Weekly Market Commentary – March 22, 2021

Economic Data Watch and Market Outlook

Last week’s outlook for market volatility was unfortunately accurate, as the bond market was clearly the tail wagging dog, as equities prices gyrated along-side sizable daily moves in rates.  Much of the anxiety inducing equity market moves have been prompted by the seemingly unperturbed stance of the Federal Reserve and its Chair Jerome Powell, regarding the rise in treasury yields and inflation expectations.  Instead of addressing investor worries that the Fed may be behind the curve in maintaining control on inflation, Fed Chair Powell doubled down on the central bank’s current view that inflation is “transitory” and does not alter the bank’s accommodative policies.  In terms of rates, Powell said the rise in treasury rates did not look to be “disorderly” and it was “only one indication of financial conditions”.  Despite the Fed’s assurance that the benchmark rate would remain in a zero bound range and the dot plot showed no rate change till 2023, the eight-week bond market rout continued as the 10-year Treasury yield reached 1.75% (14 month high) before closing at 1.726% on Friday.  The FOMC meeting last week also saw the central bank measurably altered its 2021 expectations for GDP growth (4.2% to 6.5%), unemployment (5.0% to 4.5%) and PCE Inflation (headline 1.8% to 2.4%, core 1.8% to 2.2%).  All of this short-term noise has caused the treasury price volatility to spike, as the ICE BofA Move Index hit its highest level since April 2020.  In contrast, the equity measure of volatility, the VIX reached its lowest level (20.0%) since February 2020.

Heading into next week’s trading sessions, it will be interesting to see if the markets will shift its sentiment from a rise in rates being caused by runaway inflation, to increases pushed by ever improving economic and earnings growth data.  Following the Fed’s prediction of faster GDP growth last week, Street analysts are also upgrading their expectations for corporate earnings growth.  After Q4 earnings for the S&P 500 surprised on the upside (5.2% versus Dec 31, 2020 estimate of -9.7%), corporate earnings are expected to rapidly accelerate in Q1 and Q2 according to FactSet.  Specifically, current projections call for an increase in Q1 earnings of 22.1% (up from 15.5% as of January 1, 2021) and Q2 earnings to soar by 50.7%.  It will be interesting to see if the extraordinary rise in earnings (albeit they are being compared to the nadir of earnings in Q1 and Q2 2020) will be enough to propel equity prices higher, in the face of rising treasury rates.

In looking ahead to the economic calendar next week, a busy schedule will highlight US housing, inflation, and personal spending data.  We start off on Monday with Existing Home Sales which is estimated to have dropped by -7.3% in February to 6.20 mm units on a seasonally adjusted annual rate (saar).  The reasoning behind the decline is severe winter weather in February that disrupted sales activity.

The Markit Manufacturing PMI Index on Wednesday is projected to show a rise of 1.4 points to 60.0 in the flash March report.  Regional data during the month has showed strengthening in various manufacturing sectors.  The Market Services PMI Index is expected to increase by 0.7 points to 60.5 for March.  The services sector should continue to recover as the vaccine rollout will accelerate to offset drags caused by COVID-19.

On Friday, both Consumer Spending and Personal Income will decline as the stimulus checks that boosted both in January, will see their positive influence fade in February.  Consumer Spending if forecast to fall by -0.6%, while Personal Income is estimated to have dropped by -7.6%.  Severe winter weather also played a hand in their declines.  And we close out the week with the PCE Price Index, which is expected to rise by 0.3% (1.7% annually) on the month, while the core PCE Deflator increased 0.16% (1.5% annually).

The Week In Review

U.S. Equities

US equity markets were lower during a volatile week, as the price of value and growth, large and small cap stocks were pulled up or down by the vacillation of interest rates.   

US Index Performance

  • Dow Jones -0.45%  MTD +5.62%  YTD +7.12%                   
  • S&P 500 -0.74%  MTD +2.78%  YTD +4.55%
  • Russell 2000 -2.76%  MTD +4.18%  YTD +16.04%
  • NASDAQ -0.79%  MTD +0.24%  YTD +2.54

Drivers: I) Retail Sales for February showed a decline of -3.0%, which was worse than Street estimates.  The drop was somewhat expected, after the lofty 7.6% gain in January sales, supported by $600 stimulus checks.  The fall in sales was also aggravated by severe winter weather in Texas and other regions throughout the US.

II) Industrial Production in February came in weaker than expected, falling by 2.2%. Once again, the main culprit in the poor production reading was extreme winter weather conditions. The manufacturing sector has also had to contend with continue supply chain issues, as parts deliveries are being delayed.  Within the subsectors, mining output dropped by -5.4%, while utilities output rose by 7.4% due to cold weather conditions.

III) In March , the NAHB survey fell from February’s reading of 84 to 82.  The rise in mortgage rates (30-year mortgage climbed to 3.09% from low of 2.66% on December 24, 2020) have been a recent drag on homebuilder sentiment, but it still remains at a high level by historical standards.

IV) Housing Starts in February fell by -10.3% to 1.421 million units saar, while there was a decline in Housing Permits of -10.8% to 1.682 million units.  The declines exceeded Street estimates, but were again expected due to the severe winter weather which depressed housing activity in February.

V) Equities Month to Date are higher with Small-Cap, Value, Utilities, and Industrials leading equity price performance. The laggards for the period are Large-Cap, Growth, Technology, and Info Technology

Capitalization: Large Caps +2.47% (YTD +4.57%), Mid-Caps +2.79% (YTD +8.22%) and Small Caps +4.19% (YTD +16.04%). Style: Value +8.05% (YTD +21.97%) and Growth +2.21% (YTD +9.98%). Sector Groups: Energy +2.84% (YTD +30.68%), Financials +5.92% (YTD +16.07%), Communication Services +3.83% (YTD +11.02%), Industrials +6.47% (YTD +8.89%), Materials +6.06% (YTD +7.76%), REITs +3.51% (YTD +5.65%), Consumer Discretionary +3.23% (YTD +3.57%), Healthcare +2.10% (YTD +1.35%), Information Technology -0.79% (YTD -0.15%), Technology -0.84% (YTD -0.41%), Utilities +6.53% (YTD -0.89%) and Consumer Staples +4.81% (YTD -1.67%)

European Equities

The MSCI Europe Index was lower last week on rising inflation concerns, and the continued lock-downs and slow vaccine rollout could have a deleterious affect on the region’s economic growth.

Drivers: I) The EU’s problems in trying to contain COVID-19 cases, has caused new cases to rise in Italy, Germany, and France, and has caused a continuation of lock-downs. This has caused the Street to downgrade economic growth projections for the region to a -1.0% contraction in Q1, and a decline from 13.0% to 7.5% in Q2.  With an increase in the vaccine rollout, normalization of activity is expected to begin after mid-year.

II) Euro-zone inflation in February was unchanged at 0.9% on an annualized basis (0.1% m/m), while the core reading dropped by -0.3% to 1.1% annualized (-0.1% m/m). The decline in inflation was driven by the fall in core goods price inflation (-0.5% to 1.1%) and services price inflation (-0.2% to 1.2%). Rising inflation was seen in the 2.5% increase to energy, while food price inflation slowed by -0.2%.

III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was lower by -0.12% for the week (MTD +2.86% YTD +3.85%).

Asian Equities

Asian markets were mostly higher on the week as passage of the $1.9 trillion stimulus package by the US is expected to  help spur economic growth in the region.  The DJ Asia Index was higher by +0.78% for the week, (MTD +2.25% YTD +8.11%).

Drivers: I)  In Japan, orders for Private Core Machinery fell by -4.5% m/m in January, after gains were seen over the past three consecutive months beginning in October.  Manufacturing and non-manufacturing orders declined in January, which was the first month of the renewed state of emergency, with the larger fall coming from non manufacturers, which was lower by -8.9%.

II) In China, domestic fixed asset investment has slowed due to a normalization of monetary policy, as debt issuance by local governments has been reduced. Over the past two years, real estate investment posted the strongest growth at 7.6% per annum, while investment in manufacturing rose by 1.7% and infrastructure dropped by 1.6% per annum, which was much weaker than December’s reading.

III) Performance of Asian Indexes for the week, month-to-date and year-to-date.  The Nikkei rose by +0.25% (MTD +2.85% YTD +8.61%), the Hang Seng Index was higher by +0.82% (MTD -0.09% YTD +6.26%) and the Shanghai Composite declined by -1.48% (MTD -2.98% YTD -1.97%).

Fixed Income

Treasury yields were higher on the week as the Federal Reserve did not extend an exemption that allowed banks to exclude Treasuries held with the central bank as part of their calculated capital requirements.  The expiration of the supplementary leverage ratio on March 31, could reduce bank appetite to hold treasuries.

Performance: I) The 10-year Treasury yield rose last week ending at 1.726% up from 1.629%. The 30-year yield advanced last week finishing at 2.438% rising from 2.379%.

II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index fell by -0.28% last week, MTD -1.49% and YTD -3.61%. The Bloomberg Barclays US MBS TR was lower by -0.36% last week, MTD -0.62% and YTD -1.21%. The Bloomberg Barclay’s US Corporate HY Index declined by -0.53% for the week, MTD -0.75% and YTD -0.05%.

Commodities

The DJ Commodity Index fell last week by -1.75% and is lower month to date -0.48% (YTD +10.89%).  The decline in commodities were led by a sharp decline in oil prompted by further lockdowns in the Euro-zone, and by China’s plan to reduce carbon emissions leading to less demand for steel related commodities such as iron ore.

Performance: I) The price of oil fell last week by -6.28% to close at $61.44 and is lower month to date by -0.36% (YTD +26.63%). Oil suffered its worse weekly decline since October, as extended lockdowns and slow vaccine rollout in Europe could adversely affect the demand for oil.

II) The ICE USD Index, a gauge of the U.S dollar’s movement against six other major currencies, was higher by +0.34% closing at 91.97 for the week (MTD +1.14% YTD +2.27%). The USD rose last week as interest rates rose and the US Fed upgraded its 2021 GDP growth projections to 6.5% and core inflation to slightly above 2.0%.

III) The price of gold posted its best gain the three weeks as interest rates stabilized on Friday,  and inflation and equity market volatility concerns drove the precious metal higher.  Gold jumped in price by +0.99% last week, rising to $1742.9 (MTD +0.57% YTD -8.03%).

Hedge Funds

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

Performance:

  1. The HFRX Global Hedge Fund Index is higher by +0.41% MTD (+1.77% YTD).
  2. Equity Hedge advanced by +1.23% MTD (+3.02% YTD).
  3. Event Driven is up MTD +0.43% (+2.40% YTD).
  4. Macro/CTA has risen by +0.32% MTD (+1.03% YTD).
  5. Relative Value Arbitrage is down by -0.45% (+0.27% YTD).
  6. Multi-Strategy is lower MTD by -0.51% (+0.05% YTD)

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