Economic Data Watch and Market Outlook
Equity markets in the US fell in all five trading sessions last week, as the stock indexes experienced their worst weekly decline since mid-June. A torrent of headwinds buffeted equities including the poor non-farm payroll report for August (235K jobs versus a projected gain of 725k), economists downgrading global GDP growth due to the spread of the Delta variant, concerns over US stock valuations and the seasonality factor. I touched on the seasonality factor last week, but in short, September historically has been the worst performing month for the S&P 500 since 1928, posting on average a -1.00% loss. In the months where the index has been negative (54.0% of the time), the S&P 500 has suffered an average decline of -4.6% according to Yardeni Research. Adding to the negative tone, push back from a number of moderate Democrats have put the $3.5 trillion stimulus package in jeopardy, and China continued their regulatory crackdown, this time suspending the approval of any new video games and reining in leading and sales in the real estate sector. Weakness was seen across the board, but economically sensitive cyclical and value stocks were impacted the most.
Heading into next week’s trading sessions, market volatility should remain heightened as “quadruple” witching will take place on Friday with the expiration of futures and options on the equity indexes and individual stocks. The US Federal Reserve will be entering its “quiet period” before the scheduled FOMC meeting to take place on September 21 and 22, as investors will be looking for clues as to the potential time frame when tapering will occur. And investors will be on edge as no less than five prominent Wall Street firms have called for an equity market correction, due to concerns over the Delta variant and softening economic data. It will be interesting to see if the buy on the dip contingent, or those calling for a greater than a 5.0% decline for the first time since October of 2020 will win the battle of wills.
In looking ahead to the economic calendar next week, a busy calendar will focus on August CPI and retail sales data. On Tuesday, the August CPI is projected to rise by 0.4% and 5.4% on an over year annualized basis, while the core rose 0.31% and 4.2% over the year. The primary drivers are expected to be energy (1.6%) and food (0.5%).
On Wednesday, the reading for August Industrial Production is expected to show a rise of 0.5%. Manufacturing output is projected to rise by 0.4% with motor vehicles parts production jumping higher by 1.1%. Utilities output is also expected to rise by 1.4% as electricity demand rose due to hot weather conditions.
August retail sales released on Thursday, are estimated to have dropped by 0.2%, with autos and parts dealers the leading culprits, falling by 4.0% in August.
Closing the week on Friday, University of Michigan Consumer Sentiment Index is projected to improve by 1.7 points to 72.0 in September. The sentiment indicator plunged in August (81.2 to 70.3) as consumer attitudes worsened due to the spread of the Delta variant and concerns over inflation.
The Week In Review
U.S. Equities
US equity indexes suffered their worse weekly decline since mid-June, as the Biden administration caused stocks to sink due to a proposal to levy a tax on corporate share buybacks, and the potential opening of an investigation into Chinese government corporate subsidies which could raise already heightened tensions.
US Index Performance
- Dow Jones -2.11% MTD -2.06% YTD +14.63%
- S&P 500 -1.68% MTD -1.37% YTD +19.91%
- Russell 2000 -2.80% MTD -2.01% YTD +13.50%
- NASDAQ -1.61% MTD -0.93% YTD +17.28%
Drivers: I) The Biden Administration is considering the launching of an investigation under US trade law, targeting Beijing’s use of boundless subsidies to support domestic companies, which in many cases provides them with a competitive advantage. The administration is attempting to team up with the EU, Japan, and other Asian allies, and find support within the World Trade Organization to support this cause.
II) The Producer Price Index (PPI) for August rose by 0.7%, while the core reading ex-energy and food increased by 6%. Both the headline and core index continue to increase at a steady pace, but both were down from the 1.0% jump seen in July. With the solid sequence of price increases, the headline PPI has risen 8.3% over the year on an annualized basis, while the core has increased by 6.7%. There has been a moderation in used vehicle prices, which had surged for much of the year. This could help soften the next reading for the PCE price index.
III) The Federal Reserve’s Beige Book (commentary on current economic conditions by the 12 Federal Reserve Districts), reported that in some parts of the US, businesses were able to pass on the rise in input costs caused by supply chain bottlenecks by raising prices for goods they sold. The rise in Delta variant cases has caused a slowdown in dining out and travel, however manufacturing and transportation sectors remained strong.
IV) The JOLTs report for July showed a rise of 749,000 job openings to 10.943 mm, highlighting the continued demand for labor despite the spread of the Delta variant. The number of jobs openings is the highest on record, dating back to December 2000. The ratio of job openings to hires, which measures the tightness of the labor market and the ease which businesses can attain workers rose to a historical high of 1.64.
V) Equities Month to Date are mixed with Large-Cap, Growth, Utilities, and Consumer Discretionary leading equity price performance. The laggards for the period are Small-Cap, Value, Financials, and Materials
Capitalization: Large Caps -1.34% (YTD +19.12%), Mid-Caps -1.38% (YTD +18.47%) and Small Caps -2.01% (YTD +13.50%). Style: Value –3.30% (YTD +22.00%) and Growth -1.68% (YTD +14.16%). Sector Groups: REITs -1.73% (YTD +30.18%), Energy -1.30% (YTD +28.65%), Financials -2.13% (YTD +28.59%), Communication Services -1.19% (YTD +23.63%), Technology -1.41% (YTD +20.74%), Information Technology -1.44% (YTD +20.19%), Healthcare -1.51% (YTD +18.18%), Materials -1.89% (YTD +17.01%), Industrials -2.46% (YTD +15.73%), Consumer Discretionary -0.43% (YTD +14.05%), Utilities -0.17% (YTD +10.77%), and Consumer Staples -0.55% (YTD +7.76%)
European Equities
The MSCI Europe Index declined last week as the ECB decided to reduce the pace of its bond purchases, and over concerns the spread of the Delta variant may slow the economic recovery.
Drivers: I) The ECB last week as widely predicted, reduced the size of PEPP (pandemic emergency purchase program) over the next three months. The central bank believes that “favourable financing conditions can be maintained with a moderately lower pace of net asset purchases under PEPP than in the previous two quarters.” Expectations are for purchases to drop from €80bn/month and about €60bn/month. The ECB projects GDP growth and inflation in 2022 to be 4.6% and 1.4% respectively.
II) The final report for Euro-zone Q2 2021 GDP produced an increase from 8.2% q/q to 9.2%. The rise in growth was driven by a sharp jump in household consumption (15.8% annualized rate), which was supported by the lifting of COVID restrictions during the quarter. An increase in production was additive, as the retail, transport, lodging, and food sector benefited from the halt to restrictions, rising by 20.5% on an annual basis.
III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was lower by -1.54% for the week (MTD -0.65% YTD +14.84%).
Asian Equities
Asian markets posted gains last week, as the region’s stock indexes experienced a technical bounce despite reports the Chinese government was imposing more regulations on the gaming and real estate sectors. The DJ Asia Index rose by +1.47% for the week, (MTD +2.77% YTD +6.37%).
Drivers: I) In Japan, the survey of small business sentiment (Economy Watchers’ survey) fell far below expectations, by declining 13.7 points to 34.7 versus the consensus estimate fall of 3.4 points. The survey’s poor report was caused by a decrease in summer related travel and trips to amusement businesses due to COVID restrictions. Production lagged due to supply chain bottlenecks.
II) In China, trade activity in August grew by 25.6% yoy annualized, which beat the consensus estimate of a 17.3% rise. For the month, exports rose by 3.8% m/m, a nice rebound after declining by 1.2% m/m in July. Export sector growth was carried by an increase in shipments of lower end consumer goods (4.5% m/m) and technology products (1.3% m/m). Regionally, exports to the US grew by 2.9% m/m, and to the EU by 5.0% m/m.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei rose by +4.30% (MTD +8.16% YTD +11.67%), the Hang Seng Index was higher by +1.12% (MTD +1.35% YTD -4.06%) and the Shanghai Composite advanced by +3.39% (MTD +4.49% YTD +6.62%).
Fixed Income
Treasury yields mostly rose across the curve as wholesale inflation moderated in August, and bond investors are still awaiting the Fed’s taper decision in the coming months.
Performance: I) The 10-year Treasury yield rose last week ending at 1.335% up from 1.324%. The 30-year yield declined last week finishing at 1.933% falling from 1.944%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index rose by +0.02% last week, MTD -0.05% and YTD -0.74%. The Bloomberg Barclays US MBS TR was higher by +0.01% last week, MTD +0.02% and YTD -0.30%. The Bloomberg Barclay’s US Corporate HY Index rose by +0.11 for the week, MTD +0.30% and YTD +4.86%.
Commodities
The DJ Commodity Index declined last week by -0.08% and is higher month to date +0.69% (YTD +23.11%). Commodity prices as the rise in energy prices due to a supply/demand imbalance, was offset by the decline in metals such as iron ore due to the growth slowdown in China.
Performance: I) The price of oil jumped last week by +0.72% to close at $69.59 and is higher month to date by +1.81% (YTD +43.74%). Oil rallied on the week as US inventory levels fell below their five year average, and with production still offline due to Hurricane Ida, both the US and China released oil from their strategic reserves.
II) The ICE USD Index, a gauge of the U.S dollar’s movement against six other major currencies, was higher by +0.66% closing at 92.64 for the week (MTD +0.12% YTD +3.01%). The USD rose last week on continued expectations that the Fed will taper some time this year, and on fallen global growth concerns.
III) The price of gold declined last week due to the rise in US rates and strength of the US dollar. Gold fell by -2.21% last week, declining to $1789.5 (MTD -1.54% YTD -5.90%).
Hedge Funds
Hedge fund returns in September are primarily positive with core strategies Equity Hedge, Event Driven, and Relative Value higher, while Macro is lower.
Performance:
- The HFRX Global Hedge Fund Index is up by +0.14% MTD (+4.12% YTD).
- Equity Hedge rose by +0.27% MTD (+10.10% YTD).
- Event Driven is higher MTD +0.24% (+2.52% YTD).
- Macro/CTA has declined by -0.10% MTD (+1.20% YTD).
- Relative Value Arbitrage is up by +0.20% (+0.99% YTD).
- Multi-Strategy is positive MTD by +0.01% (+0.71% YTD).
Data Source: Haver Economics, Standard & Poor’s, HFR (returns have a two-day lag), Bloomberg, Morningstar and FactSet