Economic Data Watch and Market Outlook
US equities in a holiday shortened week, still generated excitement as stock prices experienced a bit of a roller coaster ride. The rise in prices was supported by the continued belief in the “reflation trade”, where economic and corporate earnings growth will be sustained by rising vaccination rates which will unleash pent-up demand from consumers and businesses. The sharp decline seen last Thursday was engendered by growing concerns over the spread of the coronavirus delta variant which has led to new restrictive measures in parts of the Euro-zone and Asia. This “risk-off” sentiment drove the 30-year Treasury down by 19 bps to 1.85% (before closing on Friday at 1.991%) and the 10-year Treasury to a low of 1.25%. But equity markets recovered and ended higher on Friday for the third straight week, as investors were heartened by the tone of the FOMC June minutes that reiterated the Fed was still patient and a time away in paring back any pandemic induced stimulus. Markets also took note that China reversed its policy normalization stance by lowering its Reserve Requirement Ratio (RRR) by 50 bps, which will decrease bank funding costs and borrowing costs for consumers and businesses.
Heading into next week’s trading sessions, we will have a number of important economic data releases, but the key market driver will be the true kickoff of the corporate earnings season. We will begin with earnings reports from the mega banks including Goldman Sachs, JPMorgan, Bank of America, Citigroup, and Morgan Stanley. Other notable companies reporting include PepsiCo, Fastenal, Delta Airlines and Kansas City Southern. According to FactSet, Q2 2021 earnings are projected to grow by 63.6% (highest since Q2 2009 pf 108.9%), while revenues are expected to rise by 19.6%. Sectors expected to lead the way are energy ($13.8 B versus loss of -$10.6 billion), consumer discretionary (205.2%), Financials (117.0%) and Materials (116.1%). Market reaction to earnings will most certainly be volatile, but what will be crucial is the forward earnings guidance from companies which need to positive in order to further support a seemingly inexorable rise in equity prices.
In looking ahead to the economic calendar next week, primary reports of interest will be June’s CPI and PPI, along with Retail Sales. We start off on Tuesday with the June Consumer Price Index (CPI) report which is projected to increase by 0.5%, while the core rose by 0.41%. On an annual basis, CPI is estimated to have dropped from 5.0% (May) to 4.9%, but the core will rise from 3.8% in May to 4.0%. Headline CPI is expected to be boosted by a rise of 2.4% in energy and 0.4% in food. Core inflation is rising on the normalization of travel related prices (lodging up 3.4%) and vehicle prices (0.3%) which have risen due to supply chain issues.
June’s estimate for the Producer Price Index (PPI) calls for a rise of 0.6%. Energy price increases (1.0%) were a main component in the rise in PPI, as well as food prices (0.6%). The core CPI is projected to rise by 0.5%.
Retail Sales for June is estimated to have fallen by 0.8%, as sales have slowed from the high levels seen in recent months beginning in March, due to the rise in income linked to stimulus check issuance. Motor vehicle sales and parts are projected to fall by 4.0%, while gasoline sales are expected to increase by 1.9%. We close the week with the University of Michigan Consumer Sentiment Index which is expected to improve by 1.5 points to 87.9. Consumer attitudes have improved with the increase in vaccination rates and reopening of the economy.
The Week In Review
U.S. Equities
US equity market benchmarks rose for a third straight week, as expectations of a strong corporate earnings season more than offset the negative sentiment caused by the spread of the coronavirus delta variant which has prompted virus related restrictions in parts of Asia and Europe.
US Index Performance
- Dow Jones +0.25% MTD +1.11% YTD +15.05%
- S&P 500 +0.42% MTD +1.72% YTD +17.24%
- Russell 2000 -1.11% MTD -1.31% YTD +16.00%
- NASDAQ +0.43% MTD +1.36% YTD +14.07%
Drivers: I) The June report for the ISM Services Survey dropped to 60.1 from 64.0 in May. Though the survey remains at a historically high level, the survey is being boosted by elevated readings on supplier delivery times. Several of the subcomponents declined in June, with the employment index being the standout, as it fell 6.0 points to 49.3 in June and has fallen by 9.5 points over the past two months.
II) The release of the June FOMC meeting minutes showed the Committee started the tapering asset purchases discussion, as Chair Jerome Powell had mentioned at his post meeting press conference. Of importance though, the committee members all agreed that conditions for tapering had not yet been met, but progress toward those conditions were expected. The Street expects a tapering announcement at the December meeting.
III) In May, the number of available jobs in the US rose by 0.2% reaching a new all time high of 9.209 million. The high level of job openings is indicative of the reality that companies are having a difficult time in finding workers. Several economists have speculated the payment of pandemic related UE benefits has incentivize some workers to remain at home, though this may change as 24 states have ended these excess benefits.
IV) For the week ending July 3, initial jobless claims for the normal state programs drifted higher by 2,000 to 373,000. Though unexpected, the longer-term trend since the pandemic hit has been lower over time. The continuous decline is proof of an improving labor market, and a reduction in filings for regular state and extra federal benefit programs. Claims should continue to fall as several states are ending the federal program early.
V) Equities Month to Date are higher with Large-Cap, Growth, REITs, and Technology leading equity price performance. The laggards for the period are Small-Cap, Value, Energy, and Financials
Capitalization: Large Caps +1.55% (YTD +16.72%), Mid-Caps +0.72% (YTD +17.09%) and Small Caps -1.31% (YTD +16.00%). Style: Value –0.32% (YTD +24.85%) and Growth +0.23% (YTD +13.77%). Sector Groups: Energy -1.96% (YTD +42.19%), Financials +0.01% (YTD +25.57%), REITs +3.55% (YTD +27.55%), Communication Services +0.26% (YTD +20.41%), Industrials +1.04% (YTD +17.51%), Technology +2.40% (YTD +16.62%), Materials +0.82% (YTD +15.63%), Information Technology +2.26% (YTD +16.23%), Healthcare +2.23% (YTD +14.26%), Consumer Discretionary +2.19% (YTD +13.82%), Consumer Staples +0.28% (YTD +5.18%) and Utilities +2.22% (YTD +4.59%)
European Equities
The MSCI Europe Index was higher on the week, as equities stabilized along with US markets after declining on concerns a resurgence of the pandemic would mute the current economic recovery.
Drivers: I) May Retail Sales in the Euro-zone for May rose 4.6% m/m, which beat the Street forecast of 4.3%. Sales have recovered from the decline of 3.9% in April when COVID-19 restrictions were enforced in countries such as Germany and France, which caused the closure of non-essential retail stores. The overall average growth in sales for the April-May period is approximately 9.7% above the level seen in Q1, when restrictions were tight.
II) In May, industrial production in Germany slid by 0.3% m/m which is equal to the drop experienced in April. The fall back in production was driven primarily by a steep 7.2% decline in auto production, a casualty of the shortages in semiconductors. The drop in auto production is now at a 32.7% annualized rate for Q2 2021, which mirrors a similar decline in Q1. Outside of autos, construction output rose 1.3% m/m and is on track to post a solid increase of 19.2% annualized for Q2, while energy production was also up an equivalent amount.
III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was higher by +0.39% for the week (MTD +1.08% YTD +13.01%).
Asian Equities
Asian markets fell last week on slowing growth in the region and the Japanese government declaring a coronavirus state of emergency during the Olympics due to a surge in new cases. The DJ Asia Index declined by -1.68% for the week, (MTD -2.01% YTD +1.93%).
Drivers: I) In Japan, the BoJ’s Consumption Activity Index tumbled by 3.7% m/m, after a 1.3% drop in April. A sharp decline was seen across all consumption categories, as both services and non-durable goods suffered a second consecutive monthly decline, sending both indexes to their lowest points since May 2020. The drop in consumption was caused by a third state of emergency in Japan
II) In China, the PBOC announced it would cut the Reserve Requirement Ratio (RRR) by 50 bps which can reduce bank fund costs, which can be passed through to borrowers to reduce their funding costs. This is a reaction by the government to counteract a slowdown in growth, prompted by declining share of household income in the economy (savings rates have increased) and negative impact of credit deceleration enacted in 2021.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei fell by -2.93% (MTD -2.96% YTD +2.64%), the Hang Seng Index was lower by -3.40% (MTD -5.17% YTD +0.22%) and the Shanghai Composite advanced by +0.15% (MTD -1.87% YTD +1.47%).
Fixed Income
Treasury yields declined last week as investors felt economic growth could slow due to the spread of the coronavirus delta variant, and on short covering from investors that had expected a rise in rates.
Performance: I) The 10-year Treasury yield fell last week ending at 1.359% down from 1.436%. The 30-year yield declined last week finishing at 1.991% dropping from 2.045%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index rose by +0.31% last week, MTD +0.44% and YTD -1.18%. The Bloomberg Barclays US MBS TR was higher by +0.12% last week, MTD +0.19% and YTD -0.58%. The Bloomberg Barclay’s US Corporate HY Index advanced by +0.20% for the week, MTD +0.40% and YTD +4.03%.
Commodities
The DJ Commodity Index declined last week by -2.65% and is lower month to date -2.01% (YTD +20.01%). Commodity prices retreated last week as coronavirus emergency measures were implemented in parts of Europe and Asia, prompting concerns over economic growth and abundant rain eased worries over agricultural crop yields.
Performance: I) The price of oil fell last week by -0.74% to close at $74.63 and is higher month to date by +1.57% (YTD +53.81%). Oil prices dropped last week as OPEC members have yet to reach an agreement on an increase in production, and the spread of the coronavirus delta variant could decrease demand.
II) The ICE USD Index, a gauge of the U.S dollar’s movement against six other major currencies, was lower by -0.15% closing at 92.10 for the week (MTD -0.37% YTD +2.41%). The USD was slightly lower last week as interest rates fell on coronavirus concerns and uncertainty over additional fiscal stimulus out of the US.
III) The price of Gold increased for a third straight week due to a volatile week in global equities and rising concerns over the coronavirus delta variant. Gold rose in price by +1.21% last week, climbing to $1809.5 (MTD +2.14% YTD -4.51%).
Hedge Funds
Hedge fund returns in July are mixed for the month with the core strategies Equity Hedge, Relative Value and Multi-Strategy higher, while Event Driven and Macro/CTA are lower.
Performance:
- The HFRX Global Hedge Fund Index is higher by +0.10% MTD (+3.82% YTD).
- Equity Hedge advanced by +0.65% MTD (+8.56% YTD).
- Event Driven is lower MTD -0.18% (+3.23% YTD).
- Macro/CTA has declined by -0.43% MTD (+1.12% YTD).
- Relative Value Arbitrage is up by +0.06% (+0.91% YTD).
- Multi-Strategy is higher MTD by +0.04% (+0.64% YTD).
Data Source: Haver Economics, Standard & Poor’s, HFR, Bloomberg, Morningstar and FactSet
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