Economic Data Watch and Market Outlook
Year after year Wall Street has ruminated over possible events that could immediately turn an idyllic “risk on” environment into a “sell Mortimer sell” (the movie “Trading Places” quote) moment. Invariably we always circle back to a Fed mis-step that can immediately cause a swift sell-off. We had that moment last Wednesday afternoon when the Fed released its “dot plot” showing the central bank moved forward two potential rate hikes to the end of 2023, when the March meeting showed no increases till 2024. To make matters worse, the Fed after repeating for weeks that inflation was “transitory”, sharply increased its inflation forecast to a 3.4% annual rate by Q4 2021 versus the March projection of a 2.4% level. To top it off, a “dovish” Fed official, St. Louis Fed President Bullard, stated that due to high inflation “it may be appropriate for the US central bank to begin raising rates in 2022”. The Fed news releases caused investors to head for the exits, as if someone had lit a match in a crowded theater. Every reflation and risk on trade which had become very crowded were unwound (curve steepeners, short USD, long TIPS, short duration, long small cap versus large cap stocks, long value versus short growth and technology. Massive moves were seen in the bond market as Fed sensitive 2-year Treasuries rose by 4bps to 0.20% (highest in one year), the 5-year Note yield increased by 12bps to 0.90%, while the longer end of the curve (more sensitive to economic growth) dropped with the 10-year falling to 1.436% down from 1.452% a week earlier. The yield curve flattened with the 5-year/30-year spread falling by 30 bps.
Heading into next week’s trading sessions, we will look to see if the sizable unwinding of the popular reflation trades around global that occurred were fundamentally or technically driven last week, and should we look for a possible retracement ? A parade of no less than nine Fed officials will be speaking next week, and perhaps they will try to clarify their statements which caused so much market volatility. If we recall, from under the rubble of the markets Fed Chair Jay Powell did state last week that the US economy was still far from achieving “substantial further progress” on its goals of maximum employment and 2.0% average inflation. And let us not forget, 2023 is still far away and the current actions of the Fed, US government (still considering more fiscal stimulus) and ECB (increase in PEPP) remain accommodative, and we are about to see historic rises in corporate earnings and global GDP growth in Q2.
In looking ahead to the economic calendar next week, a busy schedule will be centered around data releases concerning personal income and spending, the PCE deflator, home sales, manufacturing and services PMIs. We begin on Tuesday with May’s report on Existing Home Sales which is estimated to have fallen by 2.6% to 5.70 mm units, mostly likely caused by recent mortgage rate hikes, high home prices and lack of inventory.
The flash June report for the Market manufacturing PMI composite index is projected to drop by 1.6 points to 60.5, due to supply chain issues. The Market services PMI business activity index is expected to rise by 0.1 points to 70.5, benefiting from the re-opening of the economy.
On Friday, the report on Real Consumer Spending is projected to drop by 0.4% May, led by a decline in auto sales. With CPI and PPI for May already released, the headline and core PCI price indexes are estimated to have risen by 0.6%. This brings the headline measure up to a 4.0% annual rate, and the core PCE deflator to 3.5%. Finally, Personal Income is expected to fall by 2.3% in May as transfer payments continued to decline.
The Week In Review
U.S. Equities
US equity markets were lower on the week due to “hawkish” commentary out of the Fed, increased inflation expectations, and quadruple witching on Friday which saw the expiration of options and futures contracts.
US Index Performance
- Dow Jones -3.40% MTD -3.50% YTD +9.79%
- S&P 500 -1.87% MTD -0.81% YTD +11.71%
- Russell 2000 -4.17% MTD -1.32% YTD +13.78%
- NASDAQ -0.30% MTD +2.03% YTD +8.86%
Drivers: I) The FOMC last week signaled a meaningful shift in policy, as the bank projected two interest rate increases by the end of 2023, which communicated a faster than anticipated speed of tightening as the economy rebounds. The change in sentiment has been prompted by the jump in headline CPI data to levels last seen in 2008. The longer-term inflation expectations have now moved within the range of the Fed’s goal of 2.0% as measured by the PCE. The Fed was positive on US growth and seems ready to begin speaking about “tapering”.
II) The May PPI headline measure increased by 0.8% m/m versus the Street estimate of 0.5%, while the yoy rate rose to 6.6%. Core CPI ex food and energy rose by 0.7% m/m equaling the April rise. Supply chain issues caused goods prices to increase, as other components such as medical services and medical commodities were muted in May following stronger increases in April.
III) Retail Sales for May declined by 1.3% m/m, partly due to the drop in auto sales of 3.7% m/m where supply has been constrained by the lack of semiconductors versus a dearth of demand. Retail Sales ex-autos and gasoline dropped by 0.8% m/m. The opening of the economy did drive strong sales in grocery and clothing stores, while there was a commensurate decline in online sales and general merchandise stores.
IV) In May, US Industrial Production rose by 0.8% m/m, led by the manufacturing component which was up 0.9% m/m. There was a recovery in auto production which was hampered by a lack of semiconductors in April. Besides the supply chain issues, there is a strong base behind manufacturing as the demand for consumer goods is rising, and there is a need to re-stock inventories which were depleted during the pandemic.
V) Equities Month to Date are mostly lower with Large-Cap, Growth, REITs, and Technology leading equity price performance. The laggards for the period are Mid-Cap, Value, Materials and Financials
Capitalization: Large Caps -0.64% (YTD +11.43%), Mid-Caps -1.79% (YTD +12.52%) and Small Caps -1.32% (YTD +13.78%). Style: Value –4.89% (YTD +21.74%) and Growth -2.48% (YTD +9.32%). Sector Groups: Energy +0.38% (YTD +39.66%), REITs +2.58% (YTD +22.47%), Financials -7.22% (YTD +20.60%), Communication Services +0.26% (YTD +16.71%), Industrials -5.18% (YTD +12.77%), Materials -7.41% (YTD +12.08%), Technology +2.70% (YTD +9.36%), Healthcare +0.09% (YTD +9.32%),Information Technology +2.52% (YTD +9.15%), Consumer Discretionary -0.37% (YTD +7.20%), Utilities -1.61% (YTD +2.91%) and Consumer Staples -2.73% (YTD +2.56%)
European Equities
The MSCI Europe Index declined last week due to concerns over the change in the US Fed’s outlook towards higher inflation and the timing as well as pace of interest rate increases.
Drivers: I) Euro-zone Industrial Production in April rose by 0.8% m/m. The increase brings the April level to 2.6% above the Q1 level annually, and is just 0.2% below the pre-pandemic level. Manufacturing production was stable as auto production lagged due to semiconductor shortages. A third lockdown sent IP lower in Germany by 0.3% m/m, while Italy and Spain saw gains of 1.8% and 1.1% m/m as they avoided another COVID-19 lockdown.
II) The final May reporting of the Euro-zone Harmonised Index of Consumer Prices (HICP) showed headline prices rose by 0.2% m/m, while core prices edged 0.1% m/m higher. On an annualized basis headline inflation rose by 0.4% to 0%, and the core reading jumped by 0.3% to 1.0%. The rise in inflation was led by energy price inflation (2.7% to 13.1%), while food price inflation fell 0.1% to a 0.5% annual rate.
III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was lower by -3.19% for the week (MTD -1.61% YTD +11.53%).
Asian Equities
Asian markets were lower last week due to concerns over the reversal of the Fed’s long term accommodative policies, and economic data out of China showing a moderation in growth. The DJ Asia Index declined by -1.46% for the week, (MTD -0.98% YTD +5.17%).
Drivers: I) In Japan, private core machinery orders increased by 0.6% m/m for April, which was below the Street consensus estimate of a 2.5% rise. The weaker performance was caused by a decline of 11.0% in orders from the nonmanufacturing sector, while manufacturing orders rose by a strong 10.9%. The drop of nonmanufacturing orders was due to a drop of 37.1% in orders from the transportation and postal sectors.
II) In China, the May Retail Sales rose by 4.5% on an annual basis, up from 4.3% seen in April but momentum has slowed from the 6.3% per annum rise in March. The recent moderation in growth is due to mobility restrictions adopted in Guangdong province due to new COVID-19 cases, slowing in the growth of disposable income and the continued increase in savings rates which was 33.7% in Q1 2021.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei rose by +0.06% (MTD +0.37% YTD +6.24%), the Hang Seng Index was lower by -0.20% (MTD -1.25% YTD +5.61%) and the Shanghai Composite declined by -1.80% (MTD -2.50% YTD +1.50%).
Fixed Income
Treasury yields fell on the longer end of the curve, while short term yields rose on expectations that the Fed will be limited in the number of rate hikes it can implemented due to still high rates of unemployment and expected deceleration in economic growth beginning in 2022.
Performance: I) The 10-year Treasury yield fell last week ending at 1.436% down from 1.452%. The 30-year yield dropped last week finishing at 2.015% declining from 2.140%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index rose by +0.11% last week, MTD +0.71% and YTD -1.60%. The Bloomberg Barclays US MBS TR was lower by -0.34% last week, MTD -0.25% and YTD -0.97%. The Bloomberg Barclay’s US Corporate HY Index declined by -0.07% for the week, MTD +0.70% and YTD +2.96%.
Commodities
The DJ Commodity Index dropped last week by -3.51% and is lower month to date -3.07% (YTD +18.23%). Commodity prices experienced sharp declines as China reiterated its stance to draw down on its existing stockpile of industrial metals to meet current demand, to blunt the extraordinary jump in metals prices seen in 2021.
Performance: I) The price of oil advanced last week by +1.05% to close at $71.55 and is higher month to date by +7.38% (YTD +47.46%). Oil prices rose for a fourth straight week, as the market expects the drawdown of the global inventories to continue, and increase as economic growth strengthens.
II) The ICE USD Index, a gauge of the U.S dollar’s movement against six other major currencies, was higher by +1.97% closing at 92.32 for the week (MTD +2.51% YTD +2.65%). The USD rose last week after the FOMC intimated it would raise rates twice in 2023 and begin curtailing its asset purchases.
III) Gold suffered its largest weekly decline since March 2020 as the USD rallied on a more “hawkish” tone from the Federal Reserve. Gold fell in price by -6.08% last week, dropping to $1763.5 (MTD -7.49% YTD -6.94%).
Hedge Funds
Hedge fund returns in June are positive for the month with the core strategies Equity Hedge, Event Driven, Relative Value and Multi-Strategy higher, while Macro/CTA is lower.
Performance:
- The HFRX Global Hedge Fund Index is higher by +0.29% MTD (+3.63% YTD).
- Equity Hedge advanced by +0.53% MTD (+7.19% YTD).
- Event Driven is up MTD +0.27% (+3.55% YTD).
- Macro/CTA has fallen by -0.19% MTD (+1.97% YTD).
- Relative Value Arbitrage is up by +0.33% (+0.84% YTD).
- Multi-Strategy is higher MTD by +0.32% (+0.61% YTD).
Data Source: Haver Economics, Standard & Poor’s, HFR, Bloomberg, Morningstar and FactSet