Economic Data Watch and Market Outlook
Global equity markets rose in the prior week, but was subject to a push and pull direction wise. The positive price effect prompted by improving economic data and additional stimulus measures, had to battle the negative sentiment caused by the rise in new COVID-19 cases. In the US, the Citigroup US Economic Surprise Index hit an all-time high of 119.3, boosted by a record rebound in US May retail sales of 17.7% and stronger than expected recovery in the Philly Fed District manufacturing and new order surveys. US and China officials also met in Hawaii, and they agreed that China would accelerate its purchase of US agricultural goods (thus far $4.7 billion in purchases) to meet its Phase One trade deal goal of $36.5 billion. In addition, the EU is negotiating a potential €750 billion monetary stimulus package to provide further support to the euro-zone economy’s recovery from the COVID-19 induced recession. On the negative side, new COVID-19 cases have increased in states that have recently re-opened, with potential hotspots in Arizona and Florida.
As we enter next week’s trading sessions, we find the S&P 500 has rallied approximately 47.0% from the March 23rd low to close at 3097.74 on Friday. The index now sits about 8.5% below its all-time high of 3386.15 achieved this past February 19th. How much further can the market rally, after outperforming virtually every rebound estimate promulgated by Wall Street strategists since hitting bottom in March? Clearly investors have been looking at forward economic and earnings data for 2H 2020 and well into 2023, in pushing equity prices higher. JPMorgan has projected S&P500 eps growth to recover by 29.6% next year, after declining by an estimated -22.9% in 2020. GDP growth is expected to rise by 3.0% in 2021, after this year’s drop of -4.7%. Helping this positive outlook for US equity prices, is the hoard of cash that have flowed into US money market funds and bank accounts. According to Morningstar, as of the end of May, there was a record $4.8 trillion in US money market funds and cash held at banks topped $15.4 trillion according to the FDIC. Markets are presently in a consolidation phase, but with further stimulus expected from global central banks and with the globe awash in liquidity, there is potential upside for equity prices after any short-term correction.
In turning to next week’s economic calendar, investors will be on the outlook for signs of a recovery in the US housing market as well as personal income and spending. On Monday, we begin with Existing Home Sales for May which is estimated to have fallen by 16.9% to 3.60 million units. Existing home sales data lags pending home sales data by a month or so. With pending home sales sharply lower in March and April, a drop in May existing home sales would be in line.
New Home Sales out on Tuesday for the month of May, is projected to show an increase of 5.9% to 660,000 units. The relaxation of social restrictions in May are expected to boost new home sales for the month.
On Thursday, the Durable Goods Orders for May are expected to rise by 8.0%, reversing some of the downside seen in March and April. The growth is projected to be supported by an increase in orders for core capital goods and transportation. We close out the week on Friday, with a reading of May Consumer Spending which is projected to rise by 8.5%, but a drop of 6.9% is expected for Personal Income. On the inflation front, the PCE price index is estimated to have risen by 0.1% in May. On a year ago basis, the headline index is up 0.6% and the core reading up only 1.0%.
The Week In Review
U.S. Equities
US equity markets rose on the week on news of further stimulus measures from the US Fed and China’s promise to comply with the Phase One trade deal, offsetting reports of a rise in new COVID-19 cases.
- Dow Jones +1.07%, MTD +2.05%, YTD -8.22 S&P 500 +1.88%, MTD +1.88%, YTD -3.19%
- Russell 2000 +2.25%, MTD +1.85%, YTD -14.40%
Drivers: I) China announced after meeting with US officials in Hawaii, that they would accelerate the purchase of US agricultural goods to comply with the Phase One trade deal. The China government has asked state owned businesses to increase their buying to meet the Phase One goals. These companies are expected to increase their purchases of all agricultural goods ranging from soybeans and corn to ethanol.
II) May US Retail Sales rose by a record 17.7%, the highest increase on record since the data series began in 1992. Beneath the sales data, we found that a number of trends persisted despite the re-opening of physical stores. Non-store retailers, which are dominated by online merchants, saw an increase of 9.0%, and has jumped 25.4% over the past three months. Non-store retailer now account for 30.0% of sales as department stores lag.
III) Housing Starts for the month of May came in below expectations, rising just 4.3% versus the projected rise of 23.0%. Single and multifamily starts saw moderate gains. The data regarding permits was strong, increasing by 14.4% to 1.22 million units on a seasonal adjusted annual rate (saar), which beat Street forecast of an 11.0% gain. Despite the strong increase, permits still remain far below the pre-COVID-19 level of 1.54 million in January.
IV) The June reading for the Philadelphia Fed’s manufacturing survey blew past expectations, with the Index rising from -43.1 to 27.5. The ISM weighted composite also saw a sharp rise from 43.4 to 53.8. The outsized increase should not surprise anyone, as we are bouncing off of a low base, but the survey is the first regional survey to show a positive reading. The Empire State survey showed improvement, but remained negative.
V) Equities Month to Date are mixed with Mid-Cap, Value, Technology, and Information Technology leading equity price performance. The laggards for the period are Small-Cap, Growth, Utilities and Health Care.
Capitalization: Large Caps +2.11% (YTD -2.91%), Mid-Caps +2.14% (YTD -8.83%) and Small Caps +1.85% (YTD -14.40%). Style: Value +2.02% (YTD -21.91%) and Growth +1.09% (YTD -7.95%). Industry Groups: Technology +4.42% (YTD +12.01%), Information Technology +4.31 (YTD +10.95%), Consumer Discretionary +2.46% (YTD +2.07%), Communication Services +2.15 (YTD +1.60%), Healthcare -2.24% (YTD -0.67%), Consumer Staples +0.57% (YTD -4.80%), REITs +2.14% (YTD -7.94%), Materials +1.22% (YTD -7.95%), Utilities -4.04% (YTD -10.48%), Industrials +2.26% (YTD -14.38%), Financials +2.52% (YTD -21.37%) and Energy +1.91% (YTD -32.62%).
European Equities
The MSCI Europe Index rallied last week as lessening tensions between the US and China, along with expectations for further regional monetary stimulus boosted equity prices.
Drivers: I) The EU is in the process to negotiating a recovery package of grants and guarantees for EU and non-EU countries. The overall package is composed of €438 billion in grants (including €5 billion for non-EU countries); €73 billion in guarantees (of which €11.5 billion is for non-EU countries); and €250 billion in loans. The amounts each country receives will be based on how hard hit they were by the COVID-19 pandemic.
II) Euro-zone inflation reading for May shows core prices were lower by 0.1% month over month, which is a reversal of the 0.1% m/m increase seen over the past several quarters. The drop brought the core inflation rate to 0.9% on an annual basis. The inflation decline has been driven by a decrease in food price inflation (-0.2%) and energy inflation (-2.2%). The recent decline in the German VAT will be a further drag on inflation in 2H2020.
III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was higher by +2.67% for the week (MTD +5.07%, YTD -11.94%).
Asian Equities
Asian equity markets rose last week, as a receding of US/China tensions and China’s rapid response to a rise in new COVID-19 cases provided investors with some comfort. The Dow Jones Asia Index was higher by +1.48% for the week, (MTD +6.21%, YTD -9.72%).
Drivers: I) May economic data confirmed that the recovery in China is taking place. Industrial production continued its solid rebound rising 4.4% on an annual basis and 1.1% month over month, following increases in March and April. Retail sales rose by 6.6% m/m after the 9.1% gain seen in April. The primary driver was the increase in auto sales, up 14.7% on an annual basis, while contributions also came from restaurant sales.
II) The Reuters Tankan survey which measures large company sentiment, in June recovered slightly rising 4 points to -32. The improvement was prompted by increases for retailers and other services, which rose by 30 points and 17 points respectively. The non-manufacturing outlook also recovered, rising by 3 points to -29. Even though the indexes stayed negative, they seem to have bottomed, reflecting the recovery in economic activity after the state of emergency caused by the COVID-19 pandemic was lifted in May.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei rose by +0.77% (MTD +2.74%, YTD -4.02%), the Hang Seng Index was higher by +1.41% (MTD +7.36%, YTD -12.16%) and the Shanghai Composite advanced by +1.64% (MTD +4.04%, YTD -2.70%).
Fixed Income
Treasury yields were mixed, with longer dated maturities rising, as rates were primarily affected by concerns over the increase in new COVID-19 cases which can hamper an economy recovery.
Performance: I) The 10-year Treasury yield was lower last week ending at 0.699% down from 0.704%. The 30-year yield rose last week finishing at 1.461% climbing from 1.457%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index rose +0.20% last week, MTD +0.43% and YTD +5.92%. The Bloomberg Barclays US MBS TR was lower by -0.25% last week, MTD -0.17% and YTD +3.42%. The Bloomberg Barclay’s US Corporate HY Index was higher by +0.87% for the week, MTD +2.55% and YTD -2.30%.
Commodities
The DJ Commodity Index was higher last week by +2.64% and is up month to date +5.37 (YTD -12.76%). The commodity index staged a strong rally as energy rose on hopes of continued production cuts, and precious metals drew a safe haven bid due to a rise in global COVID-19 cases.
Performance: I) The price of oil rallied last week by +7.85% to close at $39.43 and is higher month to date by +11.63% (YTD -35.42%). Oil prices staged a strong rally as confidence is growth that OPEC and its partners can continue to curtail production.
II) The ICE USD Index, a gauge of the US dollar’s movement against six other major currencies, was higher by +0.58% ending at 97.66 for the week (MTD -0.65%, YTD +1.31%). The USD was higher last week as the World Health Organization issued a warning that COVID-19 was still a dangerous threat to global health.
III) Gold rose for the second week in a row, as investors were leery of the spike in new COVID 19 cases in the US and China. Gold was higher by +1.08% last week, climbing to $1756.2 (MTD +0.75%, YTD +15.30%).
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 +1.50% MTD and down -1.33% YTD.
- Equity Hedge has advanced by +1.68% MTD and lower by -6.78% YTD.
- Event Driven is up MTD +2.38% and is down YTD +1.33%.
- Macro/CTA has fallen by -0.59% MTD and is lower by -1.02%
- Relative Value Arbitrage is higher by +1.87% and is up +1.21% YTD.
- Multi-Strategy is up MTD by +1.81% and has risen by +1.03% YTD
Data Source: Haver Economics
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