Over the past few weeks, I have written about market concerns related to any signs of rising inflation or references to potential Fed “tapering”. These concerns recently manifested themselves in CPI and PPI data reaching their highest levels since 2008 and 2009, and in the release of the FOMC April minutes where several members alluded to the start of discussions regarding “tapering”. Specifically, an unexpected statement was made by some FOMC members where they agreed it may become appropriate to talk about “tapering” asset purchases “at some point in future meetings” , but the US economy was still far from achieving its duel mandate of its 2.0% inflation target and full employment. The inflation and “tapering” anxiety sent markets down through mid-week, till equity prices stabilized and rallied into Friday on Jobless Claims falling to a new pandemic low of 444k and IHS Market Composite PMI data that showed strong record levels of manufacturing and service activities. Through this consolidation phase, the S&P 500 has stayed within 4.0% of the May 17th high of 4232.6. Bitcoin in contrast is down 38.8% from its April 15th high ($63,381 to $38,800) on news of the PBOC’s proclamation that digital coins are not a “real currency” and cannot be used as a form of payment, China and US proposals to launch their own digital currency and IRS tracking of transactions in excess of $10,000.
Heading into next week’s trading sessions, we remain cautious as volatility will remain heightened with earnings season coming to an end, and investors turning their focus to Washington’s infrastructure proposals. The continued volley back and forth of infrastructure proposals has settled between an estimated $600 billion from the Republicans, and a revised $1.7 trillion from Democrats (down from original ask of $2.3 trillion). On the earnings front, companies reporting this week include technology stalwarts Intuit, NVIDIA and salesforce.com, along with retailers Best Buy, Dollar General and Costco. Thus far with 95% of S&P 500 companies having reported, 86% and 76% of companies have beaten on the top and bottom line respectively, with the average earnings beat coming in at 22.5%. The blended earnings growth rate for Q1 2021 is 51.9%, which far exceeds the March 31st earnings growth rate projection of 23.7%. On a sector basis, the strongest earnings growth has been seen from financials, consumer discretionary, communication services and information technology.
In looking ahead to the economic calendar next week, markets will pay close attention to consumer-oriented data including the Conference Board Consumer Confidence Index, Personal Income and Consumer Spending. On Tuesday, the May reading for the Conference Board Consumer Confidence Index is projected to fall by 2.7 points to 119.0. The drop to a still solid level is most likely due to the recent slowdown in the jobs data.
Thursday’s release of April’s New Orders for Durable Goods is expected to show an improvement of 0.5%, while shipments increased by 0.3%. The headline reading is expected to show a small drag caused by a drop in transportation orders from the auto sector, most probably caused by supply chain issues. The core capital goods orders reading ex-aircraft and defense are projected to show an increase of 1.5%.
Consumer Spending in April out on Friday is estimated to inch down by 0.1%, which follows the strong rise in March spending of 21.1% that was spurred on by the receipt of stimulus checks. Personal Income is expected to rise by 1.2%. Lastly, the PCE after seeing an acute increase in CPI and PPI, is projected to some a solid rise of 0.5% for the headline and core reading. The combination of “base effects” and strong monthly gain, should have the headline PCE price index rise by 3.4% and the core by 2.8% year over year.
The Week In Review
U.S. Equities
US equity markets were mixed as continued fears over persistently higher rates of inflation could lead to a reversal of the Federal Reserve’s accommodative monetary policy.
US Index Performance
- Dow Jones -0.43% MTD +1.17% YTD +12.61%
- S&P 500 -0.39% MTD -0.49% YTD +11.29%
- Russell 2000 -0.41% MTD -2.19% YTD +12.55%
- NASDAQ +0.32% MTD -3.69% YTD +4.52%
Drivers: I) Financial markets homed in on April’s FOMC minutes, finding statements that were contrary to Chair Powell press conference announcement that it was not yet time to begin “talking about talking about tapering”. In fact, a number of participants suggested that “if the economy continued to make rapid progress toward the Committee’s goals, it might be appropriate at some point to begin discussing a plan to adjust asset purchases”.
II) The April report for Housing Starts came in below expectations by falling 9.5% to 1.569 mm units versus the consensus estimate of 1.71 mm. Single family unit starts was the primary factor in the disappointing result, as it declined by 13.4%, while multifamily starts eked 0.8% higher. Housing Permits were higher by 0.3% to 1.76 mm units. Despite the recent pullback in activity, the housing market remains strong.
III) Existing Homes Sales for April came in 5.85 mm, below the 6.15 mm projection and lower by 2.7% m/m. Existing home sales have dropped for three consecutive months, after hitting 6.24 mm in February. Though sales have slowed from the hot pace seen in 2020 and earlier this year, the overall housing sector remains on solid footing.
IV) The Markit Manufacturing flash PMI survey for May rose to 61.5 from 60.5, while Services reported a sizable jump from 64.7 to 70.1. The overall data shows the economic recovery is continuing, as both surveys reached new all-time highs for the series. New orders and business were especially strong, and price measures within the surveys were higher as well.
V) Equities Month to Date are mixed with Large-Cap, Value, Energy, and Materials leading equity price performance. The laggards for the period are Small-Cap, Growth, Con. Discretionary, and Technology.
Capitalization: Large Caps -0.81% (YTD +10.70%), Mid-Caps -0.87% (YTD +12.66%) and Small Caps -2.19% (YTD +12.55%). Style: Value +1.06% (YTD +26.20%) and Growth -3.04% (YTD +10.03%). Sector Groups: Energy +5.75% (YTD +39.08%), Financials +3.64% (YTD +28.01%), Materials +4.35% (YTD +20.14%), REITs -0.88% (YTD +16.94%), Industrials +1.10% (YTD +16.60%), Communication Services -2.68% (YTD +12.47%), Healthcare +2.50% (YTD +9.89%), Utilities -0.82% (YTD +6.26%), Consumer Staples +2.07% (YTD +5.76%), Consumer Discretionary -5.73% (YTD +5.00%), Technology -2.47% (YTD +4.83%), and Information Technology -2.51% (YTD +4.76%)
European Equities
The MSCI Europe Index rose on the week as the IHS Markit PMI Composite Output Index hit a 39-month high and retail sales data out of the UK was strong.
Drivers: I) The second reading of Euro-zone Q1 2021 GDP growth was unchanged at -2.5% on a quarter over quarter basis. Growth during the earlier part of the year was negatively impacted COVID-19 restrictions which took their toll on the leisure and retail sectors. The fall in growth was exacerbated by interim factors such as severe winter weather, supply chain issuances, and Brexit disruptions.
II) The April report on Euro-zone core prices produced a drop of 0.1% month over month, bringing the core inflation rate lower by 0.2% to 0.7% on an annual basis. The reading was impacted by a 0.4% decline in services price inflation, while core goods inflation increased by 0.1%, bringing their annual rates to 0.9% and 0.4% respectively. Food price inflation was lower by 0.5%, while energy price inflation surged by 6.1% m/m.
III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was higher by +0.95% for the week (MTD +3.35% YTD +12.46%).
Asian Equities
Asian markets ended the week mixed as positive jobless claims data out of the US was offset by the decline in Japan’s Q1 real GDP due to the new wave of COVID-19 cases and restrictions. The DJ Asia Index was higher by +1.83% for the week, (MTD +0.01% YTD +4.82%).
Drivers: I) In Japan, real GDP for Q1 2021 came in below expectations by dropping 5.1% quarter over quarter, due to emergency COVID-19 measures. The largest detractor from growth was the acute 5.5% decline in capex, which saw a reduction in construction investment, while equipment investment remained strong. Private consumption was a bit weaker, falling by 5.4% reflecting the impact of the second state of emergency measures.
II) In China, April Industrial Production fell below expectations, by rising 0.5% m/m and 9.8% on an annual basis, but was a nice rebound following the 4.1% m/m decline in March. The fall back in production seems to be a product of the de-carbonization effort of the government, which caused a slowdown in production of coal, crude steel, and iron.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei rose by +0.83% (MTD -1.72% YTD +3.86%), the Hang Seng Index was higher by +1.57% (MTD -0.92% YTD +4.34%) and the Shanghai Composite declined by -0.11% (MTD +1.15% YTD +0.39%).
Fixed Income
Treasury yields ebbed and flowed last week based on investor interpretations of the April FOMC minutes that highlighted several Fed officials expressing a desire to begin discussions about “tapering”.
Performance: I) The 10-year Treasury yield fell last week ending at 1.616% down from 1.625%. The 30-year yield dropped last week finishing at 2.323% declining from 2.337%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index rose by +0.07% last week, MTD -0.02% and YTD -2.63%. The Bloomberg Barclays US MBS TR was lower by -0.03% last week, MTD -0.32% and YTD -0.87%. The Bloomberg Barclay’s US Corporate HY Index declined by -0.09% for the week, MTD -0.06% and YTD +1.88%.
Commodities
The DJ Commodity Index fell last week by -1.53% and is higher month to date +0.77% (YTD +19.41%). Commodity prices declined last week as worries over the potential reversal of an accommodative Fed led to sharp drops in previously high-flying commodities such as palladium, platinum, and timber.
Performance: I) The price of oil declined last week by -2.53% to close at $63.85 and is higher month to date by +0.57% (YTD +31.59%). Oil prices fell on the week as investors were concerned that progress towards an Iran nuclear deal would lead to an increase of 2 to 3 million barrels of new oil coming to market per day.
II) The ICE USD Index, a gauge of the U.S dollar’s movement against six other major currencies, was lower by -0.34% closing at 89.99 for the week (MTD -1.43% YTD +0.07%). The USD fell as US interest rates stabilized and on continued concerns over the growth of the US twin deficits (current account and fiscal).
III) Gold rallied for a third week in a row, as the precious metal rose on uncertainty over the recent rise in inflation and the potential Fed response, as well as the sharp decline in Bitcoin. Gold rose in price by +1.99% last week, rising to $1880.6 (MTD +6.32% YTD -0.76%).
Hedge Funds
Hedge fund returns in May are negative for the month with all of the core strategies Equity Hedge, Event Driven, Macro/CTA , Relative Value and Multi-Strategy lower.
Performance:
- The HFRX Global Hedge Fund Index is lower by -0.59% MTD (+2.34% YTD).
- Equity Hedge declined by -0.87% MTD (+4.81% YTD).
- Event Driven is down MTD -0.56% (+2.72% YTD).
- Macro/CTA has declined by -0.53% MTD (+1.09% YTD).
- Relative Value Arbitrage is down by -0.32% (+0.04% YTD).
- Multi-Strategy is lower MTD by -0.23% (-0.11% YTD).
Data Source: Haver Economics, Standard & Poor’s, HFR, Bloomberg, Morningstar and FactSet