings and revenues by 22.5% and 8.1% respectively. Despite the rosy projections, we remain cautious as last week. We hope for a peaceful transition of power during the Presidential inauguration on Wednesday, January 20th, put/call ratios remain extended, and markets are following similar price patterns from 2009 which showed a decline over the same time period.
In turning to the coming week’s economic calendar, housing will dominate the news cycle along with the release of the Markit US Manufacturing and Services PMIs. We begin on Wednesday with January’s read for the NAHB housing market index, which is expected to have increased by 1 point to 87. Homebuilder sentiment remains upbeat with low mortgage rates and the recent uptick in mortgage purchase applications.
On Thursday, December Housing starts are projected to drop by 1.1% to 1.530 million units. A decline is expected to be led by the volatile multi-family data which is estimated to have fallen by -1.8% in December after a rise of 4.0% in November.
The Markit Manufacturing PMI for January is projected to decline by 1.1 points to 56.0. The index has been rising over the past several months due to delays in supplier delivery times related to pandemic issues. January’s Markit Services PMI is expected to slide by 0.3 points to 54.5. The weakness is also most probably attributable to coronavirus related issues.
The Week In Review
U.S. Equities
US equity markets were primarily lower on the week, as markets were leery of the $1.9 trillion stimulus package from President elect Biden, which could lead to higher taxes later on in the year.
US Index Performance
- Dow Jones -0.91% MTD +0.73% YTD +0.73%
- S&P 500 -1.46% MTD +0.39% YTD +0.39%
- Russell 2000 +1.51% MTD +7.53% YTD +7.53%
- NASDAQ -1.54% MTD +0.86% YTD +0.86
Drivers: I) US Retail Sales in December fell by -0.7% which was below the expected drop of -0.1%. Sales were down -1.4% ex-autos, as consumers pulled back on spending on food and beverage services (-4.5% in December) most likely caused by the recent increase in new COVID-19 cases. Post-holiday sales were down for on-line merchants (-5.8%) as well as grocery stores (-1.7%). Income support from last month’s Response and Relief Act should support consumer spending for the remainder of Q1.
II) The Consumer Price Index (CPI) in December rose by 0.4%, with the core index ticking up 0.1%. The core CPI was up 1.6% year over year in December, as inflation remains below pre-COVID-19 levels. The important measure of tenants rent was up only 0.1% for the month or 2.3% on a year over year basis. The strong surge in used vehicles during Q3 has now declined three months in a row, including a 1.2% drop in December.
III) The PPI in December increased by 0.3%, with the core index (ex. Food and energy) up 0.1%. The reading came in below consensus estimates, was led by a rise in energy prices (5.5%), while food prices dropped (-0.1%) for the first time since August. The core index reported a solid jump in goods prices (0.5%), but a slowing in services prices (-0.1%). Recent CPI and PPI data is projecting a 1.3% annual rise for the PCE deflator in December.
IV) The reading of December’s Industrial Production beat expectations by rising 1.6%, led by a strong 0.9% increase in manufacturing output. The Q4 result for manufacturing output is a strong 11.0% annual rise for the quarter, but the measure is still about 3.0% below the annual level seen pre-pandemic. The growth in industrial production saw a surge in utilities output of 6.2% and an increase of 1.6% in mining output during the month.
V) Equities Month to Date are higher with Small-Cap, Value, Energy, and Financials leading equity price performance. The laggards for the period are Large-Cap, Growth, Consumer Staples, and Technology.
Capitalization: Large Caps +0.75% (YTD +0.75%), Mid-Caps +3.12% (YTD +3.12%) and Small Caps +7.53% (YTD +7.53%). Style: Value +6.26% (YTD +6.26%) and Growth +5.92% (YTD +5.92%). Sector Groups: Energy +12.73% (YTD +12.73%), Financials +4.86% (YTD +4.86%), Materials +4.02% (YTD +4.02%), Consumer Discretionary +3.07% (YTD +3.07%), Healthcare +3.03% (YTD +3.03%), Utilities +0.40% (YTD +0.40%), Industrials +0.22% (YTD +0.22%), REITs -0.72% (YTD -0.72%), Information Technology -1.74% (YTD -1.74%), Communication Services -2.08% (YTD -2.08%), Technology -2.12% (YTD -2.12%) and Consumer Staples -2.79% (YTD -2.79%).
European Equities
The MSCI Europe Index fell on the week as news of the President-elect Biden’s $1.9 billion stimulus plan could not offset the negative sentiment caused by the sharp increase in new global COVID-19 cases.
Drivers: I) Industrial Production in the Eurozone for November grew by 2.5% month over month, and has now grown by 16.2% during the October to November period above in Q3 rate. The sharp increase was influenced by a massive surge of 53.0% month over month in Ireland’s industrial production. The report from Ireland was affected by Brexit, which prompted companies to relocate intellectual property into the country.
II) Eurozone Retail Sales due to tightening COVID-19 restrictions, suffered a drop of -6.1% month over month. The rise in new coronavirus cases led to a closing of non-essential retail stores, and particularly impacted consumption in France and Italy. A similar trend occurred during the spring lock-downs, with a solid recovery that followed. Recent sales data from France (where lockdowns were most severe in December) is showing a rebound.
III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was lower by -2.08% for the week (MTD +1.18% YTD +1.18%).
Asian Equities
Asian equities rose last week on the back of record earnings from Taiwan Semiconductor, and strong bids for regional semi-conductor manufacturers such as Seiko Epson in Japan. The DJ Asia Index was higher by +1.34% for the week, (MTD +4.49% YTD +4.49%).
Drivers: I) In Japan, November Private core machinery orders were up a strong 1.5% month over month. The report easily beat the consensus forecast which called for a decline of -6.5%, bringing the October to November average about 72.0% above the Q3 average orders on an annual basis. Orders from non-manufacturers led with a gain of 5.6%, a third consecutive monthly gain, while manufacturers orders fell by -2.4%.
II) In China, the December trade report showed a sizable rise in export activity of 18.1% on an annual basis. For all of 2020, exports grew by 4.0% on an annual basis. On the other hand, merchandise imports fell by 2.2% month over month in December, but rose on an annual basis by 6.5%. China’s trade surplus widened to a record $78.2 billion with the US in December, up from the $75.4 billion posted in November.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei rose by +1.35% (MTD +3.92% YTD +3.92%), the Hang Seng Index was higher by +2.49% (MTD +4.91% YTD +4.91%) and the Shanghai Composite was flat at -0.10% (MTD +2.69% YTD +2.69%).
Fixed Income
Treasury yields declined last week as renewed lockdown measures in a number of states prompted by the sharp rise of new COVID-19 cases, caused December retail sales to suffer a worse than expected drop.
Performance: I) The 10-year Treasury yield fell last week ending at 1.090% down from 1.120%. The 30-year yield declined last week finishing at 1.836% dropping from 1.876%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index rose by +0.19% last week, MTD -0.76% and YTD -0.76%. The Bloomberg Barclays US MBS TR was higher at +0.12% last week, MTD +0.02% and YTD +0.02%. The Bloomberg Barclay’s US Corporate HY Index rallied higher by +0.12% for the week, MTD +0.35% and YTD +0.35%.
Commodities
The DJ Commodity Index rallied last week by +0.93% and is up month to date +4.21% (YTD +4.21%). Commodities prices continued their 2021 rally as agriculture rose due to supply/demand imbalances, and industrial metals continue to rise on strong global industrial production data.
Performance: I) The price of oil fell last week by -1.30% to close at $52.04 and is higher month to date by +7.25% (YTD +7.25%). Oil dropped last week as the new lockdowns in China due to the spike in new coronavirus cases engendered fears of a regional economic slowdown and lower 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 +0.79% ending at 90.78 for the week (MTD +0.94% YTD +0.94%). The USD rose on uncertainty over the future of Italy’s government, and news the Biden administration will push for another $1.9 trillion in fiscal stimulus.
III) Gold was lower last week after the Biden administration announced plans to propose a new $1.9 trillion COVID-19 relief plan. Gold fell in price by -1.19% last week, dropping to $1827.7 (MTD -3.55% YTD -3.55%).
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 +0.89% MTD (+0.89% YTD).
- Equity Hedge has advanced by +1.76% MTD (+1.76% YTD).
- Event Driven is up MTD +0.70% (YTD +0.70%).
- Macro/CTA has risen by +0.67% MTD (+0.67% YTD).
- Relative Value Arbitrage is higher by +0.25% (+0.25% YTD).
- Multi-Strategy is up MTD by +0.18% (+0.18% YTD).
Data Source: Haver Economics, Standard & Poor’s, HFR, Bloomberg, Morningstar and FactSet
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