Economic Data Watch and Market Outlook
Investors last week dealt with a number of concerns including inflation (July PPI 7.8% highest 12 month rise since November 2010), the spread of the Delta variant (rising cases in Asia lead to new restrictions) , and “hawkish” commentary from Atlanta Fed President, Raphael Bostic (should the US labor market continue to improve over next few months, the Fed is on track to taper and rate hikes can potentially start in “very late” 2022). US equity markets however, shrugged off these concerns as the S&P 500 and DJIA forged new record highs. The equity indexes were supported by the US Senate approval of the $1.1 trillion infrastructure bill, as well as the framework around the $3.5 trillion spending bill to be debated by the House when Congress reconvenes after the summer recess. The spectacular corporate earnings season also lent a helping hand, as the spate of outsized earning growth reports from the S&P 500 continued. According to FactSet, with 91.0% of the S&P 500 having reported, the year over year earnings growth for Q2 is 89.3% (versus June 30 estimate of 63.0%) which is the highest growth seen since Q4 2009 (109.1%). Of greater importance, with the rise in materials and input costs, companies have been able to pass along these higher costs as they have the strongest “pricing power” in years due to pent up demand from consumers. Specifically, the S&P 500 companies have posted a 13.0% profit margin, a historical high, and is solidly above the five year average of 10.6%. Robust earnings and positive forward projections have FactSet raising 2021 S&P 500 earnings to 41.9%, far above the 22.1% initial estimate from December 2020.
Heading into next week’s trading sessions, we will begin to close out the corporate earnings season with reports from big box retailers including Walmart and Target, home improvement companies Home Depot and Lowe’s, and information technology stalwarts Cisco Systems and NVIDIA. But one large concern is at the center of everyone’s mind, will equities continue their unabated rally for the rest of 2021? The S&P 500 has risen nine months in a row without a correct greater than 5.0%, the VIX is at a complacent level of 15.45 and the month of September has historically been the worst performing month (since 1928 -1.0% average monthly loss 52% of the time). However, on the plus side, corporate earnings and GDP are on track to provide above trend growth for several more quarters, high levels of investor and corporate cash will support equities (expect increases in dividends, stock buybacks and M&A activity) and market technicals have recently improved (68.9% of S&P 500 trading above 50 day moving average). One last interesting positive is the S&P 500 after hitting its P/E cycle high of 23.6 on August 28, 2020, the index is now trading at 21.1 despite appreciating by 27.37% over this time period. Though we are due for a correction, underlying fundamentals and technicals support higher equity prices.
In looking ahead to the economic calendar next week, the reports of note will be US Retail Sales, Industrial Production and Housing Starts for July. On Tuesday, the July Retail Sales are projected to fall by 1.5% due to the recent rise in new COVID-19 cases which curbed consumer spending and a drop in motor vehicles and parts sales. Also on Tuesday, Industrial Production for July is estimated to increase by 0.5% led by a revival in motor vehicle and parts output (9.4%) which have been impacted by supply chain bottlenecks.
US Housing Start for July out on Wednesday, are projected to drop by 5.0% to 1.560 mm. A weakening in several housing sectors have been seen in recent months, after a very strong run since mid-2020. Single family home starts are expected to decline by 4.7%, while multifamily starts are estimated to fall by 5.7%
The Week In Review
U.S. Equities
The S&P 500 and DJIA closed at record highs, as strong corporate earnings have been able to offset the dive in consumer sentiment caused by the spread of the Delta variant and its potential negative effect on growth.
US Index Performance
- Dow Jones +0.94% MTD +1.74% YTD +17.31%
- S&P 500 +0.75% MTD +1.72% YTD +20.02%
- Russell 2000 -1.06% MTD -0.09% YTD +13.19%
- NASDAQ -0.10% MTD +1.15% YTD +15.01%
Drivers: I) The Consumer Price Index (CPI) for July came in lower than expected, as the headline reading was up 0.47% (estimate 0.6%) and 5.3% (projected 5.5%) over a year annualized. The strong rise in used vehicle prices that drove inflation in recent months receded, with an increase of only 0.2%. Airfares which had risen was 0.1% lower last month, and rent of primary residences rose just 0.16%, the weakest rise since March.
II) July’s Producer Price Index (PPI) and the core ex-food and energy both posted a stronger than expected rise of 1.0%, versus the consensus estimate of an increase of 0.6% for both data sets. The headline PPI has now risen by 8% over the past year annualized (oya), and the core reading was up 7.5% oya. Much of the rise in PPI was driven by firmer prices in airfares, hospitals and used vehicles. With a recent pull back in used vehicle and lodging costs, we may have seen the peak in inflationary pressures for now.
III) The JOLTs report for June showed a jump of 590,000 job openings, bringing total openings to 10.073 million. The report shows the strength in demand for labor, as the level of job openings is at an all-time high. The total number of hires rose from 6.022 mm in May to 6.791 mm in June. The report also highlighted workers are positive on the job market, thus employees who quit their jobs in June rose by 6.6%.
IV) For August the University of Michigan Consumer Confidence index plunged to 70.2 from July’s reading of 81.2, far below the expected Street consensus which called for a rise of 0.8 points to 82.0. The recent rise in Delta variant cases weighted on sentiment, as the current conditions index dropped from 84.5 to 77.9. The increase in inflation was also a concern, as expected inflation for the year ahead came in at 4.6%.
V) Equities Month to Date are mixed with Large-Cap, Value, Financials, and Utilities leading equity price performance. The laggards for the period are Small-Cap, Growth, Communication Services and Energy
Capitalization: Large Caps +1.52% (YTD +19.02%), Mid-Caps +1.24% (YTD +18.52%) and Small Caps -0.09% (YTD +13.19%). Style: Value +1.74% (YTD +25.53%) and Growth +0.12% (YTD +14.36%). Sector Groups: Energy +0.01% (YTD +32.91%), Financials +5.56% (YTD +31.95%), REITs +0.76% (YTD +29.85%), Communication Services +0.18% (YTD +20.96%), Materials +2.92% (YTD +20.43%), Technology +1.07% (YTD +19.53%), Industrials +1.59% (YTD +19.19%), Information Technology +1.00% (YTD +18.99%), Healthcare +1.21% (YTD +18.64%), Consumer Discretionary +0.63% (YTD +13.23%), Utilities +4.10% (YTD +11.10%) and Consumer Staples +1.46% (YTD +8.68%)
European Equities
The MSCI Europe Index was higher for a fourth straight week, boosted by solid corporate earnings and the easing of restrictions across parts of the region.
Drivers: I) June Euro-zone Industrial Production dropped by 0.3% m/m and was lower in Q2 2021 by 0.5% q/q on a seasonally adjusted annual rate (saar). The poor result was due exclusively to the decline in auto production prompted by the semiconductor shortages. The production of autos plunged by 35% q/q saar during Q1 and Q2, while Industrial Production ex-autos rose by 5.0% q/q saar in Q1 and was flat in Q2.
II) In June, UK GDP growth for Q2 came in at 8% q/q or 20.7% annualized. The increase in Q2 GDP still leaves growth approximately 4.4% below the Q4 2019 pre-COVID level. Growth was driven by strong gains in services, led by the rise of 4.5% in healthcare services and the 14% m/m increase in hospitality which dramatically improved after the easing of restrictions that occurred during the second half of May.
III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was higher by +1.64% for the week (MTD +2.62% YTD +16.86%).
Asian Equities
Asian markets were mixed last week, as the spread of the Delta variant initiated new restrictions in Japan, South Korea, and China. Asia has been hit harder by COVID due to much lower vaccination rates versus the US and the Euro-zone. The DJ Asia Index fell by -0.91% for the week, (MTD +0.40% YTD +0.83%).
Drivers: I) In Japan, the Producer Price Index (PPI) advanced by 0.8% m/m in July, while the measure rose by 5.6% over a year annualized, which is the highest increase since September 2008. The primary component behind the rise was the sizable jump in electric power cost during the summer season. The increase in PPI and input prices reflect the rise in oil, commodity, and auto-related goods prices.
II) In China, the rise of the Delta variant, enforcement of new restrictions and several new regulatory actions has prompted investment firms to lower their Q3 GDP growth projection. JPMorgan has revised down the Q3 growth forecast from 4.3% q/q to 2.0% q/q on a seasonally adjusted annual rate. Weakening data has been seen in July manufacturing PMIs, exports, and imports, as well as domestic investment.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei rose by +0.57% (MTD +2.55% YTD +2.79%), the Hang Seng Index was higher by +0.71% (MTD +1.53% YTD -3.48%) and the Shanghai Composite advanced by +1.68% (MTD +3.50% YTD +1.24%).
Fixed Income
Treasury yields were higher last week as the PPI rose for a sixth consecutive month, and reached a 7.8% rate for the past 12 months, the highest level seen since 2010.
Performance: I) The 10-year Treasury yield rose last week ending at 1.286% up from 1.228%. The 30-year yield increased last week finishing at 1.929% rising from 1.895%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index rose by +0.11% last week, MTD -0.31% and YTD -0.82%. The Bloomberg Barclays US MBS TR was higher by +0.05% last week, MTD -0.20% and YTD -0.35%. The Bloomberg Barclay’s US Corporate HY Index declined by -0.16 for the week, MTD -0.35% and YTD +3.65%.
Commodities
The DJ Commodity Index rose last week by +0.14% and is lower month to date -1.38% (YTD +22.19%). Commodity prices were driven by the rise in corn and wheat prompted by hot weather that can lower crop yields.
Performance: I) The price of oil advanced last week by +0.28% to close at $68.03 and is lower month to date by -7.83% (YTD +40.21%). Oil was up slightly last week as concerns over a potential decline in demand caused by the Delta variant, was offset by the decline in global inventories.
II) The ICE USD Index, a gauge of the U.S dollar’s movement against six other major currencies, was lower by -0.28% closing at 92.52 for the week (MTD +0.47% YTD +2.88%). The USD declined last week as interest rates stabilized and components within the CPI report showed some moderation.
III) The price of gold was higher last week, as investors sought the safe heaven due to the rise in Delta variant cases and the sharp drop in US consumer confidence. Gold increased by +1.00% last week, rising to $1781.5 (MTD -1.95% YTD -5.99%).
Hedge Funds
Hedge fund returns in August are mostly higher on the month with the core strategies Equity Hedge, Event Driven, and Macro/CTA higher, while Relative Value and Multi-Strategy are lower.
Performance:
- The HFRX Global Hedge Fund Index is higher by +0.22% MTD (+3.50% YTD).
- Equity Hedge advanced by +0.30% MTD (+8.68% YTD).
- Event Driven is higher MTD +0.22% (+1.87% YTD).
- Macro/CTA has advanced by +0.31% MTD (+1.39% YTD).
- Relative Value Arbitrage is lower by -0.05% (+0.78% YTD).
- Multi-Strategy is down MTD by -0.07% (+0.52% YTD).
Data Source: Haver Economics, Standard & Poor’s, HFR (returns have a two-day lag), Bloomberg, Morningstar and FactSet
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