Economic Data Watch and Market Outlook
Global market headwinds were blowing last week as the White House and Congressional democrats remained in a stalemate regarding the fifth COVID-19 rescue bill, the US and China cancelled a review of the Phase One trade deal due to scheduling issues, and interest rates rose in the US as the rising size of treasury auctions are expected to accelerate in order to feed the $3 trillion growing beast of a deficit for the remainder of 2020. Despite these impediments, equity markets forged higher with the S&P 500 briefly rising above its February all time high of 3386.15, before closing just 0.4% lower. Markets are being fueled by a second straight week of lower COVID-19 infections and hospital cases in the US, as well as the US government reaching a $1.5 billion deal with Moderna to purchase 100 million doses of its coronavirus vaccine. Market sentiment was also boosted by the drop in weekly jobless claims to 963,000 for the week ending August 8, a second straight weekly decline and the first below 1 million since March. Gold snapped a nine-week rally, suffering its worse daily decline (-5.0%) mid-week since 2013. Interest rates were notably higher on the longer end of the curve, as the auction of new treasury paper was not well received.
As we enter next week’s trading sessions, we wonder whether equity markets can continue their torrid recovery for the remainder of 2020? Since hitting bottom on February 19th, the S&P 500 has rallied approximately 51.0% recovering essentially the entire loss seen in Q1. The incredible price retracement has only taken 153 calendar days, versus an average of plus four years it took during the past 12 bear markets according to Bloomberg. Pushing the markets higher again has been the forwarding looking tendencies of financial markets, not the present or past. With the Q2 US corporate earnings season coming to an end, 91% (456 companies) of the S&P 500 have reported and earnings are tracking a “less-worse” drop of -33.6% versus the original projection of -44.0%. Approximately 84% have beaten their estimates, far above the 15-year average of 65%. Investors have also been heartened by positive earnings guidance from 8 out of 11 sectors, led by consumer discretionary, healthcare and financials. The current consensus S&P 500 2021 earnings estimate is $163.31 or a 30.9% yoy increase. Market volatility should remain heightened as these are the summer doldrums with average trading volumes down 30% from their norms, political rhetoric will rise with a rescue package still in negotiation and the US Presidential election coming to the fore, and let’s not forget COVID-19.
In turning to next week’s economic calendar, housing data will take center stage along with a read of US leading economic indicators. On Monday, the August National Association of Home Builder’s survey is expected to rise 1 point to 73. This recent rise in homebuilder sentiment has been aided by mortgage rates remaining low.
Housing Starts on Tuesday are estimated to have jumped by 7.1% in July to 1.270 units, while permits surged by 5.0% to 1.32 million on a seasonally adjusted annual rate. The rise in home construction is a reversal of the sharp decline caused by COVID-19’s spread, as states and cities have re-opened.
Closing out the week on Friday is the August reading of the Markit manufacturing PMI which is projected to rise by 0.6 points to 51.5. The Markit services PMI is expected to increase by 1.0 points to 51.0. Finally, Existing Home sales are estimated to have jumped 19.7% in July to 5.65 million units, recovering from the COVID-19 Q1 drop.