Economic Data Watch and Market Outlook
The US equity market correction I alluded to last week, lasted one day, as the increase in coronavirus delta variant cases around the global sent stocks lower on Monday. The rise in variant cases in states with low vaccination rates, and throughout the Euro-zone and Asia, caused the S&P 500 to suffer its worst one-day decline (-1.59%) in two months. The DJIA fell by -2.09%, the index’s poorest showing since October. The risk off sentiment drove the 10-year Treasury yield to an intra-day low of 1.17% (far below the 1.77% high in March). However, variant fears were more than neutralized by the spectacular earnings and revenue reports from US corporations. The “buy the dip” mentality was in full force beginning on Tuesday and for the remainder of the week, as the DJIA crossed 35.000 for the first time and the NASDAQ Composite hit a new all-time high. With an estimated 24% of companies having reported, 88.0% have beaten their earnings estimate (five-year average 75.0%), with earnings coming in at 19.0% above estimates (five-year average 7.8%). Q2 2021 earnings are growing at 74.2% on a year over year basis (versus end of Q2 estimate of 63.2%). All eleven sectors in the S&P 500 have posted positive earning growth, led by financials, healthcare, technology, and communication services. A few weeks ago, I wrote that the seemingly inexorable rise in equity prices would need the support of strong earnings, thus far this scenario has played out.
Heading into next week’s trading sessions, all eyes will turn to the upcoming FOMC meeting where markets will be searching for guidance regarding the timing of eventual ‘tapering” and a rise in interest rates. Flying under the radar is the start of Congressional talks about the expiration of agreement that suspended the US debt limit ceiling in 2019. Treasury Secretary Yellen already warned Congress after years of using accounting tricks to hide the true level of debt and deficits would no longer be tolerated. This will be an interesting soap opera as President Biden and Congressional Democratic leaders continue to push for a $3.4 trillion infrastructure package via “reconciliation”. Finally, over 180 S&P 500 and 10 DJIA constituents report earnings next week, with big tech at the forefront led by Facebook, Apple, Amazon, Microsoft, Alphabet, Advanced Micro Devices and Qualcomm.
In looking ahead to the economic calendar next week, a busy schedule will be centered around data tied to durable goods, personal spending and personal income and inflation. On Tuesday, June Durable Goods orders are expected to climb by 3.2%. Aircraft orders in June are projected to rise, as well as orders for core capital goods (0.4%). The Conference Board Consumer Confidence Index is projected to fall by 2.3 points to 125.0 in July. Though at historically high levels, sentiment is waning a bit due to the spike in delta variant cases.
On Thursday, Q2 GDP growth is expected to rise by 8.0% saar, propelled by fiscal stimulus and a strong “re-opening” surge in economic activity.
On Friday, Real Consumer Spending for June is expected to be unchanged which any increase in spending being driven by a rise in consumer prices. Personal Income in June is also projected to be flat, as the rise in income earlier in the year pushed by stimulus check issuance continues to decline. Finally, within the personal income report, the headline PCE deflator is estimated to rise by 0.5% in June, with the year over year rate remaining steady at 3.9%. The core PCE Price Index is projected to increase by 0.39% in June, while the year over year rate should remain unchanged at 3.4%.
The Week In Review
U.S. Equities
US equity markets broke out to new all-time highs, as concerns over the spread of the delta variant were out-weighted by very strong corporate earnings, revenues, and profit reports
US Index Performance
- Dow Jones +1.12% MTD +1.70% YTD +15.72%
- S&P 500 +1.97% MTD +2.74% YTD +18.41%
- Russell 2000 +2.15% MTD -4.34% YTD +12.44%
- NASDAQ +2.84% MTD +2.30% YTD +14.07%
Drivers: I) The July Flash PMI report provided mixed results as services failed to meet expectations, while the manufacturing index beat expectations. The services survey dropped sharply from June’s level of 64.6 to 59.8 this month, led by a decline in business expectations which fell by 10 points. The manufacturing index rose from 62.1 to 63.1 in July, supported by a moderate easing in supply chain bottlenecks.
II) US Housing starts in June rose by 6.3% to 1.643 mm, which beat expectations which called for a rise of only 1.1% to 1.590 mm. Housing permits disappointed by declining by 5.1% to 1.598 mm, far below the projected increase of 1.3% to 1.705 mm. The fall in permits was seen mostly in single family homes, which dropped by 6.3% as the fervent buying of these homes has cooled after a very strong period earlier in the recovery.
III) In June, Existing Home Sales increased by 1.4% to 5.86 mm which was a reversal of a four straight month downtrend in sales, that highlighted the slowing of housing activity that experienced very strong performance in late 2020 and early 2021. The solid increase in June does not bring sales close to the peak of 6.7 mm seen last October. Housing data industry wide, is showing a moderation in sales due to high home prices.
IV) US Initial Jobless claims for the week ending July 17, increased by 51k to 419k which was contrary to expectations which projected another weekly decline. This was the largest increase in claims since last March. Continuing claims fell slightly from 3.265 mm the previous week to 3.24 mm. The national drop in claims is related to some states that have ended the extra UE benefit programs, causing individuals to find jobs.
V) Equities Month to Date are mixed with Large-Cap, Growth, Tech, and Healthcare leading equity price performance. The laggards for the period are Small-Cap, Value, Energy, and Materials
Capitalization: Large Caps +2.47% (YTD +17.80%), Mid-Caps +0.38% (YTD +16.69%) and Small Caps -4.34% (YTD +12.44%). Style: Value –2.80% (YTD +21.74%) and Growth -0.71% (YTD +12.70%). Sector Groups: Energy -9.92% (YTD +30.65%), REITs +4.34% (YTD +28.52%), Financials -1.22% (YTD +24.02%), Communication Services +2.05% (YTD +22.56%), Technology +4.62% (YTD +19.14%), Information Technology +4.30% (YTD +18.55%), Industrials +1.12% (YTD +17.61%), Healthcare +4.36% (YTD +16.63%), Materials -0.73% (YTD +13.84%), Consumer Discretionary +2.63% (YTD +14.31%), Consumer Staples +2.04% (YTD +7.02%) and Utilities +3.92% (YTD +6.31%)
European Equities
The MSCI Europe Index rose as strong PMI data and continued improvements in employment offset worries over increased restrictions brought on by the spread of the coronavirus delta variant
Drivers: I) The ECB last week reiterated it will remain accommodative and they support a stronger recovery in economic growth. The ECB stated that interest rates will remain at the current or lower levels “until it sees inflation reaching 2.0% well ahead of the end of its projection horizon and durably for the rest of the projection horizon.” Asset purchases will remain in place until the first-rate hike, which currently is not being discussed.
II) The July Euro-Zone PMI rose 1.1 points to 60.6, beating the Street estimate of a rise to 59.8. The Services sector provided the strong boost, as business activity increased by 2.1 points to 60.4, while the manufacturing index dropped by 1.7 points to 60.9. The momentum in reopening support the rise in services, as remaining restrictions were removed in June and early July. The drop in manufacturing was due to input shortages.
III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was higher by +0.99% for the week (MTD +0.96% YTD +12.87%).
Asian Equities
Asian markets were lower last week, as the surge in coronavirus cases in the region has prompted governments to tighten social and travel restrictions, all of which can slow economic growth. The DJ Asia Index declined by -2.04% for the week, (MTD -2.75% YTD +1.16%).
Drivers: I) In Japan, the Bank of Japan reported reals exports in June increased by 0.5%, which brought the Q2 average 14.8% higher than the Q1 average on an annualized basis. Auto exports were solid in June, rising by 5.4% m/m despite the semiconductor shortages. As chipmakers increase their capacity and production, the shipment of semiconductor making equipment jumped by a strong 10.3% in June.
II) In Taiwan, June’s Industrial Production beat Street expectations by increasing by 18.37% over a year ago, versus the consensus estimate of a 12.5% rise. Industrial production showed a sizable increase in technology production, while non-technology production also posted a solid gain. Specifically, gains were seen in information and electronics categories at a 6.9% m/m pace in June. Non-tech manufacturing was up 3.4%.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei fell by -1.63% (MTD -4.32% YTD +1.20%), the Hang Seng Index was lower by -2.46% (MTD -5.30% YTD +0.09%) and the Shanghai Composite advanced by +0.31% (MTD -1.14% YTD +2.23%).
Fixed Income
Treasury yields were modestly lower last week as the IHS Markit Flash US Composite Output Index fell to a four-month low due to continued supply chain and capacity constraint issues
Performance: I) The 10-year Treasury yield fell last week ending at 1.276% down from 1.298%. The 30-year yield declined last week finishing at 1.920% dropping from 1.925%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index rose by +0.19% last week, MTD +0.87% and YTD -0.75%. The Bloomberg Barclays US MBS TR was higher by +0.18% last week, MTD +0.48% and YTD -0.29%. The Bloomberg Barclay’s US Corporate HY Index advanced by +0.18% for the week, MTD +0.48% and YTD +3.95%.
Commodities
The DJ Commodity Index rose last week by +0.65% and is lower month to date +0.20% (YTD +22.72%). Commodity prices rose last week as energy rose on projections of declining supplies, and coffee rallied strongly as frost in Brazil has severely cut expected crop yields.
Performance: I) The price of oil climbed higher last week by +1.04% to close at $72.17 and is lower month to date by -1.76% (YTD +48.74%). Oil rose in price last week as markets are still trying to determine if the rise in OPEC (plus allies) production will be negative for the market, or will the spread of the delta variant pose a threat to global demand.
II) The ICE USD Index, a gauge of the U.S dollar’s movement against six other major currencies, was higher by +0.21% closing at 92.91 for the week (MTD +0.51% YTD +3.31%). The USD rose last week on the back of strong corporate earnings and solid US housing data.
III) The price of gold dropped last week as equity markets were in a “risk-on” mode due to strong corporate earnings and a rise in the USD. Gold declined in price by -0.54% last week, falling to $1802.1 (MTD +1.72% YTD -4.90%).
Hedge Funds
Hedge fund returns in July are mostly lower on the month with the core strategies Event Driven and Macro/CTA, Relative Value and Multi-Strategy lower, while Equity Hedge is up.
Performance:
- The HFRX Global Hedge Fund Index is lower by -0.32% MTD (+3.40% YTD).
- Equity Hedge advanced by +0.16% MTD (+8.04% YTD).
- Event Driven is lower MTD -0.66% (+2.73% YTD).
- Macro/CTA has declined by -0.98% MTD (+0.56% YTD).
- Relative Value Arbitrage is down by -0.11% (+0.74% YTD).
- Multi-Strategy is lower MTD by -0.11% (+0.49% YTD).
Data Source: Haver Economics, Standard & Poor’s, HFR (returns have a two-day lag), Bloomberg, Morningstar and FactSet
This report discusses general market activity, industry, or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. It is for informational purposes only and does not constitute, and is not to be construed as, an offer or solicitation to buy or sell any securities or related financial instruments. Opinions expressed in this report reflect current opinions of Clearbrook as of the date appearing in this material only. This report is based on information obtained from sources believed to be reliable, but no independent verification has been made and Clearbrook does not guarantee its accuracy or completeness. Clearbrook does not make any representations in this material regarding the suitability of any security for a particular investor or the tax-exempt nature or taxability of payments made in respect to any security. Investors are urged to consult with their financial advisors before buying or selling any securities. The information in this report may not be current and Clearbrook has no obligation to provide any updates or changes.