Economic Data Watch and Market Outlook
US equities ended 1H of 2021 on a high note, as the major indices reached or broached new all-time highs, with the S&P 500 rallying for a 5th straight quarter which its longest winning streak since 2017. The benchmark index gained 15.25% during the first half of the year (best showing since 2019), the DJIA rose by 13.79%, while the Russell 2000 surged by 17.54%. The tailwind behind equity returns have been strong and strengthening US economic data and corporate earnings, a continuation of accommodative fiscal and monetary policies, and success of the US vaccination program. Specifically, recent economic reports show a surging US economy as US Weekly Jobless claims hit a new pandemic low of 364k, the Conference Board Survey of Consumer Confidence posted a pandemic high, ISM Manufacturing data has been solid, and the Non-Farm Payroll (850k) and Pending Home Sales both exceeded expectations. The accelerating economy has taken a toll on fixed income, as the BloombergBarclays US Aggregate Bond Index fell -1.60% in 1H, as the 10-year Treasury rate has risen from 0.917% (January 2nd) to 1.437%. Conversely, commodities have surged during this period on rising demand, with the Bloomberg Commodity jumping 21.15%, led by a 51.4% surge in oil (best first half since 2009). Bitcoin has had a roller coaster ride, finishing the first half of the year up 9.13% ($31,690 to $34,585) but is substantially lower than the peak reached on April 13th of $63,196 (-44.92%).
Heading into next week’s trading sessions, some of the key potential market drivers will be the release of the FOMC minutes (hopes are for no more surprises), progress out of Washington on infrastructure spending, and the perpetuation of strong economic data reports. But as we head into 2H of 2021, it will be interesting to take note of notable historical global equity market trends from the past. JPMorgan research found that US equities have outperformed other global equity market by 7.0% per annum over the past 13 years. In addition, over the past five decades, after a 10-year period of outperformance by US equities, 75% of the time performance reversed during the following decade. Though it is impossible to predict a decade’s performance let alone the next year’s, but I can see over the next few quarter how US equity performance can experience a bit of mean reversion to the rest of the world, particularly versus non-US developed markets. The US is experiencing rising inflation, and expectations call for a slight moderation in economic and earnings growth after peaking in Q2. In addition, there are growing calls for anti-trust legislation in Congress and a global taxation rate, all of which will greatly impact the technology sector (“Big Tech”).
In looking ahead to the economic calendar next week, a light calendar will focus on the release of last month’s FOMC meeting minutes and the service industry. We begin on Tuesday with June’s ISM Services Survey which is projected to slip by 0.5 points to 63.5, as business activity and new orders have moderated as the speed of the re-opening has plateaued.
On Thursday, weekly Initial Jobless Claims are expected to drop by 14k to 350k for the week ending July 3. This is a continuation of expected declines in claims as the labor market improves.
The Week In Review
U.S. Equities
US equity markets were higher for a second straight week as the DJIA, S&P 500 and NASDAQ all reached new all-time highs, as the US Non-Farm payroll report showed better than expected job growth.
US Index Performance
- Dow Jones +1.06% MTD +0.86% YTD +14.76%
- S&P 500 +1.71% MTD +1.30% YTD +16.75%
- Russell 2000 -1.18% MTD -0.20% YTD +17.30%
- NASDAQ +1.94% MTD +0.93% YTD +13.59%
Drivers: I) The June Non-Farm jobs report posted an increase of 850,000, above the Street estimate of 750k, the largest one month increase since last August. The overall UE rate rose from 5.8% to 5.9% as workers are gaining confidence in leaving an existing job to find a new one. The greatest job increases were 188k in government employment and 343k in leisure and hospitality, but overall jobs are still down 13% from pre-pandemic levels.
II) The jobs report showed the participation rate was unchanged at 6%, and is far below the 63.4% level of February 2020. Workers may still be leery of going back to work due to COVID-19 concerns, have an inability to find childcare or they may still be receiving extra UE benefits still being paid by 24 states through September. Average hourly earnings growth was solid at 3.6% on a year over year basis, but U-6 remains elevated at 9.8%.
III) In June, the Conference Board Consumer Confidence Index increased by 7.3 points to 127.3, which exceeded the Street consensus estimate of 118.7. The index has been rising quickly in recent months and the June improvement brings it back to pre-pandemic levels. A primary driver of consumer confidence has been the strength of the labor market where there is strong demand for labor and job openings are plentiful.
IV) In May, the US Pending Home Sales Index rose by 8.0% exceeding the Street estimate which called for a decline of 1.0%. Compared with results from a year ago, sales were up by 13.1%, as home sales declined last year due to the pandemic. Pending home sales recovered from a drop in April, as the recent fall in the 10-year Treasury has sent the 30-year mortgage rate back below 3.00% and there was an increase in listings.
V) Equities Month to Date are higher with Large-Cap, Value, Healthcare, and Technology leading equity price performance. The laggards for the period are Small-Cap, Growth, Consumer Staples, and Materials
Capitalization: Large Caps +1.16% (YTD +16.29%), Mid-Caps +0.72% (YTD +17.09%) and Small Caps -0.20% (YTD +17.30%). Style: Value +0.25% (YTD +25.56%) and Growth +0.22% (YTD +13.76%). Sector Groups: Energy +1.50% (YTD +47.21%), Financials +0.64% (YTD +26.36%), REITs +0.88% (YTD +24.26%), Communication Services +1.07% (YTD +21.39%), Industrials +0.81% (YTD +17.24%), Technology +1.51% (YTD +15.60%), Materials +0.63% (YTD +15.41%), Information Technology +1.43% (YTD +15.29%), Healthcare +1.82% (YTD +13.79%), Consumer Discretionary +1.42% (YTD +12.96%), Consumer Staples -0.07% (YTD +4.82%) and Utilities +1.24% (YTD +3.58%)
European Equities
The MSCI Europe Index was lower, as positive jobs data out of the US was offset by concerns regarding the spread of the delta variant in the UK which has prompted Spain, Portugal, and Malta to halt UK travelers from coming into their countries.
Drivers: I) The Euro-zone EC Sentiment Survey posted a strong gain of 3.4 points to 117.9, the highest level for the survey since 2000. The rise in sentiment was driven by services which rose by 6.6 points to 17.9 and the retail sector’s increase of 4.0 points to 4.5, which have prospered as restrictions are being lifted. Regionally, sentiment improved in Germany (+5 points to 117.2), France (+1.3 points to 112.2) and Italy (+2.1 points to 117.9).
II) In June, Euro-zone core prices were higher by 0.3% m/m which brought core inflation lower by 0.1% to 0.9% on an annual basis. There was a 0.5% increase in core goods price inflation to 1.2% annualized, while there was a 0.4% decline in service price inflation to 0.7% on an annual basis. The price and inflation readings should be taken with a grain of salt, as the HICP basket has new weights and can be subject to short term distortions.
III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was lower by -1.17% for the week (MTD +0.68% YTD +12.57%).
Asian Equities
Asian markets declined last week as China’s President Xi Jinping at the Chinese Communist Party’s 100th anniversary stated anyone who tries to bully China “will face broken heads and bloodshed”, which was presumably aimed at the US. The DJ Asia Index declined by -1.64% for the week, (MTD -0.33% YTD +3.67%).
Drivers: I) In Japan, May’s Retail Sales dropped by 0.4% m/m, though better than expected still follows a poor April decline of 4.6%. All of the underlying good’s categories experienced a decline with the exception of food and beverages. Motor vehicles fell by 5.9% in May, while electronics and appliance sales declined by 4.4%. Much of the decline has been due to the imposing of another state of emergency as new COVID-19 cases rose.
II) In China, the National Bureau of Statistics reported total industrial profits increased by 36.4% on an annualized basis in May. This brought industrial profit growth for the year to an annual 83.4% rise. The upstream resource and materials sectors benefited from solid demand growth and pricing trends, while the high tech and machinery equipment manufacturing sectors improved from strong demand and government policy support.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei fell by -0.86% (MTD -0.03% YTD +5.74%), the Hang Seng Index was lower by -3.42% (MTD -1.84% YTD +3.75%) and the Shanghai Composite advanced by -2.46% (MTD -2.02% YTD +1.32%).
Fixed Income
Treasury yields fell and the yield curve flattened, as markets determined that the current rate of monthly jobs growth will keep the UE employment rate from reaching pre-pandemic levels for at least a year.
Performance: I) The 10-year Treasury yield fell last week ending at 1.436% down from 1.529%. The 30-year yield declined last week finishing at 2.045% dropping from 2.152%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index rose by +0.54% last week, MTD +0.13% and YTD -1.48%. The Bloomberg Barclays US MBS TR was higher by +0.20% last week, MTD +0.06% and YTD -0.71%. The Bloomberg Barclay’s US Corporate HY Index advanced by +0.46% for the week, MTD +0.20% and YTD +3.82%.
Commodities
The DJ Commodity Index rose last week by +3.19% and is higher month to date +0.64% (YTD +23.25%). Commodity prices rose as extremely hot weather in the US has caused a spike in natural gas and electricity usage, and the planting of corn and soybean crops came in below expectations.
Performance: I) The price of oil advanced last week by +1.62% to close at $75.19 and is higher month to date by +2.34% (YTD +54.97%). Oil prices rose as OPEC and its allies have not be able to reach an agreement for plans to ease production curbs through the end of the year.
II) The ICE USD Index, a gauge of the U.S dollar’s movement against six other major currencies, was higher by +0.49% closing at 92.24 for the week (MTD -0.21% YTD +2.57%). The USD rose as the successful vaccine rollout has help to boost the economic recovery, and Biden administration continues to push for more fiscal stimulus.
III) Gold was modestly higher last week as interest rates declined and the USD was stable. Gold rose in price by +0.40% last week, climbing to $1787.7 (MTD +0.91% YTD -5.67%).
Hedge Funds
Hedge fund returns in July are positive for the month with the core strategies Equity Hedge, Macro/CTA, Relative Value and Multi-Strategy higher, while Event Driven is lower.
Performance:
- The HFRX Global Hedge Fund Index is higher by +0.12% MTD (+3.86% YTD).
- Equity Hedge advanced by +0.33% MTD (+8.22% YTD).
- Event Driven is lower MTD -0.02% (+3.39% YTD).
- Macro/CTA has risen by +0.12% MTD (+1.68% YTD).
- Relative Value Arbitrage is up by +0.04% (+0.88% YTD).
- Multi-Strategy is higher MTD by +0.03% (+0.63% YTD).
Data Source: Haver Economics, Standard & Poor’s, HFR, Bloomberg, Morningstar and FactSet
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