Economic Data Watch and Market Outlook
US equity markets were battered last week by a confluence of factors which first drove all three major indexes to new intra-day highs on Tuesday, before dropping and ending lower on the week. Markets are worried we are seeing the peak in economic and earnings growth both of which are expected to slow from here. Unfortunately, support for this narrative is coming from the rise in COVID-19 delta variant cases around the globe, which can stall the global recovery. Adding fuel to the fire, are the poor technical readings we are seeing from equity markets. For example, the Russell 2000 is down -8.00% from its June all time high, and the index is experiencing more new price lows than new price highs from its constituents. According to data from Market Extremes, this price action has occurred three times since June 2000 (September 2014, July 2015, and October 2018) and in all three cases the S&P 500 and Russell 2000 were 10.0% lower over the next three months. On the flip side, GDP and corporate earnings growth are expected to remain above trend over the next few years, and the Fed Chair Powell last week reiterated inflation is transitory (“base effects” of low inflation readings during pandemic will drop out of 12-month inflation calculation, supply constraints will ease, and first surge in demand for services as the economy reopens). Equity markets though, have been due for a correction (S&P 500 has not declined by -5.00% or more in over nine months) and during the first post pandemic summer vacation season, expect lighter than normal volume and higher levels of volatility.
Heading into next week’s trading sessions, we will be in the thick of corporate earnings season with Netflix of “FAANG” reporting on Tuesday, along with communication service companies Verizon Communications and AT&T. Other notable companies reporting next week include industrials JB Hunt Transport Services and rail operator CSX Corporation, as well as the airlines United, American, and Southwest. Federal Reserve officials will enter their quiet period before the commencement of the July 28th FOMC meeting. But market direction and volatility will most likely been driven by news over the spread of the coronavirus delta variant, which has led to multi-month highs in new cases in countries such as Japan and Ireland. Markets are grappling with fears of new lock downs which would have a deleterious effect on global growth, versus reports current vaccinations have a high efficacy rate in warding off the virus. We will see which belief will prevail next week.
In looking ahead to the economic calendar next week, data releases will be dominated by reports regarding the health of the US housing market, and the first reading of US PMI for July. On Tuesday, US Housing Starts for June as estimated to have increased by 1.1% to 1.590 mm units, and related permits rose by 1.3% to 1.705 mm units. Multi-family starts which have been strong for several months are expected to cool and decline by 3.0%, while single family which had lagged are projected to increase by 2.9%. June Existing Home Sales are projected to rise by 2.6% to 5.95 mm, reflecting the recent decline in mortgage rates.
We close out the week with the Markit Manufacturing PMI which is estimated to have risen by 0.4 points to 62.5 in the July flash report. The report will be influenced by mixed regional performance as a strong increase was seen in the Empire State survey, while there was a pullback in the Philadelphia Fed survey. The Markit Services PMI is expected to fall by 0.6 points to 64.0 for July, as the initial strong readings from the economy re-opening and the effect from fiscal stimulus are moderating as should be expected.
The Week In Review
U.S. Equities
US equity indexes broke a three-week winning streak as an upside surprise in June Retail Sales could not offset the plunge in consumer sentiment caused by the highest inflation expectations since 2008.
US Index Performance
- Dow Jones -0.52% MTD +0.58% YTD +14.45%
- S&P 500 -0.96% MTD +0.75% YTD +16.12%
- Russell 2000 -5.11% MTD -6.35% YTD +10.07%
- NASDAQ -2.13% MTD -0.77% YTD +14.07%
Drivers: I) The June CPI report showed a 0.9% m/m jump for both the headline and core consumer prices, beating street estimates (0.5% and 0.41% respectively) and highlighting temporary shortages and supply chain issues continue to put upward price pressure across sectors. The rise in prices sent the core CPI rate to 4.5% from 3.8%. Key drivers were a 7.0% jump in hotel room rates and used vehicle prices which surged by 10.5% m/m.
II) The Producer Price Index (PPI) in June was higher than expected and followed the trend of strong inflation reports over the past several month. The headline index increased by 1.0% (estimate was 0.6%) and the core reading also rose by 1.0% (estimate was 0.5%). On a year ago basis, headline CPI is up 7.3% and the core reading is up 5.6%. Similar to the CPI data, PPI showed increases in motor vehicles and parts dealers of 4.0%, while air transportation accounted for a 5.1% increase. There was weakness in the sticky price item related to healthcare.
III) In University of Michigan survey for July plunged from 85.5 in June to July’s level of 80.8. The index has weakened recently, but is measurably higher than the pandemic lows. Driving down sentiment was the rise in inflation expectations, which increased on a one year forward expectation basis from 4.2% to 4.8%. This reading is the highest since 2008, and the five year forward inflation view rose to 2.9% but is lower than the 3.0% in May.
IV) US Retail Sales for June rose by 0.6%, which exceeded the Street estimate which called for a decline of 0.8%, but some of the gain can be attributed to the 0.9% rise in consumer prices. Growth was seen in the 2.6% m/m gain in clothing sales and a 3.3% m/m jump in electronics sales. The was a solid increase of 2.3% m/m in food services which reflects a positive trend in services spending which is improving as restrictions are lifted.
V) Equities Month to Date are mostly lower with Large-Cap, Growth, REITs, and Utilities leading equity price performance. The laggards for the period are Small-Cap, Value, Energy, and Communication Services
Capitalization: Large Caps +0.27% (YTD +15.27%), Mid-Caps -2.11% (YTD +13.79%) and Small Caps -6.35% (YTD +10.07%). Style: Value –4.01% (YTD +20.22%) and Growth -3.42% (YTD +9.62%). Sector Groups: Energy -9.59% (YTD +31.12%), REITs +4.24% (YTD +28.40%), Financials -1.55% (YTD +23.61%), Communication Services -1.68% (YTD +18.08%), Technology +1.79% (YTD +15.92%), Industrials -0.50% (YTD +15.72%), Information Technology +1.44% (YTD +15.30%), Healthcare +2.13% (YTD +14.14%), Materials -1.52% (YTD +12.94%), Consumer Discretionary -0.31% (YTD +11.04%), Utilities +4.83% (YTD +7.26%) and Consumer Staples +1.58% (YTD +5.54%)
European Equities
The MSCI Europe Index declined as concerns rose over the spread of the coronavirus delta variant, and the torrential rain fall that has caused flooding in Germany, Belgium, and Luxembourg.
Drivers: I) In May, industrial production for the Euro-zone was lower by 1.0% m/m, which was caused by the sharp decline in auto production of 7.8% m/m, while manufacturing output ex. autos was down only 0.2% m/m. The shortfall in auto production is being caused again by shortages of semi-conductors. Specifically, auto production was down 7.2% m/m in Germany, 8.0% in France and 6.7% in Italy. Demand for autos remains high, and the lack of production currently should turn to a boost in coming months as supply chain issues ease.
II) The final release of the Eurostat HICP showed headline inflation fell by 0.1% to 1.9% on an annualized basis in June, while core inflation also dropped by a tenth to 0.9%. Adding to inflation was a 0.5% rise in core goods price inflation to 1.2%, which was partially offset by a sizable 0.4% decline in services price inflation to 0.7%. Within the headline reading, food price inflation was up by 0.5% and energy price inflation fell by 0.5% to 12.6% annually.
III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was lower by -1.10% for the week (MTD -0.03% YTD +11.77%).
Asian Equities
Asian markets were higher last week, after China reported better than expected GDP and retail sales growth for Q2. The DJ Asia Index advanced by +1.31% for the week, (MTD -0.72% YTD +3.27%).
Drivers: I) In Japan, the July Reuters Tankan reported strong improvement as the manufacturers’ current conditions DI (diffusion index) gained 3 points to 25. Solid growth was seen across several industries including steel and nonferrous metals, which rose by 34 points. This is a reversal of the production decline in May due to the semiconductor supply shortage, and should continue to improve as supply chain issues are resolved.
II) In China, Q2 GDP rose 7.9% on an annual basis, after soaring by 18.3% in Q1. Growth was seen across several sectors. Retail sales increased by 0.9% m/m, aided by auto sales which jumped by 4.5% on an annual basis. Industrial production provided a boost as it grew by 8.3% on an annual basis, and 0.6% m/m. Fixed asset investment posted a strong gain of 12.6% annualized in 1H and 06% M/M for June.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei rose by +0.22% (MTD -2.74% YTD +2.87%), the Hang Seng Index was higher by +2.39% (MTD -2.91% YTD +2.62%) and the Shanghai Composite advanced by +0.43% (MTD -1.45% YTD +1.91%).
Fixed Income
Treasury yields dropped for a third consecutive week as Fed Chair Powell reiterated current inflationary pressure are transitory and the Fed is a long way away from raising rates or “tapering”.
Performance: I) The 10-year Treasury yield fell last week ending at 1.298% down from 1.359%. The 30-year yield declined last week finishing at 1.925% dropping from 1.991%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index rose by +0.24% last week, MTD +0.68% and YTD -0.94%. The Bloomberg Barclays US MBS TR was higher by +0.11% last week, MTD +0.30% and YTD -0.47%. The Bloomberg Barclay’s US Corporate HY Index declined by -0.15% for the week, MTD +0.25% and YTD +3.88%.
Commodities
The DJ Commodity Index declined last week by -1.47% and is lower month to date -0.45% (YTD +21.93%). Commodity prices fell last week as the spread of the coronavirus delta variant raised concerns the global recovery could stall, causing a decline in demand for energy and industrial metals.
Performance: I) The price of oil fell last week by -4.29% to close at $71.43 and is lower month to date by -2.77% (YTD +47.21%). Oil suffered its greatest weekly decline since March, as markets expect OPEC to increase output and new coronavirus lock-downs will reduce demand.
II) The ICE USD Index, a gauge of the U.S dollar’s movement against six other major currencies, was higher by +0.66% closing at 92.70 for the week (MTD +0.29% YTD +3.09%). The USD rose last week on investor concerns the spread of the delta variant and ensuing lockdowns, will slow the recovery in Europe and Asia.
III) The price of gold rallied for the fourth week in a row, as interest rates fell and investors “de-risked” due to the potential slowdown in the economic recovery prompted by the spread of the coronavirus delta variant. Gold rose in price by +0.14% last week, climbing to $1812.0 (MTD +2.28% YTD -4.38%).
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 lower by +0.06% MTD (+3.66% YTD).
- Equity Hedge advanced by +0.26% MTD (+8.14% YTD).
- Event Driven is lower MTD -0.36% (+3.04% YTD).
- Macro/CTA has declined by -0.29% MTD (+1.27% YTD).
- Relative Value Arbitrage is up by +0.01% (+0.85% YTD).
- Multi-Strategy is higher MTD by +0.00% (+0.60% YTD).
Data Source: Haver Economics, Standard & Poor’s, HFR, Bloomberg, Morningstar and FactSet
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