ECONOMIC DATA WATCH AND MARKET OUTLOOK
For the third week in a row, the coronavirus and the potential for further spreading of the virus was the main driver of global markets. Mainland China as of Saturday has reported an estimated 35,000 cases and a death toll of 723. The virus has spread to approximately 25 countries and the World Health Organization (WHO) has declared the illness a “global public health emergency”. Global risk assets rose last week, perhaps on the back of two pieces of news. WHO epidemiologist, Dr. Marie Van Kerkhove, reported she has analyzed 17,000 cases provided by Chinese officials. She found that 82% of the cases were mild, 15% severe, and 3% critical. The death rate at this point is 2%. In addition, over the past few days health officials in China reported they were beginning human trails with a coronavirus vaccine and the U.S. was making progress on a vaccine as well. It is the hoped that containment of the virus and the development of a viable vaccine, could limit further potential economic downside risks to the first quarter.
As we enter next week’s trading sessions, lost in the coronavirus news cycle has been positive earnings and economic data coming out of the U.S. Thus far, with about 64% of S&P 500 companies having reported, 71% and 67% have beaten their earnings and revenue estimates respectively. More importantly, we are on track to have the first positive quarterly earnings report since Q4 2018, which now stands at 0.7%. The original December 31, 2019 Q4 earnings estimate from FactSet was for a drop of -1.7%. We also received better than expected U.S. non-farm payroll data, industrial production and factory orders. It will be interesting to see if Fed Chair Jerome Powell, in his mid-week testimony in front of the House Financial Services Committee will raise the potential negative effect the coronavirus may have of U.S. and global growth. If so, will he provide clues as to potential for rate cuts later in the year to combat a coronavirus induced economic slowdown?
In turning to next week’s economic calendar, a light calendar will be centered area inflation data, consumer sentiment and the all-important U.S. January retail sales results. The January U.S. Consumer Price Index will be released on Thursday, with the Street estimate that it rose by 0.1% and up higher by 2.4% on a yearly basis. It is believed the 0.6% drop in energy kept CPI muted. But the core index seeing a pickup in food prices, should be up 2.2% year over year in January, the softest annual change since mid-2019.
On Friday, Street estimates for U.S. Retail Sales calls for a solid increase of 0.5% in January. The labor market remained vibrant in January and with the backdrop of strong consumer sentiment, we believe favorable factors are firmly in place for consumer spending to continue to grow.
Also, out on Friday is January’s Industrial Production report which is expected to fall 0.2%. Weakness is being driven by the continued problems with Boeing’s 737 MAX production halt, which by JPMorgan’s estimate, depressed overall production by 0.7% in January. We finish the week with the University of Michigan Consumer Sentiment Index which projected to drop 0.8 points down a still healthy level of 99.0. The Index still shows high levels of consumer confidence but worries over the coronavirus may have dampened sentiment a bit.
THE WEEK IN REVIEW
U.S. EQUITIES
U.S. equity markets were higher on the week but retreated on Friday on concerns the coronavirus could continue to spread and negatively impact US multinational corporations and the global economy.
a) Dow Jones +3.06%, MTD +3.06%, YTD +2.15 b) S&P 500 +3.21%, MTD +3.21%, YTD +3.17% c) Russell 2000 +2.67%, MTD +2.67%, YTD -0.62%
Drivers: I) U.S. Non-Farm payrolls started off the year with a better than expected increase of 225,000 in January. A milder than normal winter may have bolstered construction jobs, while growth was also seen in education, healthcare and hospitality. The gain was slightly higher than the recent 211,000 average seen over the last three months, and the average hourly wage gain was a solid 0.25% which continues the recent trend like result. On an annual basis, wages grew at a 3.1% rate.
II) The Unemployment Rate in January rose a tenth to 3.6% due to more re-entrants into the workforce which pushed the Labor Participation rate up by 0.2%. The ratio of those employed versus the U.S. population rose by 0.2 points for a cyclical high of 61.2%, and the prime age employment rate (25-54) reached 80.6% which is the best level since 2001. We have started 2020 in a similar environment we had seen in 2019, solid job growth, tight labor market and income levels continuing to grow at a modest pace.
III) U.S. vehicles sales began 2020 with a strong showing by rising to 17 million seasonally adjusted annualized units. A continuing trend of increasing light truck and SUV sales were additive to sales growth, rising by 3.1%, or 383,000 units to an annualized rate of 12.5 million units. Traditional car sales continue to fall, as they were down 5.1% to 4.5 million units annually. January vehicles sales were 1.9% higher than reported in January 2019.
IV) The January ISM Manufacturing survey surprised on the upside, coming in at 50.0 versus a revised 47.8 in December. The gain placed the ISM Index above the recessionary threshold of 50 for the first time since July of 2019. New orders, production and employed all gained ground in January, while inventories dropped and remains below 50. Expectations for continued improvement in manufacturing are muted due to the halt in production of Boeing’s 737 Max Jet and likely trade disruptions caused by the coronavirus.
V) Equities Month to Date are higher with Large-Cap, Growth, Technology and Information Technology leading equity price performance. The laggards on the year are Mid-Cap, Value and Utilities.
Capitalization: Large Caps +3.16% (YTD +3.27%), Mid-Caps +2.24% (YTD +1.42%) and Small Caps +2.67% (YTD 0.62). Style: Value –2.20% (YTD -2.73%) and Growth +2.14% (YTD +0.79%). Industry Groups: Technology +4.55% (YTD +8.68%), Information Technology +4.40% (YTD +8.16%), Utilities -0.54 (YTD +6.05%), Communication Services +3.28% (YTD +3.83%), REITs +1.70% (YTD +3.14%), Industrials +3.10 (YTD +2.63%), Consumer Discretionary +2.34% (YTD +2.29%), Consumer Staples +1.72% (YTD +2.05%), Healthcare +3.91 (YTD +1.09), Financials +3.16% (YTD +0.49%), Materials +4.24% (YTD -2.24%) and Energy +0.93% (YTD -10.22%).
EUROPEAN EQUITIES
The MSCI Europe Index rose last week by +2.18% on hopes that medical researchers were making progress on a potential vaccine and treatment for the coronavirus.
Drivers: I) The Euro-zone’s December retail sales plunged by 1.6% in December, which more than fully offset November’s 0.8% increase. A majority of the decline was due to an expected correction following November’s Black Friday related increase, as the Euro-zone’s national statistical office deals with seasonality factors. Sales were down sharply across all subsectors particularly clothing and textiles.
II) German Industrial Production in December fell by a steep 3.5% m/m rate, while the yearly level dropped by 6.8%. For the fourth quarter 2019, output fell by 1.9%. Energy production increased by 2.0% for the month, but construction dove by 8.7%. Core industrial production was also poor, declining by 2.9% month over month. Disappointing factory orders and the negative effects of the coronavirus, make a Q1 recovery in German manufacturing unlikely.
III) Performance of European Indexes for the week, month-to date and year-to-date. The MSCI Europe Index was higher by +2.18% for the week (MTD +2.18%, YTD -0.39%).
ASIAN EQUITIES
Asian equity markets rose during the week as China reduced by half, tariffs on $75 billion of U.S. imports engendering optimism over the continuation of trade talk between the U.S. and China. The Dow Jones Asia Index advanced by +2.49% for the week, (MTD +2.49%, YTD -0.63%).
Drivers: I) China’s coronavirus epidemic is expected to have a noticeable negative near-term impact on the economy. Specifically, the government delayed the re-opening of factories after the Lunar New Year, plus the disruption of household spending and factory production, and a prolonging of such disruptions will bias growth risk to the downside. Along with the anticipated supply chain disruptions, the coronavirus is expected to slow Q1 GDP in China to 1.0% q/q. Should the effects of the epidemic dissipate by the end of Q1, economists are anticipating a strong rebound of 9.3% (JPMorgan) in Q2.
II) China’s government in response to the coronavirus outbreak have provided fiscal easing equivalent to 0.5% of GDP, along with monetary support (two RRR cuts and a 0.1% rate cut). As the coronavirus persists, Street economists expect additional fiscal support amounting to 0.3% of GDP, particularly aid to ailing corporations. In addition, there are expectation for one more 0.5% RRR cut and 10 bps more in policy rate cuts. Even with the fiscal and monetary support, expectations are for 2020 China GDP to fall below the 6.0% projected rate.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei was higher by +2.68% (MTD +2.68%, YTD +0.73%), the Hang Seng Index rose by +4.26% (MTD +4.26%, YTD -2.46%) and the Shanghai Composite was lower by -3.38% (MTD -3.38%, YTD -5.71%).
FIXED INCOME
Treasury yields rose last week as the U.S. Non-Farm payroll data easily exceeded Street estimates.
Performance: I) The 10-year Treasury yield was higher last week ending at 1.583% up from 1.508%. The 30-year yield climber higher last week finishing at 2.048% up from 1.998%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index was lower -0.07% last week, MTD +0.07% and YTD +1.86%. The Bloomberg Barclays US MBS TR was higher by +0.13% last week, MTD +0.13% and YTD +0.83%. The Bloomberg Barclay’s US Corporate HY Index advanced by +0.62%, MTD +0.62% and YTD +0.65%.
COMMODITIES
The DJ Commodity Index declined last week falling -0.20% and is lower month to date -0.20% (YTD -8.12%). Commodity prices were lower last week as energy prices and industrial metals dropped on continued concerns over global demand, prompted by the on-going coronavirus epidemic.
Performance: I) The price of oil dropped last week by -2.49% to close at $50.34 and is lower month to date in January by -2.49% (YTD -17.55%). Oil prices fell for a fifth straight week as potential negative effects the coronavirus may have on the global economy weighted on investors.
II) The ICE USD Index, a gauge of the U.S. dollar’s movement against six other major currencies, was higher by +1.37 ending at 98.70 for the week (MTD +1.37%, YTD +2.40%). The USD was firmer last week, boosted by positive U.S. economic data and the on-going spread of the coronavirus.
III) Gold was lower last week as better than expected U.S. economic jobs data drove the USD and interest rates higher, all negative influences for gold. Gold was lower by -1.22% last week, falling to $1573.9 (MTD -1.22%, YTD +3.33%).
HEDGE FUNDS
Hedge fund returns in February are higher with all of the core strategies, Equity Hedge, Event Driven, Macro, Relative Value and Multi-Strategy in positive territory.
Performance:
- I) The HFRX Global Hedge Fund Index is higher at +0.69% MTD and up +0.69% YTD.
- II) Equity Hedge has risen by +1.10% MTD and is up +0.77% YTD.
- III) Event Driven is higher MTD +0.41% and is up YTD +0.93%.
- IV) Macro/CTA has risen by +1.12% MTD and is up +1.95% YTD.
- V) Relative Value Arbitrage has advanced by +0.24% and is up +0.93% YTD.
- VI) Multi-Strategy is up MTD at +0.17% and is higher by +0.85% YTD.
Data Source: Haver Economics
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