Economic Data Watch and Market Outlook
Global equity markets last week demonstrated again that any news regarding “COVID-19”, over-rides macro and fundamental factors in driving equity prices. The trading week begun, basking in the euphoria of the surprising non-farm payroll report, which sent major US indices back to breakeven for the year. The S&P 500 through last Wednesday, June 10th, had rallied an estimated 44.0% off its March 23rd bottom. This brought the index to within 5.0% of its February 19th all-time high of 3386.0. Not to be out done, the NASDAQ Composite reached a new all time high exceeding 10,000 for the first time (10,020.35). The bullish sentiment and “overbought” conditions hit a wall on Thursday, as markets digested the sobering outlook from Fed Chair Jay Powell that it would take till 2023 for the US labor market to fully recover. But the knockout punch was delivered via the news that a rise in COVID-19 cases were seen in Arizona, New Mexico, and Utah with new potential hotspots appearing in Florida and Arkansas. The S&P 500 fell by 5.9% on Thursday, before rebounding on Friday as investors “bought the dip”.
As we enter next week’s trading sessions, I had written last week that I felt this one-way rise in equity prices was bound to experience a drawdown. With all of the data we have seen over the past several weeks of global institutions being unweight equities and record amounts of cash being held in money market funds, we have all wondered who is buying? Two data points may give us a clue. The Hulbert Stock Newsletter Sentiment Index (HSNSI) which follows several dozen stock market timers was approaching extreme bullishness. The CBOE reported last week that 71.0% of notional options exposure on the exchange were single stock options expiring in less than two weeks. Is this a revival of the “day-traders” seen in the early 2000’s during the tech bubble? On the news front, several FOMC members will be speaking next week and we are expecting policy decisions from the BOJ and BOE. Expect volatility to remain as the VIX broached 40.0% for the first time in over two weeks.
In turning to next week’s economic calendar, the key releases next week will be tied to the housing market and retail sales. We begin on Tuesday with US retail sales for May, where the Street forecast calls for a partial reversal of the sharp decline seen in March and April, rising 9.6% for the month. The re-opening of restaurants across the country are expected to boost food service sales.
May industrial production, also reporting on Tuesday, is estimated to have risen by 2.4% after dropping in March (-4.5%) and April (-11.2%). After seeing demand depressed by COVID-19, signs of output are picking up particularly in auto production after restriction on activity were being lifted.
On Wednesday, US housing starts are projected to jump by 22.9% for May, to 1.905 million units start. Housing permits are expected to increase by 11.1% to 1.185 million units, with the sharpest gains seen in single and multi-family units.
The Week In Review
U.S. Equities
US equity markets halted a three-week rally, as an outbreak of new COVID19 cases and a longer time to recovery projected for the US economy by Fed Chairman Powell weighted on investors.
- Dow Jones -5.51%, MTD +0.96%, YTD -9.20 S&P 500 -4.73%, MTD -0.01%, YTD -4.98%
- Russell 2000 -7.89%, MTD -0.39%, YTD -16.28%.
Drivers: I) At the June FOMC meeting, the committee remained dovish as there was near unanimity in determining no changes in policy which are keeping rates near zero till at least the end of 2023. The worrying news was the forecast from FOMC members projecting the expected fall in GDP for 2020 would be an estimated -6.5%. Compounding concerns was the Fed’s outlook that the UE rate would not return to normal till 2023, and the rate of inflation would remain weak.
II) May’s consumer price index (CPI) fell by -0.1% while the core index also declined by -0.1%. The readings coming in slightly below expectations, were above the dramatic declines we had seen in March and April due to the spread of the coronavirus. The headline reading from a year ago, recently fell from 2.5% as recently as January to 0.1% in May and core index rate over the past year declined from 2.4% in February to 1.2% in May. Inflation measures in the US are expected to remain soft, but they seem to have bottomed in March and April.
III) The producer price index (PPI) for the month of May climbed by 0.4%. This higher than expected result was due primarily to a sharp 6.0% jump in the food index, prompted by the rise in meat prices. Energy prices also increased by 4.5%. The core index ex-food and energy actually fell by -0.1% which matched expectations. This data leads to a forecast of a rise of 0.12% for May’s PCE price index, leaving it essentially unchanged.
IV) May’s University of Michigan consumer sentiment index rebounded from 72.3 in April to 78.9. The index had fallen during the onset of the coronavirus pandemic and equity bear market, by 30 points from February through March. The index has risen by 7 points over the past two months, following improvements seen in other sentiment indicators. The survey continues to show a moderation in inflation expectations, with the one-year forecast dropping from 3.2% to 3.0% in the June preliminary report.
Equities Month to Date are mixed with Mid-Cap, Value, REITs, and Energy leading equity price performance. The laggards for the period are Small-Cap, Growth, Health Care and Consumer Staples.
Capitalization: Large Caps +0.10% (YTD -4.82%), Mid-Caps +0.28% (YTD -10.48%) and Small Caps -0.39% (YTD -16.28%). Style: Value +1.72% (YTD -22.14%) and Growth -0.94% (YTD -9.80%). Industry Groups: Technology +1.58% (YTD +8.96%), Information Technology +1.48 (YTD +7.94%), Consumer Discretionary +0.85% (YTD +0.47%), Communication Services -0.21 (YTD -0.75%), Healthcare -5.22% (YTD -3.70%), Consumer Staples -1.90% (YTD -7.13%), REITs +2.77% (YTD -7.37%), Utilities -1.70% (YTD -8.29%), Materials -0.77% (YTD -9.76%), Industrials +1.67% (YTD -14.87%), Financials +1.84%, (YTD -21.89%) and Energy +2.71% (YTD -31.10%).
European Equities
The MSCI Europe Index was down last week by -6.04%, declining on news of a rise in new COVID-19 cases in the US and the UK’s record fall in GDP of -20.4% in April.
Drivers: I) GDP in the UK for April experienced its largest decline in history of -20.4% m/m. Combining the April drop with that seen in March, the lock-down induced fall is a cumulative -25.1%. Underneath the report there was a sharp drop in the services sector of -19.0%, in industrial production of -24.3% and construction of -40.1%. Continue weakness in the economy should prompt the BOE to move ahead with another £100bn in QE next week.
II) Industrial Production for the euro-zone fell by -17.1% m/m in April, following a decline of -11.9% in March. Weakness was seen across all sectors, but readings were disparate as well. The sharpest drops were seen the transportation section (-53.2% m/m) and textile industry (-37.7% m/m), while food was down (-6.7% m/m) and energy (-4.4% m/m). From a country perspective, production fell in Germany by -21% m/m and France -20.0%.
III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was lower by -6.04% for the week (MTD +2.34%, YTD -14.23%).
Asian Equities
Asian equity markets declined on worries that a new outbreak of COVID-19 cases in the US would hamper an expected rebound in global economic growth. The Dow Jones Asia Index was lower by -1.51% for the week, (MTD +4.66%, YTD -11.03%).
Drivers: I) In Japan, April private core machinery orders (capex) slumped by -12.0% m/m, following a drop of -0.4% in March. The primary driver of the decline was a steep fall 0f -20.2% in non-manufacturing orders, which was a reversal of the one-off surge seen in orders from the transportation sector in March. Overall orders were down by an annualized rate of -38.8% when compared to Q1 results, confirming that the COVID-19 pandemic was greatly suppressing capex.
II) Exports for China during the month of May came in better than expectations, falling by -3.3% on a yearly basis and was lower by -0.4% m/m. Imports saw a commensurate drop as well, falling by -16.7% annually and -0.8% m/m. Exports to developed countries such as the US, EU and Japan were positive. The export of consumer goods showed an upward surge, increasing 400.0% on the quarter at a seasonally adjusted annual rate, supported by shipments of medical care products including surgical masks and protective gowns.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei fell by -2.44% (MTD +1.95%, YTD -4.76%), the Hang Seng Index was lower by -1.89% (MTD +5.87%, YTD -13.38%) and the Shanghai Composite declined by -0.38% (MTD +2.36%, YTD -4.27%).
Fixed Income
Treasury yields fell, with longer duration bonds seeing the most significant decline, while shorter yields were slightly higher causing the yield curve to flatten. The drop in yields were caused by the sharp drop in global equity markets, the dovish tone from the Fed and the rise in COVID-19 cases in the US.
Performance: I) The 10-year Treasury yield was lower last week ending at 0.704% down from 0.901%. The 30-year yield declined last week finishing at 1.457% falling from 1.672%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index rose +0.72% last week, MTD +0.23% and YTD +5.71%. The Bloomberg Barclays US MBS TR was higher by +0.16% last week, MTD +0.08% and YTD +3.68%. The Bloomberg Barclay’s US Corporate HY Index was lower by -1.39% for the week, MTD +1.66% and YTD -3.15%.
Commodities
The DJ Commodity Index was higher last week by +1.60% and is up month to date +2.73 (YTD -14.95%). The commodity index rallied higher last week as precious metals appreciated as a risk-off tone was pervasive throughout global equity markets, caused by an increase in US COVID-19 cases and the projection of a slow recovery in the US economy by the Fed.
Performance: I) The price of oil declined last week by -6.18% to close at $36.56 and is higher month to date by +3.51% (YTD -40.12%). Oil prices declined as the Fed stated a recovery in the US job market would take several years, and US oil inventories reached a record high of 540 million barrels.
II) The ICE USD Index, a gauge of the U.S dollar’s movement against six other major currencies, was higher by +0.14% ending at 97.09 for the week (MTD -1.23%, YTD +0.73%). The USD was slightly higher as investors fled risk assets due to a rise in coronavirus cases in the US, and a tepid outlook for US growth from the Fed.
III) Gold rose last week on public health concerns that a spike in COVID-19 cases could lead to a second wave of infections. Gold was higher by +2.89% last week, climbing to $1737.3 (MTD -0.32%, YTD +14.06%).
Hedge Funds
Hedge fund returns in June are higher with the core strategies Equity Hedge, Relative Value and Multi-Strategy in positive territory, while Macro/CTA is lower on the month.
Performance:
- The HFRX Global Hedge Fund Index is higher at +0.90% MTD and down -1.92% YTD.
- Equity Hedge has advanced by +0.90% MTD and lower by -7.50% YTD.
- Event Driven is up MTD +1.66% and is down YTD +0.62%.
- Macro/CTA has fallen by -1.13% MTD and is lower by -1.56%.
- Relative Value Arbitrage is higher by +1.43% and is up +0.65% YTD.
- Multi-Strategy is up MTD by +1.52% and has risen by +0.86% YTD
Data Source: Haver Economics
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