Economic Data Watch and Market Outlook
For the past few weeks, I have been writing about the potential of a market correction, which appears to have become a “waiting for Godot” moment. Despite a wall of worries concerning Fed monetary policy, inflation, mixed economic data and Middle East tensions, US equity markets staged a strong rally last week. Negative sentiment caused by declines in the IHS Markit Services and Manufacturing PMIs, as well as the highest reading for the core PCE in over 30 years, was more than offset by the dovish tone of Fed Chair Powell’s speech at Jackson Hole and news that the FDA provided formal approval of Pfizer’s COVID-19 vaccine. Equity markets did wobble on Thursday on the news of the tragic deaths of thirteen US service members and an estimated 90 Afghan citizens caused by a terrorist attack at the Kabul airport in Afghanistan. But markets recovered on Friday, as investors have continued to buy on the dip, a strategy that has been highly successful over the past 17 months. The S&P 500 reached its 52nd all time high for 2021, and the NASDAQ breached 15,000 for the first time closing at 15,129.50, while the DJIA came within 0.5% of setting a new historic high.
Heading into next week’s trading sessions, a slew US economic data releases will take center stage, as well as the finish of the corporate earnings season. With 488 (98.0%) of S&P 500 companies having reported, approximately 86.0% have beaten their earnings estimates, with earnings rising for Q2 at 92.7% yoy (versus the end of quarter estimate of a 62.0% increase). The outsized growth in earnings for the S&P 500 has supported an inexorable rise, which has not experienced a 5.0% decline or greater since November 4, 2020 (205 trading sessions). Such a lengthy stretch of an uptrend without a peak to trough drop of 5.0% or more has occurred only eight times in history according to Dow Jones Market Data. Interestingly, after such a protracted bull run, the S&P 500 has on average returned 6.5% in the following year, and 27.4% over a two year period.
In looking ahead to the economic calendar next week, a very busy schedule will be centered around housing data and the latest update on US employment. On Monday, July’s Pending Homes Sales index is projected to drop by 3.0%, a continuation of the slowdown after a torrid pace of sales seen in late 2020 and early 2021.
The Conference Board Consumer Confidence Index out on Tuesday, is estimated to have fallen by 6.1 points to 123.0 in August. The index which measures consumer attitudes have recovered to pre-pandemic levels, however the drop in sentiment has been driven by inflation and its impact on the affordability of goods and services.
The August reading of the ISM Manufacturing Survey out on Wednesday, is expected to slip by 0.5 points to 59.0, which is consistent with declines seen in several regional surveys.
On Friday, the Nonfarm payroll report for August is projected to show an increase of 625,000, with the UE rate dropping to 5.2% from 5.4% in July. There has been a recent slowing in the growth of jobs, due primarily to the waning influence of fiscal stimulus provided at the beginning of the year and the recent spread of the Delta variant has negatively affected travel, hospitality, and entertainment. Hourly earnings are estimated to have increased by 0.3%, and the participation rate should continue to recover from the pandemic-induced decline by rising to 61.8% from 61.7% in July. Also on Friday, the ISM Services survey is expected to drop in August by 3.1 points to 61.0. The decline in the survey probably reflects the continued increase in new Delta variant cases and recent declines in consumer spending.
The Week In Review
U.S. Equities
US equities rallied last week, as the S&P 500 and NASDAQ posted new highs as Fed Chair Powell did not alter the Fed’s plan to taper late in 2021 and reiterated the recent inflation spike was still transitory.
US Index Performance
- Dow Jones +0.98% MTD +1.70% YTD +17.26%
- S&P 500 +1.54% MTD +2.72% YTD +21.20%
- Russell 2000 +5.06% MTD +2.37% YTD +15.98%
- NASDAQ +3.22% MTD +3.55% YTD +17.39%
Drivers: I) The Jackson Hole speech by Fed Chair Powell was dovish, did not contain any new revelations and reiterated “if the economy evolved broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year.” But we now know Chair Powell does not favor a 2022 start to tapering, setting up a probable tapering announcement at either the November or December FOMC meetings. He also stated recent inflation news is likely to be transitory, and “we have much ground to cover to reach maximum employment”.
II) Consumer Spending for July slid by 0.1%, led by a drop in goods spending of 1.6% while services continued to recover towards pre-pandemic levels by rising 0.6%. There are signs that consumption will pick-up through Q3 as high frequency data including Chase credit card data and transportation spending have improved. Nominal income rose by 1.1% in July due to an increase in child tax credit payments and employee compensation.
III) The July headline Personal Consumption Expenditures price Index increased 0.4%, which was below the Street estimate of a 0.5% rise. The core price index jumped by 0.3% which was in line with expectations. On a year ago basis the headline was up 4.2% and the core 3.6% both in line with estimates.The belief is month over month inflation rates should continue to moderate versus the strong readings from earlier in the year.
IV) July’s Existing Home Sales came in better than expected, by rising 2.0% to 5.99 mm which follows an upside revision to June’s report. Sales have risen two months in a row, after slowing over the past several months. Limiting factors to the recent moderation of sales were dearth of inventory and high prices. The price of existing homes continues to increase, climbing by 17.8% in July versus a year ago, down from 23.2% in June.
V) Equities Month to Date are mixed with Mid-Cap, Value, Financials, and Utilities leading equity price performance. The laggards for the period are Small-Cap, Growth, Energy, and Consumer Staples
Capitalization: Large Caps +2.66% (YTD +20.47%), Mid-Caps +2.76% (YTD +20.38%) and Small Caps +2.37% (YTD +15.98%). Style: Value +3.06% (YTD +27.15%) and Growth +1.86% (YTD +16.35%). Sector Groups: Financials +6.73% (YTD +33.41%), Energy -0.11% (YTD +32.75%), REITs +0.99% (YTD +30.15%), Communication Services +2.54%(YTD +23.82%), Technology +3.01% (YTD +21.83%), Information Technology +3.02% (YTD +21.37%), Materials +2.34% (YTD +19.75%), Healthcare +1.87% (YTD +19.41%), Industrials +1.53% (YTD +19.12%), Consumer Discretionary +0.79% (YTD +13.41%), Utilities +3.88% (YTD +10.86%), and Consumer Staples +0.45% (YTD +7.60%)
European Equities
The MSCI Europe Index closed higher as corporate earnings have been strong, Delta variant restrictions are being lifted and the Fed maintained a “dovish” tone.
Drivers: I) The August Euro-zone Composite Output PMI fell by 0.6 points to 59.5, leaving the reading at a strong base and portends strong economic activity for Q3. New Orders though down 1 point to 59.3 shows strong demand remains intact. Positive results were also seen in the employment index (56.1) and the sentiment measure remained historically high (67.9). The Street estimate calls for a 10.5% q/q saar jump in GDP for Q3.
II) The final report for Q2 2021 German GDP growth was revised higher by 0.6% to 7% quarter/quarter saar. Despite lockdown measures that existed till late in the quarter, the growth in GDP showed strong improvement. The primary growth drivers were a large increase in consumer spending (13.6%), government consumption (7.4%) and Capex (2%). The Bundesbank expects Q3 growth to accelerate to 13% q/q saar.
III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was higher by +1.65% for the week (MTD +1.71% YTD +15.82%).
Asian Equities
Asian markets experienced a technical bounce as the spread of the Delta variant continues to hamper production and trade. The DJ Asia Index rose by +3.25% for the week, (MTD +1.22% YTD +1.66%).
Drivers: I) At the Monetary Policy Committee (MPC) meeting in August, the Bank of Korea raised the base policy rate by 0.25% to 0.75%, raising the record low rate which has held since May 2020. The Bank communicated that the interest rate hike cycle has begun, and further rate increases will depend on growth and inflation trends, the path of COVID-19 and variant cases, financial imbalance risk and changes in other major central bank policy.
II) In China, Industrial Profits for the month of July increased by 16.4% yoy as reported by the National Bureau of Statistics (NBS). Growth in macro data has been boosted by the low base effect from 1H 2020, but when compared to the same period in 2019, industrial profits for the first seven months of 2021 are higher by a strong 44.6% on an annualized basis. July’s industrial profits rose at an annual rate of 18.0% versus 15.7% in 2019.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei rose by +2.32% (MTD +1.32% YTD +1.55%), the Hang Seng Index was higher by +2.26% (MTD -2.34% YTD -7.15%) and the Shanghai Composite advanced by +2.77% (MTD +3.67% YTD +1.41%).
Fixed Income
Treasury yields rose last week as Fed Chair Powell’s stated his support for a late 2021 start to tapering and the US headline PCE inflation rate hit a 30-year high.
Performance: I) The 10-year Treasury yield rose last week ending at 1.305% up from 1.259%. The 30-year yield climbed higher last week finishing at 1.907% rising from 1.869%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index fell by -0.05% last week, MTD -0.20% and YTD -0.70%. The Bloomberg Barclays US MBS TR was higher by +0.08% last week, MTD -0.17% and YTD -0.32%. The Bloomberg Barclay’s US Corporate HY Index rose by +0.70 for the week, MTD +0.29% and YTD +4.31%.
Commodities
The DJ Commodity Index advanced last week by +2.97% and is lower month to date -2.08% (YTD +21.32%). Commodity prices surged last week as tropical storm IDA threatened oil production in the US gulf coast, as well as agricultural harvests including soybeans.
Performance: I) The price of oil jumped last week by +10.41% to close at $68.73 and is lower month to date by -6.88% (YTD +41.65%). Oil soared last week on production concerns caused by tropical storm IDA, and US inventories fell below their five year average.
II) The ICE USD Index, a gauge of the U.S dollar’s movement against six other major currencies, was lower by -0.81% closing at 92.68 for the week (MTD +0.64% YTD +3.06%). The USD suffered its worse weekly decline since early May, as investors felt Fed Chair Powell’s comments at Jackson Hole were decidedly “dovish”.
III) The price of gold increased last week as “dovish” comments from Fed Chair Powell left markets believing both nominal and real rates will stay low, which is bullish for the precious metal. Gold rose by +2.16% last week, rising to $1821.2 (MTD +0.24% YTD -3.90%).
Hedge Funds
Hedge fund returns in August are mostly positive on the month with the core strategies Equity Hedge, Event Driven and Macro/CTA higher, while Relative Value and Multi-Strategy lower.
Performance:
- The HFRX Global Hedge Fund Index is up by +0.38% MTD (+3.67% YTD).
- Equity Hedge rose by +0.81% MTD (+9.24% YTD).
- Event Driven is higher MTD +0.50% (+2.15% YTD).
- Macro/CTA has advanced by +0.02% MTD (+0.90% YTD).
- Relative Value Arbitrage is lower by -0.01% (+0.81% YTD).
- Multi-Strategy is down MTD by -0.03% (+0.55% YTD).
Data Source: Haver Economics, Standard & Poor’s, HFR (returns have a two-day lag), Bloomberg, Morningstar and FactSet