Economic Data Watch and Market Outlook
Despite the slowdown in US job growth, rising tensions between the US and China and President Trumps’ executive order proposing a ban on the use of China’s TikTok and WeChat apps in the US, global equity markets continued to stage an impressive rally. If investors had fallen asleep on February 19th and awoke last Friday, August 7th, they would have missed the virtual round trip of the S&P 500 of essentially losing over 34.0% followed by a climb of approximately 50.0%. After hitting an all-time high of 3386.15 in February, the S&P 500 dropped to a low of 2237.4 on March 23rd, and has rallied to 3347.25 as of Friday’s close to come within 1.14% from its historical high. The initial push in equity prices was ignited by massive monetary and fiscal stimulus and a strong recovery in job growth and consumer spending. In defiance of the gridlock in Washington, with the White House and Democrats in Congress having stated they are “very very far apart on significant issues” on the passage of the 5th COVID-19 stimulus bill, equity markets have recently rallied on the sharp rebound in global industrial production, and corporate earnings that have been better than their “worse-case scenario”. The star of this global equity rally has been the NASDAQ, driven by the strong performance of technology companies such as Apple, Amazon and Microsoft, which has propelled the index to 32 new highs in 2020 while closing last week above the 11,000 mark for the first time at 11,010.98.
As we enter next week’s trading sessions, the key news items that will drive markets will be progress on the next coronavirus stimulus bill in the US, the tail end of the corporate earnings season and continued decline in new US COVID-19 cases. The COVID-19 stimulus bill is stalled due the insistence of Democrats to provide over $1 trillion in aid to state and local governments, which brings their total package to $3.4 trillion versus the proposed $1.12 trillion from the Republicans. President Trump has stated he will execute executive orders to extend unemployment benefits, eviction protection for renters, provide student loan relief and defer payroll taxes if Congress cannot agree on a new stimulus bill. It is important this impasse be resolved as there are still over 31 million Americans collecting UE benefits. Notwithstanding the dysfunction in Washington, it will be interesting to see if US markets can continue their upward momentum and reach new highs next week.
In turning to next week’s economic calendar, the data releases will be centered around inflation data, retail sales and consumer sentiment. On Tuesday, the July Producer Price Index is projected to rise by 0.2%. The primary rise in the index is being driven by an expected 7.7% jump in energy prices, but core PPI looks to remain muted at 0.1% increase.
On Wednesday, the consumer price index in July is estimated to have risen by 0.4%, while the core price index increased by 0.23%. Energy will be the primary push behind the rise in CPI, as it is forecasted to have increased by 3.0% in July.
July’s Retail Sales data out on Friday is projected to have increased 2.8%, continuing the growth rebound that began in May. Auto sales are expected to show a strong 9.0% rise, while gasoline sales are estimated to increase by 4.5%. Closing out Friday will be the University of Michigan consumer sentiment index which is expected to be unchanged at 72.5. Sentiment has moderated due to concerns over the rise of new COVID-19 cases and the potential loss of supplemental unemployment benefits due the lack of new legislation from Washington.
The Week In Review
U.S. Equities
US equity markets continued their rally as better than expected jobs and manufacturing data have helped offset the negative sentiment caused by the stalemate in DC over the size of the new stimulus package.
- Dow Jones +3.88% MTD +3.88% YTD -2.50 S&P 500 +2.49% MTD +2.49% YTD +4.93%
- Russell 2000 +6.03% MTD +6.03% YTD -5.18%
Drivers: I) The US nonfarm payroll in July jumped by 1.763 million, which was above the consensus estimate of 1.5 million. The rate of unemployment fell more than expected, to 10.2% from 11.1%, though the labor force participation rate slid to 61.4%. The trend of job growth is expected to continue its rise, though at a more moderate level. Major factors to watch for is legislation from Washington and a new spike in COVID-19 cases.
II) The ISM manufacturing survey bounced higher in July, from 6 in June to 54.2. The recovery from the COVID-19 induced decline in manufacturing, has been headed by a strong rise in news orders and production, which increased to 61.5 and 62.1 respectively. A positive sign in the data is also seen in supplier deliveries and inventories which dropped in June and July, and are improving due to increased demand.
III) New Factory Goods orders in June rose by 6.2%, which was above the Street estimate of a rise of 5.0%. The increase was led by a jump in shipments of 9.8%. The rise in orders show a continuation of the bounce seen in May and June, following sizable declines in March and April. Orders for non-durable goods such as oil, chemicals, and textiles and advanced 5%, but overall orders remain 10.0% below a year earlier level.
IV) The ISM non-manufacturing survey in July rose from the June level of 1 to 58.1, slightly ahead of the consensus forecast of 58.0. Despite recent high frequency data reports that show a moderating of growth, many business surveys during June and July have showed improvement. The solid increase was supported by strong data related to activity (67.2) and new orders (67.7).
V) Equities Month to Date are higher with Small-Cap, Value, Financials, and Industrials leading equity price performance. The laggards for the period are Mid-Cap, Growth, REITs, and Healthcare.
Capitalization: Large Caps +2.43% (YTD +5.38%), Mid-Caps +2.05% (YTD -1.82%) and Small Caps +6.03% (YTD -5.18%). Style: Value +5.31% (YTD -15.71%) and Growth +3.74% (YTD +2.14%). Sector Groups: Technology +3.01% (YTD +24.98%), Information Technology +3.05% (YTD +23.82%), Consumer Discretionary +2.51% (YTD +12.74%), Communication Services +3.02% (YTD +9.91%), Healthcare +0.85% (YTD +5.39%), Consumer Staples +1.34% (YTD +2.25%), Materials +2.18% (YTD +1.63%), Utilities +1.05% (YTD -3.14%), REITs +0.68% (YTD -4.26%), Industrials +4.77% (YTD -6.67%), Financials +3.30% (YTD -18.06%) and Energy +3.18% (YTD -35.84%).
European Equities
The MSCI Europe Index rose last week on improvements in manufacturing and services PMI data, and a rebound in retail sales.
Drivers: I) Euro-zone countries reported strong growth in industrial production led by Germany and France’s June increases of 10.8% and 12.7% month over month respectively. The large gains though have yet to offset the step cumulative decline of 28.0% in March and April caused by the COVID-19 economic shutdown. A key component behind the growth is the revival of German auto production which rose by 7.0% for the month.
II) June Euro-zone Retail Sales rose by a healthy 5.7%, following the strong surge of 20.3% in May. The sizable jump in retail sales, brings them back to pre-COVID-19 levels. The positive data is leading Street economists to project a sharp Q3 rebound in GDP growth of 60.0% on an annualized basis, following the step 40.0% decline seen in Q2. Germany and France are leading gains, as their sales are now 2.0% and 4.0% above pre-virus levels.
III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was higher by +1.66% for the week (MTD +1.66% YTD -7.93%).
Asian Equities
Asian equity markets were mixed as optimism for more US fiscal stimulus was offset by rising US/China tensions. The DJ Asia Index advanced by +1.74% for the week, (MTD +1.74% YTD -6.80%).
Drivers: I) President Trump last Thursday evening issued executive orders preventing US residents from doing business with China’s TikTok and WeChat applications within 45 days, targeting September 20th as the start date. The order centers around WeChat, which has approximately 1 billion users worldwide, and is alleged its “data collection threatens to allow the Chinese Communist Party access to American’s personal and proprietary information. It is anticipated the orders will be challenged in court.
II) In China, the July Caixin/Manufacturing PMI increased by 1.6 points to 52.8, which was the third consecutive monthly jump and best reading since January 2011. The jump in manufacturing was broad based, with output up 2.1 points to 54.9, new orders up 2.2 points to 54.4 and export order rising 1.3 points to 48.3. The continued normalization of manufacturing activity is spreading, and is indicative of a recovery in global demand.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei rose by +2.85% (MTD +2.85% YTD -4.55%), the Hang Seng Index was lower by -0.26% (MTD -0.26% YTD -12.56%) and the Shanghai Composite advanced by +1.33% (MTD +1.33% YTD +9.96%).
Fixed Income
Treasury yields rose were slightly last week, as the “risk on” rally in equities continued and US employment data beat Street expectations.
Performance: I) The 10-year Treasury yield was higher last week ending at 0.568% up from 0.534%. The 30-year yield rose last week finishing at 1.236% jumping from 1.197%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index rose +0.10% last week, MTD +0.10% and YTD +7.83%. The Bloomberg Barclays US MBS TR was higher by +0.14% last week, MTD +0.14% and YTD +3.83%. The Bloomberg Barclay’s US Corporate HY Index was higher by +0.56% for the week, MTD +0.56% and YTD +1.28%.
Commodities
The DJ Commodity Index was higher last week by +2.10% and is up month to date +2.10% (YTD -6.01%). The commodity index forged ahead, as improving global industry production and US housing data helped to push industrial metals and lumber prices higher, while gold hit another new high at $2,046.10.
Performance: I) The price of oil rose last week by +2.89% to close at $41.60 and is higher month to date by +2.89% (YTD -31.87%). Oil prices rose despite the reduction in production curbs by OPEC and their allies, as China has recently been a large buyer of oil as their economy has continued to rebound.
II) The ICE USD Index, a gauge of the U.S dollar’s movement against six other major currencies, was lower by -0.07% ending at 93.39 for the week (MTD -0.07% YTD -3.11%). The USD resumed its decline last week, as investors are concerned over the rise of new COVID-19 cases in the US and the potential for a Joe Biden win in the November election, which could cause a shift from the Republican’s capitalistic to a more socialistic agenda.
III) Gold rose to an all-time high of $2046.1 spurred on by record low interest rates and the political impasse in Washington over the size of the next COVID-19 stimulus plan. Gold was higher by +2.61% last week, climbing to $2046.1 (MTD +2.46% YTD +34.34%).
Hedge Funds
Hedge fund returns in August are higher with all of the core strategies Equity Hedge, Event Driven, Macro/CTA, Relative Value and Multi-Strategy in positive territory.
Performance:
- The HFRX Global Hedge Fund Index is higher at +0.83% MTD and up +1.09% YTD.
- Equity Hedge has advanced by +1.13% MTD and is lower by -4.46% YTD.
- Event Driven is up MTD +0.88% and is up YTD +3.43%.
- Macro/CTA has risen by +0.85% MTD and is higher by +1.90%
- Relative Value Arbitrage is higher by +0.47% and is up +3.64% YTD.
- Multi-Strategy is up MTD by +0.42% and has risen by +3.35% YTD
Data Source: Haver Economics
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