Economic Data Watch and Market Outlook
Global equity markets consolidated during a choppy week, but the US major indexes rose for a fourth straight month despite a great deal of economic uncertainty and political intrigue. US GDP for Q2 plunged by -32.9% on an annualized basis, beating the Street estimate of -34.5%. The drop in GDP was the largest on record since the Commerce Department began the data series in 1947, and experienced its first back to back quarterly decline since 2008. Fed Chair Jerome Powell at the July FOMC meeting cautioned that high frequency economic data in the US was portending a stall in the recovery, and emphasized “fiscal policy can address things we can’t address”. Which leads us to Washington, where Democrats and Republicans were trying to bridge a $3 to $1 trillion rescue package gap, before the start of the congressional recess date of August 8th. Markets were heartened on Friday, as both sides said they would try to resolve their differences over the weekend.
As we enter next week’s trading sessions, US equity markets have risen about 45.0% off the March 23rd lows, as the rally cries of “don’t fight the Fed” and “TINA” (there is no alternative) have spurred the equity uptrend. Helping the market advance last week was the Tech goliaths, Apple, Amazon, and Facebook. Apple posted record Q2 earnings and revenues, as consumers and students working at home boosted sales. Apple stock reached above $400 per share for the first time and announced a 4 for 1 stock split. Amazon posted their largest profit in history of $5.2 billion, or $10.3 per share which blew out the Street estimate of $1.46 per share. Facebook also beat on top and bottom-line results, while Alphabet was the only disappointment as revenues dropped in Q2 for their first quarterly drop as a public company. The earnings parade continues next week with major companies CVS Health, MetLife, Bristol-Myers Squibb, Cardinal Health, T-Mobile, and Uber reporting. Markets should remain choppy as they are anxiously awaiting an agreement from the US Congress on the next COVID-19 rescue package, and a busy economic calendar will highlight progress on the US job front with the non-farm payroll release
on Friday.
In turning to next week’s economic calendar, a heavy schedule of US data releases will be led by manufacturing and jobs data. On Monday, we start off with the ISM Manufacturing survey for July, which is projected to have increased by 0.9 points to 53.5. The vast improvement in recent months is building off the sharp declines seen in March and April. Motor Vehicle sales in July are expected to increase by 14.0 million units saar. Though sales are still below the pre-COVID 19 levels, sales have jumped from the 8.7 million level seen in April.
On Wednesday, the ISM nonmanufacturing survey is estimated to have increased by 0.9 points to 58.0 for July. The rise in the index is expected to be led by new incoming business and business expectations.
The all-important nonfarm payroll release on Friday, is projected to show a jump of 1.75 million jobs in July sending the unemployment rate down from 11.1% to 10.4%. The strong job growth which began in May mirrors the upswing seen in other economic data which has improved as the US economy has begun to re-open. The job growth has been particularly strong in the lower wage sectors, which is putting downward pressure on average hourly earnings and is estimated to have dropped by 0.7% in July.
The Week In Review
U.S. Equities
US equity markets were mostly higher on the week as strong financial results from Apple, Amazon and Facebook offset the anxiety caused by the political wrangling between Democrats and Republicans on the size and scope of the next COVID-19 rescue package.
- Dow Jones -0.15%, MTD +2.51%, YTD -6.14 B. S&P 500 +1.75%, MTD +5.64%, YTD +2.38%
- Russell 2000 +0.89%, MTD +2.77%, YTD -10.57%
Drivers: I) The US Congress was unable to bridge the gap between the $3 trillion and $1 trillion COVID-19 rescue packages proposed by the Democrats and Republicans. The main issues to be resolved is the extra $600 per week of federal aid on top of state jobless benefits, liability protection for businesses and institutions should employees’ contract COVID-19, aid to state and local governments and extension of the Paycheck Protection Program. White House Chief of Staff Mark Meadows, Treasury Secretary Steven Mnuchin, House Speaker Nancy Pelosi, and Senate Minority Leader Chuck Schumer were continuing negotiations over the weekend.
II) Durable goods orders in June surged by 7.3% in June with solid increases seen in shipments (3.4%) and core capital goods orders (3.3%). The jump in durable goods orders has only partially offset the sharp declines seen during March and April caused by the spread of the coronavirus. Specifically, goods orders plunged by -55.0% on an annual rate during Q1 and Q2, with capital goods down -20.3% and durable goods shipments down -48.7%,
III) In July, the Conference Board Consumer Confidence index dropped to 92.6 from June’s level of 98.3. The large drop in sentiment which began with the spread of COVID-19 in late January, rebounded a bit during Q2 before falling a bit in July. The recent decline is due to the increase in coronavirus cases seen in new ‘hotspots” such as California, Texas, Florida, and Arizona.
IV) Pending Home Sales in June soared by 16.6%, following the steep rise of 44.3% seen in May and have staged a strong recovery after plunging due to COVID-19. The US housing market has helped by the reopening of several regions in the country and record low mortgage rates. June sales reached their highest level since 2006, which augurs well for upcoming existing homes sales.
V) Equities Month to Date are higher with Mid-Cap, Growth, Utilities, and Communication Services leading equity price performance. The laggards for the period are Small-Cap, Value, and Energy.
Capitalization: Large Caps +5.86% (YTD +2.88%), Mid-Caps +5.87% (YTD -3.79%) and Small Caps +2.77% (YTD -10.57%). Style: Value +2.65 (YTD -19.96%) and Growth +5.94% (YTD -1.54%). Sector Groups: Technology +5.60% (YTD +21.33%), Information Technology +5.65% (YTD +20.15%), Consumer Discretionary +7.18% (YTD +9.98%), Communication Services +7.29% (YTD +6.69%), Healthcare +5.36% (YTD +4.50%), Consumer Staples +6.82% (YTD +0.89%), Materials +7.10% (YTD -0.54%), Utilities +7.78% (YTD -4.14%), REITs +3.98% (YTD -4.91%), Industrials +4.33% (YTD -10.91%), Financials +3.75% (YTD -20.68%) and Energy -4.82% (YTD -37.82%).
European Equities
The MSCI Europe Index fell last week, as better than expected earnings could not offset the record drop in Q2 US GDP and concerns over the rise of new global COVID-19 cases.
Drivers: I) Second quarter GDP for the Euro-zone plunged by -40.3% quarter to quarter on an annual rate basis. The sharp decline though extremely poor, was in line with expectations and highlights the damage caused by COVID-19 during the economic shutdown from late March through April. However, the recent pickup in industrial production and retail sales is projecting GDP is presently running only 6.0% below pre-COVID 19 levels.
II) The Euro-zone unemployment rate rose slightly by 0.1 points to 7% in June. The unemployment roll increased by 203,000, bringing the total rise since February to 798,000. The UE rate has only risen by 0.6 points since the spread of COVID-19 began in February. The muted increase in unemployment was due the large subsidies proved by European governments that paid workers despite them being essentially idle, due to less hours worked or being temporarily unemployment.
III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was lower by -1.51% for the week (MTD +3.84%, YTD -10.57%).
Asian Equities
Asian equity markets were primarily lower during the week due to the historical plunged in Q2 US GDP. The DJ Asia Index declined by -1.42% for the week, (MTD +2.67%, YTD -8.39%).
Drivers: I) Industrial production in Japan for the month of June, bounced off its bottom by rising 2.7% m/m. The increase in June was the first in production since COVID-19 took hold, and follows a cumulative decline of 21.0% from February through May. The largest contributor to growth was the increase in auto output (up 28.9% m/m) and machinery which surged by 10.2%. Autos remain 40.0% below pre-COVID production levels.
II) In China, the NBS manufacturing PMI gained a better than expected 2 points to 51.1, which follows a 0.3-point rise in June. The positive report came despite concerns that poor weather and flooding in central and eastern China would curb the growth in manufacturing. Overall manufacturing conditions are improving, as new orders increased by 0.3 points to 51.7, while exports orders rose by 5.8 points to 48.4 in July.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei dropped by -4.58% (MTD -2.60%, YTD -7.19%), the Hang Seng Index was lower by -0.43% (MTD +0.69%, YTD -12.33%) and the Shanghai Composite advanced by +3.54% (MTD +10.90%, YTD +8.52%).
Fixed Income
Treasury yields dropped last week, and the curve flattened, as bonds rallied on the inability of the US Congress to agree on a new COVID-19 fiscal stimulus package.
Performance: I) The 10-year Treasury yield was lower last week ending at 0.534% down from 0.591%. The 30-year yield fell last week finishing at 1.197% declining from 1.232%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index rose +0.30% last week, MTD +1.49% and YTD +7.72%. The Bloomberg Barclays US MBS TR was higher by +0.26% last week, MTD +0.18% and YTD +3.69%. The Bloomberg Barclay’s US Corporate HY Index was higher by +0.84% for the week, MTD +4.69% and YTD +0.71%.
Commodities
The DJ Commodity Index was higher last week by +0.12% and is up month to date +5.35% (YTD -7.94%). The commodity index rose as the price of silver continued to climb and gold reached an all-time high of $1994.0.
Performance: I) The price of oil fell last week by -2.20% to close at $40.43 and is higher month to date by +2.95% (YTD -33.78%). Oil prices dropped on the week as the rise of new COVID-19 cases globally and the relaxing of output curbs by major producers put downward pressure on energy prices.
II) The ICE USD Index, a gauge of the U.S dollar’s movement against six other major currencies, was lower by -0.94% ending at 93.46 for the week (MTD -4.03%, YTD -3.03%). The USD continued its recent fall due to “dovish” comments from the US Fed and concerns the nascent economic recovery could be stalled by the recent spike in new coronavirus cases in the US.
III) Gold rose to an all-time high of $1994.0, 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 +4.93% last week, climbing to $1994.0 (MTD +10.74% YTD +30.91%).
Hedge Funds
Hedge fund returns in July are higher with all 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 +1.29% MTD and up +0.20% YTD.
- Equity Hedge has advanced by +0.68% MTD and is lower by -9.47% YTD.
- Event Driven is up MTD +0.46% and is down YTD -1.73%.
- Macro/CTA has risen by +1.65% MTD and is lower by -2.92%
- Relative Value Arbitrage is higher by +1.82% and is down -0.85% YTD.
- Multi-Strategy is up MTD by +1.82% and has fallen by -1.06% YTD
Data Source: Haver Economics
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