Economic Data Watch and Market Outlook
After spending over three plus decades in the financial industry, investment strategists (like myself) are constantly being humbled that despite our seemingly prescient prognostications, the markets are always right. Over the past several weeks I have written about the elephant in the room that could reverse the strong global equity rally. Many of us thought it would take the form of “tapering” from the Fed, when in reality it was the bond market that reminded us that equites hate unexpected surges in interest rates. Wall Street pundits coming into 2021, predicated the 10-year Treasury yield would top out at about 1.25% by year end. Well, we not only hit that level early (1.316% on February 16th), but zoomed passed it as the 10-year Treasury touched 1.61% on Thursday. The flood of US monetary and fiscal stimulus ($4 trillion and $3 trillion respectively and counting), strong economic data (personal income +10%) and upward revisions for Q1 GDP and corporate earnings have sent inflation expectations higher. With the 10-year Treasury yield having risen from 0.917% at the beginning of the year to Friday’s close 1.415%, equities seemed less attractive, particularly as the bond yield exceeded the S&P 500 dividend yield of 1.40% for the first time in recent memory. The tech laden NASDAQ suffered its worse monthly decline since October, as a higher discount rate debases the value of their future earnings. On the positive side, the rotation into value continued on reflation expectations, as energy, industrials and financials posted strong performance for the month.
As we enter next week’s trading sessions, we will await the outcome of the Senate vote on President Biden’s $1.9 trillion stimulus bill, as the House of Representatives predictability passed the legislation on Friday. Markets will also look for a stabilization in treasury rates after a roller coaster ride last week. The hope is the bond vigilantes will be satisfied with the assurances provided by Fed Chair Powell last week, that the central bank will remain accommodative as the US economic recovery is “uneven and far from complete.” Powell provided further “dovish” comments regarding rates by saying the Fed’s inflation target of 2.0% will take “more than three years to hit.” Should interest rates recede from recent highs and with equity markets technicals improving after the recent consolidation, equities can move higher on the back of rapidly improving economic and earnings data.
In turning to the coming week’s economic calendar, a busy week of data releases will be centered around ISM Composite Survey and the Non-Farm Payroll report. We start off on Monday with February’s reading of the ISM Manufacturing Survey which is forecast to rise by 0.3 points to 59.0.
The ISM Services Survey out on Wednesday, is expected to slip by 0.2 points down to 58.5. The services sector is still recovering from the drag caused by COVID-19 but should improve as the vaccine roll-out expands.
On Friday, the Non-Farm Payroll report for February is projected to show an increase of 200,000 jobs. The surge in new COVID-19 cases in December and January were a drag on job creation, but the recent decline in new cases should prompt a rise in employment. It is expected the unemployment rate should hold steady at 6.3%, and the participation rate it expected to be unchanged at 61.4%.
The Week In Review
U.S. Equities
US equity markets declined as treasury bonds rates jumped to their highest level in over a year, due to rising inflation concerns and better than expected economic data. Large cap technology continued to sell-off.
US Index Performance
- Dow Jones -1.70% MTD +3.43% YTD +1.41%
- S&P 500 -2.41% MTD +2.76% YTD +1.72%
- Russell 2000 -2.87% MTD +6.23% YTD +11.58%
- NASDAQ -4.92% MTD +1.95% YTD +2.36
Drivers: I) US equity markets experienced sharp declines last week, due to an outsized rise in US treasury note and bond yields. The catalyst behind the rate move was the $62 billion 7-year Treasury auction last Thursday, which saw the worse bid to cover ratio (2.04 dollars to buy for each dollar of bonds issued) since 2009. The poor auction sent the 10-year Treasury yield from 1.382% on Wednesday to 1.525% at the close of Thursday trading (intra-day high on Thursday was 1.61%).
II) In January, New Single Family Home Sales jumped by 4.3% to 923,000 on a seasonally adjusted annual rate. The reading beat Street expectations, but sales have moderated since hitting a recent high of 979,000 units sold last July. Though recent monthly sales data has been volatile, the housing market continues to show strong levels of activity, boosted by 30-year mortgage rates still remains below 3.0%.
III) The month of January saw a surge in Personal Income of 10.0%, with support coming from the Federal stimulus package approved in December. Specifically, stimulus checks are estimated to have provided $1.7 trillion on income in January, and the federal supplement to unemployment benefit accounted for about $300 billion. The rise in income, has continued to prompt a rise in consumer savings, as the savings rate jumped from 13.4% in December to 20.5% in January.
IV) The Personal Consumption Expenditures (PCE) price index in January, remained muted coming in at o.3%. Though the reading was slightly above Street expectations, the broader core PCE price trend remains subdued at a 5% over year annual rate. The headline PCE measure also rose by 0.3% and was up a similar 1.5% on an annualized basis.
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, Utilities and Healthcare.
Capitalization: Large Caps +2.90% (YTD +2.05%), Mid-Caps +5.57% (YTD +5.29%) and Small Caps +6.23% (YTD +11.58%). Style: Value +9.93% (YTD +12.88%) and Growth +4.22% (YTD +7.53%). Sector Groups: Energy +22.44% (YTD +27.06%), Financials +11.46% (YTD +9.58%), Communication Services +7.16% (YTD +6.92%), Technology +1.53% (YTD +2.06%), REITs +1.53% (YTD +2.06%), Industrials +6.87% (YTD +2.27%), Materials +4.06% (YTD +1.60%), Information Technology +1.40% (YTD +0.64%), Consumer Discretionary -0.44% (YTD +0.33%), Healthcare -2.11% (YTD -0.73%), Consumer Staples -1.26% (YTD -6.18%) and Utilities -6.10% (YTD -6.96%)
European Equities
The MSCI Europe Index declined last week as rising interest rates in the Euro-zone engendered fears that higher borrowing costs would choke off any recovery in the region’s fragile economy.
Drivers: I) ECB President Christine Lagarde speaking at a session of the European Parliament last week, commented on the recent surge in sovereign yields. She stated that the ECB is looking at a number of indicators to assess whether financial conditions were still supportive to the Euro-zone economy, including the risk free OIS (overnight index swap rate-central bank lending rate) rates and sovereign yields which play an important role in monetary policy.
II) The Q4 2020 GDP reading for Germany came in at 4% growth rate on a quarter over quarter, seasonally adjusted annual rate. Despite the upside move, Street estimates still call for a 5.0% contraction for Q1 2021. Details show that a decline in GDP will be due mostly to a projected 12.7% q/q plunge in consumer spending, and a 2.0% decline in government consumption.
III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was lower by -2.20% for the week (MTD +2.44% YTD +0.96%).
Asian Equities
Asian markets fell as global interest rates rose and Hong Kong raised it individual stock transaction fees by 30.0%. The DJ Asia Index was lower by -4.08% for the week, (MTD +4.10% YTD +5.73%).
Drivers: I) In Japan, industrial production posted better than expected results for January, jumping by 4.2% m/m. Street estimates had called for a drop of 0.5%, but an expected decline in auto production due to a shortage of semiconductors did not occur. In fact, auto production rose by 3.7%, while general machinery and production machinery saw gains of 11.7% and 8.1% respectively.
II) In Taiwan, the strength in exports continued to exceed expectations, as January showed a rise of 49.3% on year-to-year basis annualized rate. The primary drivers to the growth in exports has been the demand for semi-conductors in the tech sector, while non-technology orders also grew by a solid 2.1% m/m, seasonally adjusted annual rate.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei fell by -3.47% (MTD +4.75% YTD +5.59%), the Hang Seng Index was lower by -5.47% (MTD +2.42% YTD +6.36%) and the Shanghai Composite declined by -5.06% (MTD +0.75% YTD +1.04%).
Fixed Income
The 10-year and 30-year Treasury yields soared to their highest levels in over a year, as the 7-year Treasury auction had its worst bid-to-cover ratio (2.04) in history, and on rising economic and inflation expectations.
Performance: I) The 10-year Treasury yield rose last week ending at 1.415% up from 1.339%. The 30-year yield advanced last week finishing at 2.152% rising from 2.133%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index fell by -0.35% last week, MTD -1.44% and YTD -2.15%. The Bloomberg Barclays US MBS TR was lower by -0.29% last week, MTD -0.67% and YTD -0.59%. The Bloomberg Barclay’s US Corporate HY Index declined by -0.59% for the week, MTD +0.37% and YTD +0.70%.
Commodities
The DJ Commodity Index rose last week by +0.52% and is up month to date +7.53% (YTD +11.43%). Commodity prices resumed their rally on continued improvement in global economic data and the increase in demand for industry metals such as copper and platinum.
Performance: I) The price of oil rose last week by +4.49% to close at $61.66 and is higher month to date by +18.36% (YTD +27.08%). Oil rallied on the week, on expectations of a rise in demand from an accelerating global economy and OPEC members will agree to continue output restricts at their summit next week.
II) The ICE USD Index, a gauge of the U.S dollar’s movement against six other major currencies, was higher by +0.65% closing at 90.93 for the week (MTD +0.44% YTD +1.11%). The USD rose last week as global interest rates soared on increasing concerns over rising inflation and mounting government debt.
III) The price of gold declined last week and experienced its worst monthly drop in over four years as global interest rates soared to their highest levels in over a year. Gold dropped in price by -2.81% last week, declining to $1733.0 (MTD -6.31% YTD -8.55%).
Hedge Funds
Hedge fund returns in February 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 at +1.86% MTD (+1.69% YTD).
- Equity Hedge advanced by +3.09% MTD (+2.02% YTD).
- Event Driven is up MTD +1.58% (+2.21% YTD).
- Macro/CTA has risen by +2.29% MTD (+1.70% YTD).
- Relative Value Arbitrage is higher by +0.51% (+0.83% YTD).
- Multi-Strategy is up MTD by +0.39% (+0.64% YTD).
Data Source: Haver Economics, Standard & Poor’s, HFR, Bloomberg, Morningstar and FactSet