Economic Data Watch and Market Outlook
Global markets were in a classic tug of war last week, as rising global interest rates and declining bond prices offset the positive effect of better-than-expected US economic data, causing equities to vacillate between gains and losses. The upside surprises in US nonfarm payroll and ISM Manufacturing data, continual upgrades to global GDP and earnings growth rates, expansion of the vaccine rollout, and expected passage of the approximate $1.9 trillion US stimulus package all helped to push inflation expectations to multi-year highs and the 10-year Treasury yield briefly above 1.60% (we began the year at 0.917%). The negative rate sentiment was not quelled by Fed Chair Powell, when at the Wall Street Journal Forum last week, he stated that he and the Fed were “comfortable with the current policy stance”. This statement was not well received by global markets and investors that have been feeding voraciously at the Federal Reserve trough since the GFC. Everyone was expecting some words about rate control, or “Operation Twist” (adjust Fed bond purchases from short to longer term bonds), but none came, and the violent rotation from growth to value equities gained steam. The NASDAQ Composite came close to correction territory, while cyclicals such as energy rallied.
As we enter next week’s trading sessions, the Fed will enter its quiet period before the March policy meeting (March 16-17), but we will get some policy direction from the Bank of Canada and ECB meetings next week. It will be interesting to see if any policy changes come from the ECB, as tighter COVID-19 lockdowns in the Euro-zone since December are expected to cause a negative Q1 GDP print before a rebound in Q2. We are also awaiting the final version of President Biden’s $1.9 trillion stimulus package which is being debated this weekend by the Senate, after passage by the House of Representatives. As passage will require all 50 Democrats to vote yes, we would expect some revisions to gain passage. Democrats are seeking passage and a signing of the bill by President Biden before the COVID-19 unemployment benefits expire on March 14th. We expect markets to remain volatile as investors are trying to decide whether the rise in global rates is due to an unexpected and uncontrolled rise in inflation (bad), or an improving global economic expansion (good).
In turning to the coming week’s economic calendar, a light calendar will be centered around inflation data and consumer sentiment. We begin on Wednesday with February’s CPI which is expected to rise by 0.5%. The rise is expected to be pushed by a jumped in energy (6.0%) and food prices (0.1%). Outside of the volatility food and energy components, core CPI is projected to rise by 0.1%. The core reading would be below the pre-pandemic trend, and remains muted as the prices declines in lodging and airfares have yet to recover.
The February PPI data release on Friday is estimated to show a rise of 0.4%. The rise in energy (4.3%) and food (0.4%) are expected to be the main drivers of the increase in PPI. The core PPI is expected to rise by a more moderate 0.2%. We close out the week the University of Michigan consumer sentiment index, which is projected to increase by 3.2 points to 80.0 for March. The improvement in consumer sentiment is being prompted by the decline in COVID-19 cases and the acceleration of vaccine distribution.
The Week In Review
U.S. Equities
US equity markets were mixed as Fed Chair Powell disappointed investors by saying the “central bank’s current policy stance” is appropriate, and failed to suggest the Fed would help stem the recent rise in rates.
US Index Performance
- Dow Jones +1.85% MTD +1.85% YTD +3.29%
- S&P 500 +0.84% MTD +0.84% YTD +2.57%
- Russell 2000 -0.38% MTD -0.38% YTD +11.15%
- NASDAQ -2.06% MTD -2.06% YTD +0.25
Drivers: I) The US Non-farm Payroll in February jumped by 379,000 far exceeding the expected rise of 200,000. The report shows the US economy is re-opening, as an estimated 286,000 jobs were gained in restaurants and bars. The unemployment rate fell from 0.1% down to 6.2%, while the participation rate remained at 61.4%. Most importantly for the consumer, the average hourly earnings increased by 0.2%.
II) February’s ISM Manufacturing survey rose from 7 to 60.8, easily beating the consensus estimate of 58.5.
The February report was the strongest in over three years, with increases seen in new orders, production and employment between January and February. The positive reading is partially due to the catching up on orders delayed by the pandemic, which caused supply chain disruptions. The January report for key core capital goods also showed a strong increase in shipments (1.8%) and orders (0.4%).
III) In January, New Factory Orders jumped by 2.6% in January, boosted by a rise of 1.9% in factory goods shipments and an increase of 0.1% in inventories. The January report also showed that key core capital goods were improving with a strong increase in shipments of 1.8% and a solid gain for orders which rose by 0.4%.
IV) Construction Spending in January advanced by 1.7% which beat the Street consensus estimate rise of 0.8%. The increase in spending was propped up by the continue strong showing in private residential construction, which jumped by 2.5% in January, bringing the annual spending rate to over 20.0%. On a month over month basis, private residential construction rose by 0.4%. Public construction spending also rose by 1.7%.
V) Equities Month to Date are mixed with Large-Cap, Value, Energy, and Financials leading equity price performance. The laggards for the period are Small-Cap, Growth, Consumer Discretionary and Information Technology.
Capitalization: Large Caps +0.42% (YTD +2.48%), Mid-Caps -0.20% (YTD +5.08%) and Small Caps -0.38% (YTD +11.15%). Style: Value +3.67% (YTD +17.03%) and Growth -1.71% (YTD +5.69%). Sector Groups: Energy +10.00% (YTD +39.77%), Financials +4.37% (YTD +14.37%), Communication Services +1.57% (YTD +8.60%), Industrials +3.09% (YTD +5.43%), Materials +2.44% (YTD +4.08%), REITs -1.34% (YTD +0.89%), Healthcare +0.29% (YTD -0.44%), Information Technology -1.49% (YTD -0.86%), Technology -1.38% (YTD -0.94%), Consumer Discretionary -2.79% (YTD -2.47%), Consumer Staples +2.19% (YTD -4.12%) and Utilities +2.25% (YTD -4.87%)
European Equities
The MSCI Europe Index declined last week due to rising global bond yields that sent the 10-year German Bund to its highest level since last June (-0.286%).
Drivers: I) The first important economic report out of the Euro-zone for 2021, showed regional retail sales in January plunged by -5.9% m/m. A number of factors influenced the decline, led by Germany’s tightening of COVID-19 restrictions and the resumption of VAT which had been temporarily suspended due to the pandemic. Steep declines were seen in Austria (-16.6% m/m) and Ireland (-15.7% m/m) due to COVID lockdowns.
II) The Euro-zone’s Unemployment rate in January remained unchanged at 8.1%. The UE rate across the region is divergent, with the lowest in Germany at 4.6% and the highest in Spain at 16.0%., while France and Italy come in at 7.9% and 9.0% respectively. The UE rate never rose as high as that seen in the US during the pandemic, due to the regions part-time work subsidy schemes. These schemes helped to support workers in the hospitality and non-essential retail sectors that had coronavirus restrictions imposed on them.
III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was lower by -0.71% for the week (MTD -0.71% YTD +0.24%).
Asian Equities
Asian markets were mixed as investors were disappointed over the lack of action by the US Fed concerning soaring US interest rates. The DJ Asia Index was higher by +0.41% for the week, (MTD +0.41% YTD +6.17%).
Drivers: I) In Japan, February’s Consumer Sentiment rose by 4.2 points to 33.8, which beat the Street estimate of 32.0. This is the highest reading since November, with most of the subcomponents showing improvement, led by a 6.4-point rise in labor market conditions. The labor market has been less affected by the recent emergency lock-down versus last spring, as the UE rate actually declined in January. The rise in consumer sentiment should help to boost consumer spending in the coming months.
II) In China, the PMI Composite declined in February, with the NBS Manufacturing PMI falling by 0.7 points to 50.6. led by a broad drop in output, new order, and exports orders. The NBS Non-Manufacturing PMI declined by 1.0 points to 51.3, which coupled with the drop in Manufacturing PMI should lead to a short-term economic slowdown. However, economic activity should pick up as intra-country travel restrictions are lifted, and the global economic recovery continues to accelerate.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei fell by -0.35% (MTD -0.35% YTD +5.22%), the Hang Seng Index was higher by +0.34% (MTD +0.34% YTD +6.72%) and the Shanghai Composite declined by -0.20% (MTD -0.20% YTD +0.83%).
Fixed Income
The 10-year and 30-year Treasury yields rose to their highest levels in over a year on rising inflation expectations due to better-than-expected US economic data, and expected passage of the $1.9 trillion US stimulus package.
Performance: I) The 10-year Treasury yield rose last week ending at 1.567% up from 1.415%. The 30-year yield advanced last week finishing at 2.299% rising from 2.151%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index fell by -0.80% last week, MTD -0.80% and YTD -2.93%. The Bloomberg Barclays US MBS TR was lower by -0.08% last week, MTD -0.08% and YTD -0.67%. The Bloomberg Barclay’s US Corporate HY Index declined by -0.16% for the week, MTD -0.16% and YTD +0.54%.
Commodities
The DJ Commodity Index rose last week by +1.12% and is up month to date +1.12% (YTD +12.68%). Commodity prices rose last week as oil jumped to a year high of $66.29 per barrel, as OPEC and its allies agreed to stay will present production levels and agriculture (corn and soybeans) jumped on Brazil’s lagging harvest.
Performance: I) The price of oil rose last week by +7.51% to close at $66.29 and is higher month to date by +7.51% (YTD +36.62%). Oil rallied on the week as OPEC members agreed to continue output restricts into April, sending oil to its highest price per barrel in over two years.
II) The ICE USD Index, a gauge of the U.S dollar’s movement against six other major currencies, was higher by +1.18% closing at 92.00 for the week (MTD +1.18% YTD +2.30%). The USD advanced last week on the spike in US treasury rates and on a safe haven bid as global equities experienced volatility and declines.
III) The price of gold declined last week as the surge in interest rates and USD were value detractors from the non-yielding precious metal. Gold dropped in price by -2.01% last week, declining to $1698.1 (MTD -2.01% YTD -10.39%).
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:
- The HFRX Global Hedge Fund Index is higher at +0.10% MTD (+1.46% YTD).
- Equity Hedge advanced by +0.03% MTD (+1.80% YTD).
- Event Driven is up MTD +0.48% (+2.95% YTD).
- Macro/CTA has risen by +0.11% MTD (+0.81% YTD).
- Relative Value Arbitrage is down by -0.18% (+0.55% YTD).
- Multi-Strategy is lower MTD by -0.18% (+0.39% YTD).
Data Source: Haver Economics, Standard & Poor’s, HFR, Bloomberg, Morningstar and FactSet