Economic Data Watch and Market Outlook
The surprise alteration mid-month to the FOMC’s timeline to potentially raise rates faster than anticipated caused US equity markets to fall, as the S&P500 and DJIA suffered their worst weekly declines since last February and October respectively. I wrote last week that a large number of Fed officials were speaking in the coming days, and there was hope several would clarify some of their perceived “hawkish” tone. It turns out, the Fed officials staged a battle royale with both “dovish” and “hawkish” comments hitting the airwaves. Regional Fed Presidents Kaplan (Dallas), Bullard (St. Louis) and Rosengren (Boston) called for talks regarding tapering and a lift off of rates. Countering these comments were Vice Chair and New York Fed President Williams and Fed Chair Jerome Powell who stated that the Fed should not lift rates until signals of a “broad and inclusive” rebound in the job market and overall economy” were evident. The comments by Powell and Williams out weight those of the regional Fed presidents, as they are voting versus non-voting members of the FOMC. This Fed speak, along with a bipartisan agreement for a $559 billion infrastructure bill, and news that 23 financial institutions passed the Fed stress test (which could lead to stock buybacks and dividend increases) provided a tailwind to equities. The S&P 500 and NASDAQ Composite hit new all-time highs, with both growth (+4.24%) and value (+4.52%) participating in the rally.
Heading into next week’s trading sessions, with the US government and Federal Reserve continuing to provide fiscal and monetary stimulus, investors will need to turn to equity earnings and valuations to gauge how far this rally can boost share prices. Since hitting its nadir in March 2020, the S&P 500 has risen by 90.7% through last Friday and currently trades at a forward P/E of 21.1. The hope is P/E compression and cheaper valuations will come from extraordinarily strong Q2 S&P500 earnings which are projected to rise by 61.0% yoy, while revenues are estimated to increase by 19.3%. The earnings season which begins in two weeks, has already seen positive earnings guidance from several sectors and individual companies. Should earnings and revenues come in as expected or better, this could help the S&P 500 achieve its year end price target about 4500 as estimated by a number of Wall Street firms. If achieved, it would bring the S&P 500 return to about 20.0% for 2021, a tremendous return by any comparison.
In looking ahead to the economic calendar next week, the dominant themes are housing, consumer sentiment and employment. We start off on Tuesday with the June report from the Conference Board Consumer Confidence Index, which is expected to increase by 0.8 points to 118.0. Consumer confidence continues to improve on vaccine and economic progress.
On Wednesday, the May’s Pending Homes Sales Index is estimated to have dropped by 0.5%, as housing is cooling off after a sustained period of strong activity. The ISM Manufacturing survey for June is expected to fall by 0.2 points to 61.0. The Nonfarm Employment report on Friday is projected to show an increase of 800,00 for June, with the UE rate expected to decline to 5.6% from May’s 5.8%. Job growth seems to be constrained by the limited supply of labor, as the April JOLTs report showed a record 9.3 million job openings. Key indicators in the report, average workweek (34.9 hours unchanged) and hourly earnings (+0.4%) are expected to show continued improvement.
The Week In Review
U.S. Equities
US equity markets rallied last week as the S&P 500 posted its best weekly gain since February, boosted by the bi-partisan Senate agreement approving $559 billion in infrastructure spending and a lower-than-expected rise in the Personal Consumption Expenditure Price Index for May.
US Index Performance
- Dow Jones +3.44% MTD -0.18% YTD +13.56%
- S&P 500 +2.76% MTD +1.92% YTD +14.79%
- Russell 2000 +4.33% MTD +2.95% YTD +18.71%
- NASDAQ +2.56% MTD +4.59% YTD +11.42%
Drivers: I) The PCE price deflator for May increased by 0.4% (below estimate of 0.6%) and was up 3.9% on an annual basis. The Core PCE reading jumped by 0.5% (below projection of 0.61%) and rose by 3.4% annualized. The Bureau of Economic Analysis (BEA) report also showed personal income dropped by 2.0% and consumer spending fell by 0.4%, both declines were related to the drop in transfer payments following the March surge.
II) Durable Goods Orders in May posted a 3% m/m jump driven primarily by another increase in orders for commercial aircraft highlighting the rebound in air travel, while underlying orders were weaker than expected. The increase in orders was boosted by a 7.6% m/m rise in transport orders, led by motor vehicle orders which rose by 2.1% and commercial aircraft orders that soared by 27.4%. Ex-aircraft, orders were up only 0.3%.
III) Existing home sales in May dropped by 0.9% to 5.80 mm on a seasonally adjusted annual rate. The sale of existing homes has now declined for a fourth month in a row through May, after seeing sizable sales in 2020 and during Q1 of this year. A leading factor causing the drop are high home prices, as the report showed that the median sale price soared as of May by 23.6% on a year over year basis.
IV) In June, the Market Flash Manufacturing PMI rose to 62.6 from May’s reading of 62.1. The report showed a continuation of the strong momentum behind economic growth. The benchmark was supported by the supplier delivery times index which reflected lags due to supply chain issues. The Services Survey posted a strong June report of 64.8, boosted by solid results from new business and employment.
V) Equities Month to Date are mostly higher with Small-Cap, Growth, Energy, and Technology leading equity price performance. The laggards for the period are Mid-Cap, Value, Materials and Financials
Capitalization: Large Caps +2.21% (YTD +14.62%), Mid-Caps +1.92% (YTD +16.77%) and Small Caps +2.95% (YTD +18.71%). Style: Value –0.59% (YTD +27.24%) and Growth +1.66% (YTD +14.00%). Sector Groups: Energy +7.03% (YTD +48.91%), Financials -2.34% (YTD +26.38%), REITs +3.93% (YTD +24.08%), Communication Services +4.02% (YTD +20.04%), Industrials -2.30% (YTD +16.20%), Materials -5.45% (YTD +14.41%), Technology +5.13% (YTD +11.95%), Information Technology +5.03% (YTD +11.82%), Healthcare +2.12% (YTD +11.54%), Consumer Discretionary +3.04% (YTD +10.87%), Consumer Staples -0.87% (YTD +4.51%) and Utilities -0.97% (YTD +3.57%)
European Equities
The MSCI Europe Index rose last week on news of a bipartisan infrastructure agreement in the US that can advance global growth, and improved consumer confidence as COVID restrictions are being lifted.
Drivers: I) Euro-zone June report for the Composite PMI output survey was higher by 2.1 points to 59.2, which beat Street estimates of a rise to 58.5. This brought the survey to its highest level since 2006 and sends a positive message regarding expected GDP growth in Q2 and Q3 (7.5% and 13.5% respectively). With a lessening of restrictions, the composite was driven by the services sector which rose by 2.8 points to 58.0.
II) In June, Euro-zone consumer confidence improved by 1.8 points to -3.3. This recent rise brings the survey close to the cyclical peak seen in late 2017, and has risen by a solid 12.2 cumulative points since February. Consumer confidence has been boosted by the lifting of COVID-19 restrictions, which has helped to support the jump in mobility statistics which have improved significantly in recent weeks.
III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was higher by +2.13% for the week (MTD +0.49% YTD +13.90%).
Asian Equities
Asian markets rose last week as an agreement in the US for a bipartisan infrastructure spending bill could provide demand for EM exporters. The DJ Asia Index advanced by +0.22% for the week, (MTD -0.75% YTD +5.40%).
Drivers: I) In Japan, June’s Flash Composite PMI declined by 1.0 point from May’s 48.8 to 47.8. The fall was prompted by the drop of 1.5 points in the manufacturing index, while the service business activity index improved by 0.7 points despite the state of emergency being extended. Manufacturing was hampered by supply chain constraints, as the output index slid by 4.6 points to 49.1. Services should improve as vaccinations increase.
II) In Taiwan, Retail Sales for May plunged by 7.2% m/m on a seasonally adjusted basis. The sharp decline in real sales was caused by the government needing to implement COVID-19 restrictions due to a rise in cases. These restrictions included limits on social gatherings, closing of schools and public facilities. As such, spending activity involving domestic tourism, entertainment and service sector activity declined precipitously.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei rose by +0.39% (MTD +0.76% YTD +6.65%), the Hang Seng Index was higher by +1.72% (MTD +0.45% YTD +7.42%) and the Shanghai Composite advanced by +2.34% (MTD -0.22% YTD +3.87%).
Fixed Income
Treasury yields experienced their steepest rise on the long end since the beginning of the year, as the PCE price index reported its highest rise (3.9% oya) since August 2008.
Performance: I) The 10-year Treasury yield rose last week ending at 1.529% up from 1.436%. The 30-year yield increased last week finishing at 2.152% rising from 2.015%.
- II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index fell by -0.41% last week, MTD +0.30% and YTD -2.00%. The Bloomberg Barclays US MBS TR was higher by +0.07% last week, MTD -0.18% and YTD -0.91%. The Bloomberg Barclay’s US Corporate HY Index advanced by +0.37% for the week, MTD +1.07% and YTD +3.34%.
Commodities
The DJ Commodity Index rose last week by +1.51% and is lower month to date -1.57% (YTD +20.06%). Commodity prices rebounded as reports of a bipartisan infrastructure plan in the US caused a rise in industrial metals such as copper, while aluminum and zinc rose on increased demand from consumer industries.
Performance: I) The price of oil advanced last week by +3.41% to close at $73.99 and is higher month to date by +11.04% (YTD +52.49%). Oil prices increased for a fifth consecutive week on the positive outlook for demand that is expected to rise as the global economy re-opens.
II) The ICE USD Index, a gauge of the U.S dollar’s movement against six other major currencies, was lower by -0.57% closing at 91.79 for the week (MTD +1.92% YTD +2.06%). The USD fell last week as the number of Fed officials stated that we are still a quite a ways off from raising interest rates.
III) Gold posted its first weekly gain in four weeks as the USD weakened and Basel III coming into effect on Monday, which will put European capital requirements to hold physical gold at a Tier 1 basis which is on par with cash. Gold jumped in price by +0.97% last week, rising to $1780.6 (MTD -6.59% YTD -6.04%).
Hedge Funds
Hedge fund returns in June are positive for the month with the core strategies Equity Hedge, Event Driven, Relative Value and Multi-Strategy higher, while Macro/CTA is lower.
Performance:
- The HFRX Global Hedge Fund Index is higher by +0.19% MTD (+3.54% YTD).
- Equity Hedge advanced by +0.89% MTD (+7.57% YTD).
- Event Driven is up MTD +0.10% (+3.39% YTD).
- Macro/CTA has fallen by -1.02% MTD (+1.13% YTD).
- Relative Value Arbitrage is up by +0.23% (+0.74% YTD).
- Multi-Strategy is higher MTD by +0.21% (+0.49% YTD).
Data Source: Haver Economics, Standard & Poor’s, HFR, Bloomberg, Morningstar and FactSet