Economic Data Watch and Market Outlook
The price action of financial markets for a fourth straight week was dominated by concerns over the now designated COVID-19 virus (by the WHO) and its potential negative impact on global economic growth. Global risk assets slide lower on Thursday when China announced a massive jump of over 15,000 new cases of the virus and 254 additional deaths. This brought the total number of COVID-19 cases to over 64,000 with an estimated 1300 deaths. Economists are worried about the severity of the decline in economic growth in China for Q1, and the spillover effect on the global economy. During the SARS outbreak in 2002 and 2003, China accounted for only 5% of the global economy, but at $14.1 trillion as estimated by the IMF in 2019, China is now 16% of global commerce. China’s impact will be on the global supply chain, which includes low cost intermediary products for high tech companies, and electrical and electronic finished goods.
As we enter next week’s trading sessions, we are heading into the home stretch of the corporate earnings season. Flying under the radar as the COVID-19 virus has dominated the headlines, earnings for 389 S%P 500 have been released (78%) and the results have surprised on the upside. Earnings have grown at a 1.3% yoy rate, while revenues have risen by 3.6%. This is an improvement from the Q3 results of -0.8% for earnings and 3.4% gain for revenues. The results have exceeded the original December 31, 2019 S&P 500 earnings projection of -1.7%, and this would be the first positive quarter for earnings since Q4 2018. Leading the way has been the Information Technology sector which has added $5.4 billion of the net $8.5 billion in earnings seen from the S&P 500. Leadership amongst individual companies are a few familiar names, Apple, Microsoft, Intel, Alphabet and Amazon. Should corporate earnings continue their positive trend, will it be enough to minimize volatility and downside risk that the COVID-19 virus still poses?
In turning to next week’s economic calendar, a President’s Day shorten week will be dominated by housing and inflation data. On Wednesday January PPI will be released with the Street expecting no change to the inflation index. Declines are expected for energy prices (-0.6%) and food prices (-0.2%), while the core ex-energy and food is projected to uptick by 0.1%. The decline in energy are related to the declines in gasoline and natural gas prices.
Also, out on Wednesday is January Housing Starts where the Street estimate calls for a decline of 12.3% to 1.410 million units in January, while related permits increased by 3.5% to 1.47 million units. Housing starts saw a sharp gain of 16.9% in December, mostly likely due to the warmer than normal weather, and economists expect a partial reversal of Decembers gains.
Closing out the week is Existing Home Sales for January, where the Street is forecasting sales dropped by 3.4% to 5.35 million units. The decline in mortgage rates recently boosted sales, and December was the strongest month for existing home sales in over two years.
The Week In Review
U.S. Equities
US equity markets rose last week as investors balanced solid earnings reports from the S&P 500 versus the on-going COVID 19 concern and the potential drag it can have on the global economy.
a) Dow Jones +1.17%, MTD +4.27%, YTD +3.34 b) S&P 500 +1.65%, MTD +4.91%, YTD +4.87% c) Russell 2000 +1.90%, MTD +4.62%, YTD +1.27%
Drivers: I) The Consumer Price Index rose by 0.1% in January as inflationary pressures remain muted and should keep the Fed in neutral for the foreseeable future. Energy was a drag, declining by 0.7% with gasoline prices dropping 1.6% for the month. The CPI for food was higher for a second month up 0.2%. Excluding food and energy, the CPI was up 0.2% which matched the consensus estimate, and on a yoy basis, was up 2.5%. The core CPI rose by 2.3% on a year ago basis in January.
II) U.S. Retail sales in January remained strong, although weather related factors may have boosted sales. Retail sales were up 0.3% following a 0.2% increase in December. Vehicle sales were a slight drag along with a decline in gasoline sales. Weakness was seen apparel sales which plunged 3.1% after seeing a sharp 2.7% rise in December. Strong growth was seen at building supply stores and restaurants, which may have been weather related.
III) U.S. Industrial Production in January dropped by -0.3% with a main detractor being Boeing due to the company’s decision to stop production of the 737 MAX Jet. The reading met Street consensus expectation, as manufacturing output fell -0.1% but excluding the production of civilian aircraft it was up 0.3%. Capacity utilization fell by -0.3% to 76.8%. Manufacturing utilization decline from 75.2% to 75.1%. In short, the production stoppage at Boeing of the MAX Jet is distorting the industrial production reading.
IV) The University of Michigan Consumer Sentiment survey come in at a strong 100.9, up from 99.8 in January. The reading was the strongest seen in over two years, as it shrugged off any concerns from the COVID-19 virus. The expectations index drove the survey’s gain, climbing 2.1 points from January, while the current conditions component fell 1.1 points. Inflation expectations remained muted, with the 12 month expectation unchanged at 2.5% and the five-year expectation dropped from 2.5% to 2.3%.
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, Energy and Utilities.
Capitalization: Large Caps +4.98% (YTD +5.09%), Mid-Caps +4.52%(YTD +3.68%) and Small Caps +4.62%(YTD +1.27). Style: Value +3.90% (YTD -1.09%) and Growth +4.77% (YTD +3.38%). Industry Groups: Technology +6.93% (YTD +11.15%), Information Technology +6.78% (YTD +10.63%), Utilities +2.05%(YTD +8.81%), REITs +6.72%(YTD +8.22%), Communication Services +5.35% (YTD +5.91%), Consumer Discretionary +5.02% (YTD +4.97%), Industrials +4.33% (YTD +3.86%), Consumer Staples +2.57% (YTD +2.90%), Healthcare +4.85% (YTD +2.00), Financials +3.95% (YTD +1.26%), Materials +5.04%(YTD -1.49%) and Energy +2.05 (YTD -9.22%).
European Equities
The MSCI Europe Index rose last week by +0.25% as the continuation of stimulus from the ECB supported stock prices, offsetting the negative economic data out of the Euro-zone and Germany.
Drivers: I) Euro-zone industrial production in December plunged by 2.1% m/m, after seeing zero growth in November. The decline was in line with Street expectations due to the poor individual country data releases last week. Specifically, production dropped by 2.5% m/m in Germany, 2.9% in France, 2.7% in Italy and by 1.5% in Spain. Several countries mentioned a number of holidays and the month’s warmer than normal weather which depressed energy use and production as main culprits for the production decline.
II) Eurostat reported that Euro-zone employment for Q4 2019 increased by a 1.1% annual rate, which was in line with averages seen in the previous three quarter. However, over a longer time frame, employment growth has been trending down, as employment gained 1.7% in 2017, and 1.4% in 2018. But employment growth has continued to be stronger than labor force growth, leading to a drop in the unemployment rate.
III) Performance of European Indexes for the week, month-to date and year-to-date. The MSCI Europe Index was higher by +0.25% for the week (MTD +2.43%, YTD -0.14%).
Asian Equities
Asian equity markets were higher on the week as China cut tariffs by 50% on $75 billion of U.S. imports, as investor temporarily put aside worries over the potential economic impact of the COVID-19 virus. The Dow Jones Asia Index advanced by +1.17% for the week, (MTD +3.70%, YTD +0.53%).
Drivers: I) China’s Producer Price Index increased in January by 0.1% after dropping by 0.5% in December. This was the first increase in CPI after declining six consecutive months. The increase in PPI was driven primarily by the increase of prices in the mining and fuel processing industries. The COVID-19 virus will likely impact producer prices over the next by disrupting supply chains, as some factories will be closed longer than others.
II) Real Q3 GDP in Japan grew at a seasonally adjusted 0.4%, after being revised upward from an initial reading of 0.1%. Private consumption expenditure rose by 0.5% q/q, nonresidential investment expenditure saw accelerated growth by rising 1.8% q/q. Third quarter growth overall exceeded expectations led by a sizable increase in capital expenditure. However renewed trade tension between the U.S. and its trading partners and the sales tax hike may be detractors from growth in the final quarter.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei was lower by -0.59% (MTD +2.08%, YTD +0.14%), the Hang Seng Index rose by +1.42% (MTD +5.74%, YTD -1.07%) and the Shanghai Composite was higher by +1.43% (MTD -2.00%, YTD -4.36%).
Fixed Income
Treasury yields were mixed last week after declining on Friday as investors continued to keep an eye on the spread of COVID-19 around the global, and U.S. retail sales came in weaker than expected.
Performance: I) The 10-year Treasury yield was higher last week ending at 1.588% up from 1.583%. The 30-year yield was lower last week finishing at 2.041% down from 2.048%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index rose +0.03% last week, MTD -0.04% and YTD +1.88%. The Bloomberg Barclays US MBS TR was higher by +0.01% last week, MTD +0.14% and YTD +0.84%. The Bloomberg Barclay’s US Corporate HY Index advanced by +0.46%, MTD +1.09% and YTD +1.11%.
Commodities
The DJ Commodity Index rose last week climbing +1.35% and is higher month to date +1.15% (YTD -6.88%). Commodity prices rose last week as energy and metals saw an uptick on the hopes any negative economic effect from the COVID-19 virus will be short lived, and China’s central bank and government will continue to provide monetary and fiscal stimulus.
Performance: I) The price of oil was higher last week by +3.79% to close at $52.25 and is higher month to date in February by +1.20% (YTD -14.43%). Oil prices rose for the first time in six weeks as investors digested news that China was actively buying oil in the open market.
II) The ICE USD Index, a gauge of the U.S dollar’s movement against six other major currencies, was higher by +0.46 ending at 99.16 for the week (MTD +1.84%, YTD +2.87%). The USD climbed higher last week, particularly against the euro, as U.S. economic data remained solid while Europe’s economic slowdown continued.
III) Gold rose last week as investors tried to assess the impact the COVID-19 virus would have on China’s economy. Gold was higher by +0.82% last week, climbing to $1586.9 (MTD -0.40%, YTD +4.19%).
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:
- The HFRX Global Hedge Fund Index is higher at +1.02% MTD and up +1.43% YTD.
- Equity Hedge has risen by +0.92% MTD and is up +0.58% YTD.
- Event Driven is higher MTD +0.84% and is up YTD +1.35%.
- Macro/CTA has risen by +2.25% MTD and is up +3.09% YTD.
- Relative Value Arbitrage has advanced by +0.45% and is up +1.14% YTD.
- Multi-Strategy is up MTD at +0.39% and is higher by +1.06% YTD.
Data Source: Haver Economics
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