Economic Data Watch and Market Outlook
The global equity markets posted their best weekly performance since August, snapping a four-week decline. Last weeks market price action reinforced again our beliefs that markets move on what they expect to happen, versus what actually happens. On the reality front, President Trump contracted COVID-19, Fed Chair Jerome Powell called for additional fiscal stimulus to support an ebbing economic recovery, unemployment remains high and talks between House Speak Nancy Pelosi and Treasury Secretary Mnuchin remained at a stalemate. However, expectations of what could happen drove risk asset prices higher. After a roller coaster week of yes and no on a potential fifth Coronavirus stimulus bill, on Friday Speaker Pelosi and Secretary Mnuchin via a phone conference intimated there were “prospects of an imminent deal. Also, with recent improvements in consumer spending, industrial production and services, Wall Street pundits are calling for Q3 GDP growth in the US to soar by 33.0% on an annualized basis, followed up by a 2.5% showing for Q4. Not to be out done, developed markets are projected to grow by an estimated 40.6% for Q3, and 5.3% in Q4. Investors and global markets can only hope that these positive expectations will not be a false reality.
As we enter next week’s trading sessions, market participates will be pre-occupied by the start of the Q3 earnings season. The earnings parade will be led by financial heavyweights including JPMorgan, Bank of America, Citigroup, Blackrock, Goldman Sachs and Morgan Stanley. As equity markets have risen due to P/E expansion, investors are looking for an increase in earnings to push equity prices higher. FactSet has seen an improvement in Q3 expected earnings for the S&P 500, as the June 30th estimate of $31.78 has risen by 4.1% to its present level of $33.08%. This is the first positive earnings revision since Q2 2018. For Q3, earnings are expected to decline by -21.0%. For calendar year 2020, the annual decline in earnings is a projected -18.0%. Revenues for 2020 are estimated to fall by -2.7%. Looking forward to 2021, the early estimates call for S&P 500 earnings to rise by 25.7%, with revenues climbing by 8.0%. Based on these expected earnings, Wall Street pundits are calling for the S&P 500 to rise by 11.6% from its October 1st close, over the next twelve months.
In turning to the coming week’s economic calendar, the data releases will be dominated by US inflation data and the all-important September Retail Sales release. We begin on Tuesday with September’s Consumer Price Index (CPI) which is estimated to have increased by 0.2%, and 1.4% on an annualized basis. Ex-food and energy, the core CPI rose by 0.21% and 1.7% annualized. Energy prices continued to rise in September, but gasoline prices actually softened, bringing the energy CPI in September higher by 0.3%.
On Tuesday, the Producer Price Index (PPI) in September is estimated to rise by a moderate 0.1%, while core PPI rose by the same 0.1%. The prices for services and food pushed PPI higher in September.
Retail Sales for September, out on Friday, is projected to show an increase of 1.2%. Retail sales have continued to recover from their nadir seen during Q1 and early Q2 caused by the COVID-19 lockdown, driven by a sharp jump in unit auto sales and sales of food services. Closing out the week is the University of Michigan consumer sentiment index, which is forecast to drop by 1.4 points to 79.0. Though lower, this September reading is the strongest report since the COVID-19 pandemic began.
The Week In Review
U.S. Equities
US equity markets posted their strongest weekly gain since August, as investors remained hopeful that another round of stimulus will eventually be approved by Congress and the White House.
- Dow Jones +3.31% MTD +2.95% YTD +2.02%
- S&P 500 +3.89% MTD +3.46% YTD +9.22%
- Russell 2000 +6.40% MTD +8.64% YTD -0.80%
Drivers: I) The see saw battle between the White House and House of Representatives seem to be back on track on Friday, as various reports stated President Trump was flexible in increasing the stimulus package from $1.6 trillion to $1.8 trillion, and Director of the National Economic Council, Larry Kudlow stated President Trump approved the offered. However, sticking points remained regarding aid to state and local governments.
II) For September, the ISM non-manufacturing (services) reported an increase from the August reading of 9 to 57.8. The increased exceeded Street estimates and has remained at solid levels over the past several months. The ISM data was positive in September, as there were improvements in activity, orders, and employment.
III) Last week’s jobless claims report continued to confirm that the number of layoffs remain sizably above pre-COVID-19 levels, as 840,000 initial jobless claims were filed during the week ending October 3. As the number of filings continue to decline, the rate of improvement has fallen substantially when compared to the early recovery phases. This tells us that the recovery in jobs to pre-coronavirus levels will take several years.
IV) The COVID-19 pandemic caused a severe decline in global trade, which has been followed by a rebound in imports and exports. The recovery in imports has been stronger, as the US trade deficit widened in August to $67.1 billion which is the largest since 2006. This rise in the trade deficit is projected to be a drag on Q3 US GDP by 2.5% to 3.0%.
V) Equities Month to Date are lower with Small-Cap, Value, Utilities, and Industrials leading equity price performance. The laggards for the period are Large-Cap, Growth, Communication Services and Consumer Staples.
Capitalization: Large Caps +3.81% (YTD +10.45%), Mid-Caps +6.08% (YTD +3.59%) and Small Caps +8.64% (YTD -0.80%). Style: Value +8.30% (YTD -13.84%) and Growth +7.01% (YTD +5.61%). Sector Groups: Technology +2.93% (YTD +32.33%), Information Technology +3.20% (YTD +30.95%), Consumer Discretionary +4.33% (YTD +23.40%), Communication Services +2.27% (YTD +11.58%), Materials +4.53% (YTD +10.09%), Healthcare +2.65% (YTD +7.74%), Consumer Staples +2.49% (YTD +6.43%), Utilities +6.84% (YTD +0.82%), Industrials +4.83% (YTD +0.64%), REITs +4.64% (YTD -2.47%), Financials +4.83% (YTD -16.31%) and Energy +2.70% (YTD -45.97%).
European Equities
The MSCI Europe Index rose on the week on hopes of further stimulus from the US, and despite the spike in COVID-19 cases in Spain and the threat of a “hard Brexit” from Prime Minister Boris Johnson.
Drivers: I) Prime Minister Boris Johnson stated last week the UK and EU should “move on” if an agreement cannot be reached at the EU summit next week. If no deal is reach, the UK and EU would operate under World Trade Organization rules which places tariffs on goods. The major sticking points are the EU wants the UK to follow its rules on state aid provided to businesses, and the UK wants full access to EU markets to sell its fish, while the EU wants full access for its fishing fleet to UK waters.
II) Euro-zone August Retail Sales saw a robust 4.4% m/m rise, rebounding after retail sales hit bottom in April during the COVID-19 lockdowns. The sharp recovery in retail sales has been impressive, and retail sales are now 3.3% above their pre-pandemic levels. The rise in retail sales has been led by auto sales, and the rebound in overall goods demand portends a rise in goods production in the coming months.
III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was higher by +3.00% for the week (MTD +3.37% YTD -5.78%).
Asian Equities
Asian equity markets were higher on the week, as investors after a week-long holiday were heartened by the potential for further US stimulus and positive economic data out of Taiwan, China. The DJ Asia Index advanced by +0.25% for the week, (MTD +3.17% YTD -4.04%).
Drivers: I) In Taiwan, the September Manufacturing PMI continued its sharp rebound seen in recent months, jumping 3 points to 55.2. This is the highest reading since April 2018, and is significantly higher than the showing seen in Q2 of 43.3. The improvements were widespread across new orders (up 3.5 points to 57.6), exports orders (rise of 3.6 points to 53.6) and production output (increase of 3.4 points to 55.8).
II) In Japan, the September Service PMI was revised higher. Japan’s business sentiment rebounded, and the future activity index rose by 1.5 points to 53.3, which is the best reading since December 2019. The business activity index was revised higher by 1.2 points to 46.9, and the backlogs of work index also improved by 1.3 points to 46.1. Though these indices remain below the expansion level of 50, these positive revisions reflect an improvement in confidence as the government announced in September it would expand travel and restaurant subsidies beginning October 1.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei rose by +2.56% (MTD +1.87% YTD +1.63%), the Hang Seng Index was higher by +2.81% (MTD +2.81% YTD -14.03%) and the Shanghai Composite advanced by +1.68% (MTD +1.68% YTD +7.28%).
Fixed Income
Treasury yields saw their sharpest rise in four months, as expectations of further stimulus and increased government borrowing sent rates higher and prompted a steepening of the yield curve.
Performance: I) The 10-year Treasury yield was higher last week ending at 0.777% up from 0.657%. The 30-year yield rose last week finishing at 1.576% climbing from 1.403%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index fell -0.17% last week, MTD -0.22% and YTD +6.55%. The Bloomberg Barclays US MBS TR was lower at -0.05% last week, MTD -0.04% and YTD +3.58%. The Bloomberg Barclay’s US Corporate HY Index rallied higher by +1.20% for the week, MTD +1.36% and YTD +1.99%.
Commodities
The DJ Commodity Index jumped last week by +6.22% and is up month to date +3.65% (YTD +1.12%). Commodities were sharply higher on the week as hurricane Delta forced the shut of 90.0% of the crude oil capacity in the Gulf of Mexico and the increase in soybean prices as demand increased from Asia.
Performance: I) The price of oil rose last week by +9.54% to close at $40.52 and is higher month to date by +0.74% (YTD -33.63%). Oil prices jumps as Hurricane Delta shutdown the majority of the oil rigs in the Gulf of Mexico.
II) The ICE USD Index, a gauge of the U.S dollar’s movement against six other major currencies, was lower by -0.80% ending at 93.06 for the week (MTD -0.88% YTD -3.45%). The USD was lower last week on prospects for a fifth COVID-19 stimulus package from the US government and continued rise in the US budget deficit. III) Gold was higher last week as the prospects for a “reflationary” US stimulus package improved towards the end of the week. Gold rose in price by +1.67% last week, climbing to $1936.3 (MTD +2.15% YTD +27.12%).
Hedge Funds
Hedge fund returns in October are positive with the core strategies Equity Hedge, Event Driven, Macro/CTA, Relative Value and Multi-Strategy all higher for the month.
Performance:
- The HFRX Global Hedge Fund Index is higher at +0.68% MTD and up +2.31% YTD.
- Equity Hedge has advanced by +0.96% MTD and is lower by -2.01% YTD.
- Event Driven is up MTD +0.88% and is up YTD +5.50%.
- Macro/CTA has risen by +0.35% MTD and is higher by +0.46%
- Relative Value Arbitrage is higher by +0.40% and is up +4.57% YTD.
- Multi-Strategy is up MTD by +0.37% and has risen by +4.12% YTD
Data Source: Haver Economics
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