Economic Data Watch and Market Outlook
Risk assets rallied last week, led by US equity markets which saw the DJIA post an 11.8% gain, the best monthly gain since January 1987. Not to be outdone, the S&P 500 and NASDAQ rose by 10.8% and 11.8% respectively, while the Russell 2000 soared by 18.0% in November. Markets discounted the recent record rise in new global COVID-19 cases, with sharp spikes seen in the US, Europe, and South America, sending the total number of cases to 66 million worldwide. The markets also ignored the recent deceleration in US data, as the ISM Manufacturing, Non-manufacturing and DOL Jobs data all showed a decline from the previous month. Risk assets rallied on projections of 2021 global GDP estimates showing a rise of 4.7% yoy, hopes for a new $908 billion stimulus package in the US and widespread distribution of a COVID-19 vaccine with high efficacy rates. However, we should be cautious, as the new “lock-down” and social restriction orders seen throughout the US, Europe and Asia could moderate economic growth in Q4 and possibly Q1 2021. The US stimulus package is still being negotiated, and there is no guarantee it will be passed as part of the US government’s budget package that has a December 11 deadline for approval. Finally, Pfizer and BioNTech warned last week that the anticipated 100 million dose rollout of their vaccine will be cut by 50.0% due to raw material shortages and supply chain issues.
As we enter next week’s trading sessions, investors will be following the news regarding the potential approval and widespread distribution of a COVID-19 vaccine and the on-going negotiations in the US for a new stimulus package. The proposed bi-partisan $908 billion rescue package received support last week from House Speaker Nancy Pelosi and Senate Minority Leader Chuck Schumer, as well as Senate Majority Leader Mitch McConnell who stated he saw “hopeful signs” an agreement could be reached before year end. The key points will be the extra $300 per week in unemployment benefits, and extension of the nationwide ban on evictions for those who cannot pay their rents. Passage of the stimulus package would give support to the US economy, at a time when equity markets are hitting new all-time highs despite current headwinds. Technical indicators including the VIX, market breath, option put/call ratios and market momentum are showing equity markets are over-bought. Fundamentally, FactSet’s initial eps estimate for the S&P 500 for 2021 is $165.92, which has the index trading at a generous 22 times forward earnings based on Friday’s close of 3699.12. Though markets can continue to climb the wall of worry and rally, we would not be surprised if equity markets corrected a bit from here.
In turning to the coming week’s economic calendar, in a relatively light schedule, data releases will be dominated by US inflation and consumer sentiment indicators. On Thursday, November CPI is expected to rise by 0.1% and 1.1% on an annualized basis. The rise is projected to be led by an increase in food and energy prices of 0.2% and 0.4% respectively.
The November Producer Price Index (PPI) release on Friday is estimated to have ticked up by 0.1%. The rise in the index is projected to be led by jumps in energy PPI of 0.1% and food prices of 0.3%. We close out the week with a reading of December’s University of Michigan consumer sentiment index, which is expected to drop by 3.4 points to 73.5. The main culprit in driving down sentiment is the recent jump in new COVID-19 cases.
The Week In Review
U.S. Equities
US equity markets surged higher with several indexes posting low double digit returns for the month of November, due to positive news regarding COVID-19 vaccines and new US stimulus hopes.
- Dow Jones +1.16% MTD +2.05% YTD +8.28%
- S&P 500 +1.72% MTD +2.18% YTD +16.50%
- Russell 2000 +2.04% MTD +4.01% YTD +14.84%
Drivers: I) A bi-partisan stimulus bill in the US for an estimated $908 billion, gained momentum for possible passage, after support was garnered from House Speaker Pelosi, Senate Minority Leader Schumer, Senate Majority Leader McConnell and President elect Biden. Key points in the measure include $300 billion for the payroll protection program, $300 per week in extra un-employment benefits and an extension of the nationwide ban on evictions for those who cannot presently pay their monthly rent. A sticking point is a Republican proposal that provides liability protection to organizations from lawsuits related to workers contracting COIVD-19.
II) The November ISM Manufacturing survey dropped from October’s reading of 3 to 57.5. The survey though solid, shows a slowdown in manufacturing due to the recent increase in new coronavirus cases. The rise in new virus cases caused a weakening in new orders, production, and employment for November.
III) The ISM Non-Manufacturing/Services survey fell from 56.6 in October to 55.9 for November. The pull-back in the survey is believed to be related to the recent increase in new COVID-19 cases, as well as little progress on a new US stimulus package. Underneath the composite, the indexes related to activity and orders dropped during the month.
IV) The US Non-farm employment report for November showed an increase of only 245,000 new jobs, far below the Street estimate of 460,000. The unemployment rate declined by 0.2% to 6.7%. The decrease in the unemployment rate was due primarily to the 0.2% fall in the labor participation rate to 61.5%. The new jobs shortfall was led by a decline in temporary government census workers, as well as a drop in hiring in the retail and food service industries.
V) Equities Month to Date are higher with Small-Cap, Value, Energy, and Consumer Staples leading equity price performance. The laggards for the period are Large-Cap, Growth, Utilities and Materials.
Capitalization: Large Caps +2.24% (YTD +18.65%), Mid-Caps +2.68% (YTD +14.86%) and Small Caps +4.01% (YTD +14.84%). Style: Value +4.98% (YTD +1.05%) and Growth +3.09% (YTD +17.24%). Sector Groups: Technology +2.12% (YTD +38.79%), Information Technology +2.22% (YTD +38.11%), Consumer Discretionary +0.51% (YTD +27.18%), Communication Services +2.68% (YTD +22.76%), Materials +1.02% (YTD +18.84%), Healthcare +2.58% (YTD +11.90%), Industrials +1.45% (YTD +11.29%), Consumer Staples +1.08% (YTD +9.50%), Utilities -0.68% (YTD -0.86%), REITs +2.24% (YTD -1.44%), Financials +3.89% (YTD -3.86%) and Energy +10.52% (YTD -28.66%).
European Equities
The MSCI Europe Index was higher last week, with equity prices supported by the rise in German manufacturing orders and a Reuter’s report that EU officials stated a trade pact between the EU and UK was “imminent”.
Drivers: I) The Euro-zone November PMI Composite was revised higher by 0.2 points to 45.3. Even though PMI data in Europe has been volatile since the spread of COVID-19, the reading suggests that the second lockdown will be less severe than the spring. The data also shows a decline in the composite PMI has been driven mainly by a drop in the services sector, and Germany is recovering at a better clip than other countries as the manufacturing sector showed a solid reading of 51.7.
II) In October, Euro-zone retail sales rose by 1.5% month over month on a seasonally adjusted basis. The report showed retail sales were 3.3% above the level seen pre-COVID 19 during January and February. Household consumption has been on the rise since taking a hit in April, and has seen a strong uptrend since the summer. The rise in sales is a positive sign, as the increase has come about despite the rise in new coronavirus cases and implementation of new restrictions.
III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was higher by +1.85% for the week (MTD +2.79% YTD +3.45%).
Asian Equities
Asian equity markets were mixed as investors pondered the news that the initial shipments of the Pfizer and BioNTech vaccine could by 50% less than originally projected, and the potential for a new US stimulus package. DJ Asia Index declined by -0.30% for the week, (MTD +2.01% YTD +6.06%).
Drivers: I) In China, the NBS manufacturing PMI beat expectations by rising by 0.7 points to 52.1, which was the highest reading since October 2017. Overall demand continued to improve, as new orders rose 1.1 points to 53.9. Export orders gained 0.5 points to 51.5, while the employment component also improved, which suggests the overall economic recovery is helping to boost the labor market.
II) In Japan, October’s industrial production posted a solid rise of 3.8% month over month on a seasonally adjusted basis. The increase shows production has improved for a fifth consecutive month since June, and follows a gain of 3.9% in September. The production recovery has been led by the auto sector, and the October report shows a broadening of growth with increases in business machinery, which grew by 17.9% on the month. Auto production remained strong, as it grew by 6.8% which is the fifth consecutive month of gains.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei rose by +0.40% (MTD +1.20% YTD +15.13%), the Hang Seng Index was lower by -0.22% (MTD +1.88% YTD -4.35%) and the Shanghai Composite advanced by +1.06% (MTD +1.56% YTD +12.93%).
Fixed Income
Treasury yields rose last week as hopes for new stimulus increased as a bi-partisan $908 billion bill gained support from senior House and Senate members.
Performance: I) The 10-year Treasury yield was higher last week ending at 0.970% up from 0.845%. The 30-year yield rose last week finishing at 1.740% climbing from 1.576%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index fell by -0.42% last week, MTD -0.49% and YTD +6.84%. The Bloomberg Barclays US MBS TR was lower at -0.11% last week, MTD -0.10% and YTD +3.54%. The Bloomberg Barclay’s US Corporate HY Index rallied higher by +0.86% for the week, MTD +0.79% and YTD +5.96%.
Commodities
The DJ Commodity Index declined last week by -0.07% and is up month to date +0.55% (YTD +8.08%). Commodities were flat as the recent surge in industrial metal and agriculture prices slowed.
Performance: I) The price of oil rose last week by +1.25% to close at $46.09 and is higher month to date by +1.65% (YTD -24.52%). Oil prices were higher as OPEC and its allies announced they would slowly reverse its production cuts.
II) The ICE USD Index, a gauge of the U.S dollar’s movement against six other major currencies, was lower by -1.06% ending at 90.81 for the week (MTD -1.15% YTD -5.79%). The USD fell last week, as a disappointing US jobs reports prompted fears of a slowdown in the economic recovery.
III) Gold was higher last week, as passage of a new stimulus bill in the US could cause inflation to rise. Gold rose in price by +2.86% last week, climbing to $1842.0 (MTD +3.43% YTD +20.93%).
Hedge Funds
Hedge fund returns in December are higher with all of the core strategies Equity Hedge, Event Driven, Macro/CTA, Relative Value and Multi-Strategy positive for the month.
Performance:
- The HFRX Global Hedge Fund Index is higher at +0.47% MTD (+4.75% YTD).
- Equity Hedge has advanced by +0.66% MTD (+1.63% YTD).
- Event Driven is up MTD +0.38% (YTD +6.98%).
- Macro/CTA has risen by +0.56% MTD (+1.86% YTD).
- Relative Value Arbitrage is higher by +0.30% (+7.26% YTD).
- Multi-Strategy is up MTD by +0.29% (+6.68% YTD).
Data Source: Haver Economics, HFR, Bloomberg, Morningstar and FactSet
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