Weekly Market Commentary – March 15, 2021

Economic Data Watch and Market Outlook

Global markets in a volatile week rallied, as the S&P 500, Dow Jones Industrial Average and Russell 2000 indices hit new all-time highs. Investor concerns over rising inflation, potential central bank tightening and the increase in global interest rates prompted bouts of market volatility. But equity markets were heartened by solid bid to cover ratios for 7-year and 30-year Treasury auctions last week, and the 3-year auction saw its strongest bids since last June. Markets were also supported by final passage by the US House and Senate of the $1.9 trillion stimulus bill, which was signed into law by President Biden. In addition, the CPI report for February was muted, as the core index posted a 1.3% yoy rise. But on Friday, the markets got the first of an anticipated series of increases in inflation data, as the Producer Price Index came in at 2.8% yoy, the highest level since October 2018, while the Core PPI reading rose to 2.5%. Fed and Treasury officials have been stating that inflation data will pick up over the next few months, as inputs such as the price of energy have bounced off the lows seen during the pandemic induced recession. However, Treasury Secretary Janet Yellen refuted concerns that runaway inflation was a problem for the economy as government spending increases. The short term rise in inflation is expected to be transitory, as supply chain disruptions caused by the pandemic have increased input prices, but should be alleviated as the vaccine rollout accelerates.

As we enter next week’s trading sessions, we should continue to see the direction of asset prices pushed and pulled by changes in interest rates and improving economic growth and earnings. The 10-year Treasury yield closed at 1.629% on Friday due to rising PPI data, but recent releases of better-than-expected growth (January Retail sales +5.3% and Personal Income +10.0%) should portend higher equity prices. The support for equities has also been bolstered by Q4 earnings, as the S&P 500 has reported a 5.3% yoy increase in earnings versus the quarter end projection of a decline of -9.7%.  The sharp improvement in economic and earnings growth have provided a strong tailwind to the “reflation” trade, as cyclicals have sharply outperformed growth and technology. According to Bespoke Investment group, on a rolling six-month performance basis through early March, value has outperformed growth by 16.0%. Since 1991, there have been only five periods where value beat growth by at least 10.0% over a six-month period. Markets should remain volatile, till we see a shift in sentiment where investors realize that the strongest economic growth since the 1980’s is the primary propellant behind rising rates versus run-away inflation.  This would be a positive for risk assets.

In turning to the coming week’s economic calendar, a busy schedule will be highlighted by housing data and the all-important read of retail sales.  On Tuesday, February Retail Sales are projected to decline by 2.1%. This retraces part of the strong 5.3% jump in sales seen in January, most likely boosted by the stimulus checks received during the month.  Some of the fall can be blamed on severe winter weather seen throughout much of the US.

Industrial Production in February is estimated to have risen by 0.1%, led by a sharp rise in utilities output (6.0%) due to severe cold temperatures which drove up demand for heat. Manufacturing is expected to drop off due to the sector being impacted by supply chain disruptions related to parts shortages.

Housing starts for February are expected to fall by 3.0% to 1.52 million units, while permits are estimated to have declined by 7.0% to 1.755 million units.  Severe winter weather is the likely culprit behind the drop in starts.

The Week In Review

U.S. Equities

US equity markets were higher on the week as enthusiasm over “reflation” expectations pushed the DJIA and S&P 500 to new all-time highs, with value sectors such as financials crushing growth and technology.

US Index Performance

  • Dow Jones +4.17%  MTD +6.10%  YTD +7.60%
  • S&P 500 +2.69%  MTD +3.55%  YTD +5.33%
  • Russell 2000 +7.36%  MTD +6.95%  YTD +19.33%
  • NASDAQ +3.09%  MTD +1.03%  YTD +3.35

Drivers: I) The February reading of the US Consumer Price Index (CPI), saw the costs rise at their fastest pace in over six months, driven primarily by higher oil and gasoline prices. The CPI rose by 0.4%  m/m, and by 1.7% on a yoy basis.  Core CPI ex- energy and food was up by a moderate 0.1% m/m, and a more modest 1.3% yoy. Rises in price were seen in rent, medical care, recreation, and auto insurance.

II) The January JOLTs (Job Openings and Labor Turnover) survey reported that job openings increased to 6.92 million, versus 6.75 million in December. This is a solid report, as job openings hit its nadir during the pandemic at under 5 million jobs. The quits rate which measures worker confidence in leaving their current job to attain a new one, fell slightly in January from 2.4% to 2.3%.

III) In February, the Producer Price Index (PPI) rose by 0.5%, while the core index (ex-food and energy) increased by 0.2%.  In line with expectations, the index’s rise was led by the jump in energy (6.0%) and food prices (1.3%).  While the rise the PPI boosted the January core PCE price data, the effect of PPI on PCE inflation for February should moderate and be more trend like for the month.

IV) The preliminary March report for the University of Michigan Consumer Sentiment Index jumped from8 to 83.0, beating expectations of a reading of 80.0. The latest release is the best report since last March, but it is still lower than the pre-COVID-19 trend.  The vaccine rollout and increased fiscal  stimulus have boosted sentiment.

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, Healthcare and Technology.

Capitalization: Large Caps +3.33% (YTD +5.45%), Mid-Caps +3.60% (YTD +9.08%) and Small Caps +6.95% (YTD +19.33%). Style: Value +10.15% (YTD +24.34%) and Growth +3.88% (YTD +11.70%). Sector Groups: Energy +11.22% (YTD +41.33%), Financials +7.70% (YTD +18.01%), Communication Services +3.67% (YTD +10.84%), Industrials +6.77% (YTD +9.20%), Materials +6.94% (YTD +8.65%), REITs +4.47% (YTD +6.62%), Consumer Discretionary +3.30% (YTD +3.64%), Information Technology +0.54% (YTD +1.18%), Healthcare +1.72% (YTD +0.97%), Technology +0.51% (YTD +0.95%), Utilities +6.88% (YTD -0.56%) and Consumer Staples +4.46% (YTD -2.00%).

European Equities

The MSCI Europe Index rose last week as the US passed its $1.9 trillion stimulus bill, and the ECB stated it would accelerate its bond buying program to battle the economic fallout caused by the pandemic.

Drivers: I) The ECB agreed last week to markedly increase its PEPP purchases over the next three month relative to the €14bn/week or a bit over €60bn/month level we have seen in 2021.  The increase will be done “flexibly”, and the intent is to avoid a “tightening” of financing conditions from current levels.  The ECB stated by increasing its bond buying, they were “maintaining favorable financing conditions”.

II) Euro-zone Industrial Production in January rose by 0.8% m/m, which is 5.9% above the Q4 average on an annual basis. Industrial Production plummeted by a cumulative 28.0% in March and April 2020, but gained back 28.0% during the subsequent quarter. The rise in January brings production back to pre-pandemic levels. The improvements were seen across all sectors, with exceptions from the chemical and transport industries.

III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was higher by +3.73% for the week (MTD +2.99% YTD +3.98%).

Asian Equities

Asian markets were mixed as investors weighted the benefits of low interest rates and stimulus, versus China’s leveling of fines against 12 companies including Tencent and Baidu for violating anti-monopoly laws. The DJ Asia Index was higher by +0.41% for the week, (MTD +0.41% YTD +6.17%).

Drivers: I)  In Japan,  February’s Producer Price Index fell by 0.7% on an annualized basis, following a 1.5% drop in January and a 2.1% decline in Q4 2020.  February’s price rise was led by the increase in petroleum product prices. The rate of decline in imports prices abated, dropping by 3.5% after the sharp fall of 7.3% in January.

Export prices were positive for the first time since April 2019, increasing to 0.3%.

II) In China, exports for the period from January to February soared by 60.6% on a yoy annual basis, as shipments to Europe and the US jumped by 65.6% and 60.0%, respectively. Imports increased by 22.1% during the period after rising by 6.5% in December.  The strong export growth may be supported by China’s increase in global market share and by an earlier re-opening of factories after the Lunar New Year.

III) Performance of Asian Indexes for the week, month-to-date and year-to-date.  The Nikkei rose by +2.96% (MTD +2.60% YTD +8.34%), the Hang Seng Index was lower by -1.25% (MTD -0.91% YTD +5.39%) and the Shanghai Composite declined by -1.40% (MTD -1.60% YTD -0.58%).

Fixed Income

The 10-year and 30-year Treasury yields hit their highest levels since February 2020 and November 2019 respectively, as passage of the $1.9 trillion stimulus bill in the US engendered fears of rising inflation.

Performance: I) The 10-year Treasury yield rose last week ending at 1.629% up from 1.567%. The 30-year yield advanced last week finishing at 2.379% rising from 2.299%.

II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index fell by -0.42% last week, MTD -1.22% and YTD -3.35%. The Bloomberg Barclays US MBS TR was lower by -0.19% last week, MTD -0.27% and YTD -0.86%. The Bloomberg Barclay’s US Corporate HY Index declined by -0.06% for the week, MTD -0.22% and YTD +0.48%.

Commodities

The DJ Commodity Index rose last week by +0.14% and is up month to date +1.26% (YTD +12.83%). Commodities were driven higher as agriculture rallied due to poor harvest expectations out of South America and arid weather in the continental US, affecting the prices of corn and soybeans in particular.

Performance: I) The price of oil fell last week by -1.10% to close at $65.56 and is higher month to date by +6.32% (YTD +35.11%). Oil pulled back in price this week as the rally prompted by OPEC production cuts and increased usage of gasoline, were offset by data that showed global oil reserves were more than ample.

II) The ICE USD Index, a gauge of the U.S dollar’s movement against six other major currencies, was lower by -0.36% closing at 91.66 for the week (MTD +0.80% YTD +1.92%). The USD fell last week as core CPI data came in below the Fed target of 2.0% and risk assets ended higher.

III) The price of gold rose on the week due to rising physical demand out of Europe and increasing inflation concerns.  Gold jumped in price by +1.63% last week, rising to $1725.8 (MTD -0.41% YTD -8.93%).

Hedge Funds

Hedge fund returns in March are mixed for the month with the core strategies Equity Hedge, Event Driven positive, while Macro/CTA, Relative Value and Multi-Strategy are lower.

Performance:

  1. The HFRX Global Hedge Fund Index is lower by -0.17% MTD (+1.18% YTD).
  2. Equity Hedge advanced by +0.12% MTD (+1.90% YTD).
  3. Event Driven is up MTD +0.06% (+2.01% YTD).
  4. Macro/CTA has fallen by -0.43% MTD (+0.27% YTD).
  5. Relative Value Arbitrage is down by -0.55% (+0.18% YTD).
  6. Multi-Strategy is lower MTD by -0.57% (+0.00% YTD

Data Source: Haver Economics, Standard & Poor’s, HFR, Bloomberg, Morningstar and FactSet