Economic Data Watch and Market Outlook
Over many decades, market strategists like myself have come to learn that simply following conventional wisdom and fundamentals can be fraught with danger. Last week was a perfect example of how market and investor sentiment can over the short term, over-ride all other factors in determining asset prices. Markets started the week in listless fashion, trading within a range, awaiting the all-important release of May’s CPI data. In reality, markets have been in a stasis mode as the S&P 500 has traded within a daily range of less than 1.00% for fourteen straight sessions. This calm, drove the VIX to intraday low of 16.10 on Thursday (before hitting a year low of 15.65 on Friday) despite the BLS (Bureau of Labor Statistics) reporting that headline CPI in May hit its highest level of 5.0% on an annualized basis since August 2008. Core CPI ex-energy and food posted a 3.8% rise, the fastest jump since 1992. Inflation fears earlier in the year prompted sharp rises in equity market volatility and drove the 10-year Treasury yield from 0.917% on January 4, to an intra-day high of 1.77% on March 31. This time around, it is clear markets and investors have bought into the Fed mantra that the current and short term expected rise in inflation are transitory. A quick look at the BLS data does show that flexible priced items such as used cars (+7.0%), airline fares (+0.4%), apparel (+1.2%) and new cars (+1.6%) did account for more than 50.0% of the rise in CPI, while sticky prices such as medical care (-0.1%) and medical care commodities (0.0%) were muted. This sent the S&P 500 to an all-time high close of 4,247.44 and the 10-year Treasury yield to 1.452%. The expectation is once the current supply chain issues and supply/demand imbalances abate, inflation rates will follow suit as early as the Fall.
Heading into next week’s trading sessions, investors will have their eyes on comments from Fed Chair Jerome Powell after the FOMC June meeting, looking for clues about any discussion and timeline regarding the “tapering” of asset purchases. There are no expectations for any change to current interest rate or monetary stimulus policies. In addition, we will keep watch on the progress of potential G-20 discussions around the adoption of a minimum global tax rate of 15.0% on monies where they are earned by companies regardless of where they are domiciled. Already approved by the G-7, this ruling could adversely affect US technology companies which are also under attack by the US Congress which is considering anti-trust legislation.
In looking ahead to the economic calendar next week, the key data releases will revolve around inflation, retail sales and housing. On Tuesday, the May Retail Sales report is expected to show an increase of 0.5%. A main driver of the increase is the jump in sales related to dining (7.8%) as COVID-19 restrictions have been relaxed, and economists have seen a rise in credit card spending in the sector.
On Tuesday, the May Producer Price Index is projected to report a 0.6% rise. The main components behind the increase are forecast to be energy (1.0%) and food pries which is expected to rise by 0.6%. Industrial Product also out on Tuesday, is estimated to have increased by 0.9% in May. Manufacturing output is a main contributor, up an estimated 1.1% as motor vehicles and parts output rose by 9.1% as supply chain issues are easing a bit.
Housing Starts out on Wednesday is expected to increase by 1.4% to 1.590 mm units on an annualized basis in May. The volatile housing data has seen a recent pullback in single family home building activity, that may have be related to erratic moves we have seen in mortgage rates and the costs of building materials.
The Week In Review
U.S. Equities
US equity markets rallied as the S&P 500 recorded another record high, as investors believe the Fed will continue to remain accommodative despite CPI an annual 5.00% rate which is a 13 year high.
US Index Performance
- Dow Jones -0.78% MTD -0.10% YTD +13.65%
- S&P 500 +0.43% MTD +1.08% YTD +13.84%
- Russell 2000 +2.18% MTD +2.97% YTD +18.73%
- NASDAQ +1.85% MTD +2.34% YTD +9.16%
Drivers: I) The May readings for headline and core CPI both exceeded expectations on the month. CPI rose by 0.6% m/m, bringing the yoy rise to 5.0%, which is the highest reported level since August 2008. Core CPI-ex food and energy jumped by 0.7% m/m sending the annual rate to 3.6%, a rate not seen since 1991. The primary drivers of inflation were the rise in used vehicles and airfare, plus owner’s equivalent rent increased by 0.3% m/m.
II) The preliminary June release of the University of Michigan Consumer Sentiment index jumped from 82.9 to 86.4. The index improved but remained below the recent high seen in April and is still far below its pre-pandemic level. Of note, the one year forward inflation expectation declined from 4.6% to 4.0%. The abatement of inflation concerns is important, as consumer’s may be coalescing around the Fed stance that recent spikes in inflation are indeed “transitory”.
III) In April, the JOLTs report soared to a record 9.3 million jobs available in the US, as employers can not find enough workers to fill positions. The rise in job openings in April, was an increase from the heightened level of 8.3 million in March. An astounding record of 48.0% of small businesses cannot fill their job openings. Economists believe a lack of childcare, early retirements and generous UE benefits are the main culprits behind this trend.
IV) The May reading of the Small Business index dropped by 0.2 to 99.6. The first drop in the index this year was prompted by the inability of small businesses to fill their job openings, which is preventing these businesses from increasing sales closer to pre-pandemic levels. Small businesses will also need to content with higher inflation in the form of higher wages, which are needed to attract new workers.
V) Equities Month to Date are mixed with Small-Cap, Value, Energy, and REITs leading equity price performance. The laggards for the period are Large-Cap, Growth, Industrials, and Materials
Capitalization: Large Caps +1.20% (YTD +13.49%), Mid-Caps +1.30% (YTD +16.05%) and Small Caps +2.97% (YTD +18.73%). Style: Value +1.28% (YTD +29.64%) and Growth +1.13% (YTD +13.41%). Sector Groups: Energy +6.10% (YTD +47.62%), Financials -1.13% (YTD +27.95%), REITs +5.12% (YTD +25.51%), Materials -1.26% (YTD +19.48%), Communication Services +1.71% (YTD +17.38%), Industrials -1.50% (YTD +17.15%), Healthcare +0.77% (YTD +10.06%), Technology +2.60% (YTD +9.25%), Information Technology +2.55% (YTD +9.18%), Consumer Discretionary +0.26% (YTD +7.88%), Utilities +1.54% (YTD +6.20%) and Consumer Staples +0.26% (YTD +5.70%)
European Equities
The MSCI Europe Index rose last week as investor believe the Fed continue to delay any “tapering” talk, and the ECB announced it would keep rates unchanged and maintain its asset purchase program.
Drivers: I) The ECB at its meeting last week decided to increase by necessity, a faster rate of PEPP buying. ECB President Lagarde stated it was premature to discuss how these purchases may eventually end. The bank forecast for inflation was raised slightly over the next few years, but only sees core inflation hitting a moderate 1.4% rate by 2023. As such, additional QE is expected to help the Euro-zone reach its 2.0% inflation target.
II) The second report of Q1 2021 GDP for the Euro-zone was revised up from the previously reported decline of -2.5% on an annual basis, to +1.3% q/q. The sharp revision was due to data releases that showed strong growth from Ireland (+35.1% q/q annualized) and Greece (+18.9% q/q annualized). As the rate of vaccinations increase and number of new COVID-19 cases drop, the reopening momentum is gaining strength going into the summer.
III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was higher by +0.77% for the week (MTD +1.64% YTD +15.20%).
Asian Equities
Asian markets were mostly lower on rising US/China tensions and China’s report for May PPI which reached a 13 year high of 9.0% on a year over year basis. The DJ Asia Index declined by -0.67% for the week, (MTD +0.49% YTD +6.73%).
Drivers: I) In Japan, for April the BoJ Consumption Activity Index declined by 0.7% m/m after experiencing a solid rebound of 1.7% in March. Durable goods consumption saw a strong rise of 3.3%, while non-durable goods consumption fell by 2.5% after solid showings in both February and March. Services Consumption dropped by 0.4% due to the reinstating of a third state of emergency that began on April 25.
II) In China, the May PPI report showed an acceleration of inflation, rising 9.0% year over year which was the fastest increase since October 2008. The PBOC in a recent study revealed the acute rise in global commodity prices was caused by supply/demand imbalances, loose monetary policy and investment demand from speculators and inflation hedging. III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei rose by +0.02% (MTD +0.31% YTD +6.18%), the Hang Seng Index was lower by -0.29% (MTD -1.05% YTD +5.81%) and the Shanghai Composite declined by -0.06% (MTD -0.71% YTD +3.36%).
Fixed Income
Treasury yields fell as the 10-year yield posted its steepest weekly decline in over a year. Investors believe the rise in US inflation is transitory and there is high demand from banks and money funds flush with cash.
Performance: I) The 10-year Treasury yield fell last week ending at 1.452% down from 1.554%. The 30-year yield dropped last week finishing at 2.140% declining from 2.229%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index rose by +0.47% last week, MTD +0.60% and YTD -1.71%. The Bloomberg Barclays US MBS TR was higher by +0.09% last week, MTD +0.10% and YTD -0.63%. The Bloomberg Barclay’s US Corporate HY Index advanced by +0.50% for the week, MTD +0.78% and YTD +3.04%.
Commodities
The DJ Commodity Index rose last week by +0.59% and is higher month to date +1.02% (YTD +23.22%). Commodity prices were higher on the week as energy prices rose on an anticipated rise in demand due to the global economy re-opening, while industrial metals fell as China will consume its stockpile of metals to stem the recent rise in the country’s PPI caused by their sharp price rise in 2021.
Performance: I) The price of oil advanced last week by +2.00% to close at $70.80 and is higher month to date by +6.25% (YTD +45.92%). Oil prices rallied for a third straight week and hit a two year high, as the International Energy Agency forecast demand for energy will rise to pre-pandemic levels by year end.
II) The ICE USD Index, a gauge of the U.S dollar’s movement against six other major currencies, was higher by +0.43% closing at 90.53 for the week (MTD +0.52% YTD +0.67%). The USD rose on news that the ECB will remain accommodative, and the US Fed will permit inflation to run “hot” for a while.
III) Gold declined on the week as investors believe the Fed will remain “dovish” and amidst a risk on rally in global equities. Gold fell in price by -0.86% last week, dropping to $1877.8 (MTD -1.50% YTD -0.91%).
Hedge Funds
Hedge fund returns in June are positive for the month with all of the core strategies Equity Hedge, Event Driven, Macro/CTA , Relative Value and Multi-Strategy higher.
Performance:
- The HFRX Global Hedge Fund Index is higher by +0.43% MTD (+3.78% YTD).
- Equity Hedge advanced by +0.52% MTD (+7.17% YTD).
- Event Driven is up MTD +0.60% (+3.90% YTD).
- Macro/CTA has risen by +0.22% MTD (+2.39% YTD).
- Relative Value Arbitrage is up by +0.30% (+0.81% YTD).
- Multi-Strategy is higher MTD by +0.29% (+0.58% YTD).
Data Source: Haver Economics, Standard & Poor’s, HFR, Bloomberg, Morningstar and FactSet