Economic Data Watch and Market Outlook
Global equity markets led by the US, staged a strong rally as a deluge of better than expected economic data pushed investor concerns aside. The week had begun with an overhang of worry over heightening US/China tensions, civil unrest, and the potential increase in new COVID-19 cases. But it was a panacea of positive news as US non-farm payroll, ISM Services, Construction spending and several other economic reports beat their dire estimates. The positive tone was further boosted by the ECB’s announcement of a €600 billion increase in fiscal stimulus, bringing the euro-zone total rescue package up to €1.35 trillion. US equity markets rallied for the third straight week, sending the NASDAQ 100 and NASDAQ Composite to new all-time highs. The S&P 500 was no slouch ending the week at 3193.93, up over 40.0% from its March 23rd low of 2237.40. The S&P 500 capped off the strongest 50-day rally last week in over 75 years. The strong risk-on rally sent safe havens such as 10-year Treasuries (yield rose from 0.659% to 0.901%) and gold (price dropped from $1743.00 to $1688.50/0z.) lower. The strong equity market surge was also seen overseas as the EuroStoxx 600 saw its strongly weekly gain since April, and the MSCI Asia ex-Japan Index posted its best weekly result since December 2011.
As we enter next week’s trading sessions, with markets heartened by the continued support from global central banks, will the economic data releases maintain their positive trends. As we have written over the past several months, equities markets are a forward-looking mechanism, and their recent strong rally may have been vindicated by the unexpected strong non-farm payroll data in the US. A clue may be provided by Fed Chair Jay Powell as the FOMC conducts its June meeting, and investors are looking for guidance whether the Fed is seeing a V, U or L shaped recovery. But let us remember, equity market price trends are not a one-way street. When we overlay the trading pattern of the S&P 500 presently versus same time frame in 2009, the index did suffer a –7.0% decline from 6/12/09 – 7/10/09 before resuming its rally over the next decade plus.
In turning to next week’s economic calendar, in a light week the key data releases will center around US inflation and consumer sentiment. We begin on Wednesday with the consumer price index (CPI) which is projected to be unchanged in May at 0.3%, while the core index ex-food and energy should also be flat at 1.3%. The COVID-19 pandemic has caused large declines in the prices for energy and services (lodging and airfares).
The producer price index (PPI) is estimated to have increased by 0.2% in May. The recent declines in energy prices have driven PPI lower, but the current rebound in energy is prompting forecasters to estimate a 4.2% increase in energy PPI for May. But overall, core PPI is expected to remain muted due to the decline in services PPI.
We close out the week on Friday with the University of Michigan consumer sentiment index, which is estimated to have risen 2.7 points to 75 in June. The slight uptick in consumer sentiment is being shaped by the consumers view regarding the lifting of social restrictions prompted by COVID-19.
The Week In Review
U.S. Equities
US equity markets staged a sharp rally last week as several US economic data releases came in better than expected, led by non-farm payroll which gained 2.5 million jobs versus a projected decline of 7.5 million.
- Dow Jones +6.81% ,MTD +6.81%, YTD -5.00 S&P 500 +4.96%, MTD +4.96%, YTD -0.26%
- Russell 2000 +2.87%, MTD +6.51%, YTD -15.95%
Drivers: I) US non-farm payroll employment in May staged one of the greatest turnarounds in modern economic history. The average Street estimates of a loss of 7.5 million jobs, was proven to be very wrong as jobs actually increased by a shockingly large 2.5 million jobs. The increase in jobs sent the unemployment rate from 14.7% in April to 13.3%, easily beating the Street estimated of 20.0%. The huge upside surprise has an actual economic basis as the economic re-opening in May, had already led to recent rises in auto sales and credit card usage.
II) The greatest increases in employment was found the leisure and hospitality sector which saw a gain of 1.2 million jobs. We are also seeing a strong increase in workers were construction (464,000 jobs) and education/healthcare (424,000 jobs). The sharp increase in hospitality jobs was a primary reason overall average hourly earnings declined by -0.1% for May. This was a reset of the rise in hourly earnings in April, influenced by the massive lay-off of lower paid workers.
III) Construction spending in April decline by -2.9%, but easily beat the Street estimate that called for a drop of -4.6%. Construction has held in for the most part, as other economic indicators saw massive decline in March and April. New residential construction in April did see a sharp decline 0f -4.5% in new residential construction, which was the largest monthly decline since the Great Recession (-7.0%) and follows the March decrease of -1.2%.
IV) The ISM non-manufacturing survey in May jumped from April’s reading of 41.8 to 45.4, exceeding Street expectations. The report highlighted improvement during the month, which is just beginning to offset the sizable slide seen in March and April. Several economic indicators including the ISM data, are showing signs of improvement as the easing of restrictions begin to accelerate.
V) Equities Month to Date are higher with Small-Cap, Value, Energy, and Financials leading equity price performance. The laggards for the period are Large-Cap, Growth, Consumer Staples, and Utilities.
Capitalization: Large Caps +5.10% (YTD -0.06%), Mid-Caps +7.04% (YTD -4.45%) and Small Caps +8.13% (YTD -9.11%). Style: Value +12.29% (YTD -14.05%) and Growth +7.11% (YTD -2.46%). Industry Groups: Technology +3.65% (YTD +11.19%), Information Technology +3.85% (YTD +10.47%), Consumer Discretionary +5.58% (YTD +5.19%), Communication Services +3.41% (YTD +2.85%), Healthcare +0.23% (YTD +1.84%), Materials +7.79% (YTD -1.97%), Consumer Staples +2.00% (YTD -3.45%), REITs +7.05% (YTD -3.51%), Utilities +2.52% (YTD -4.35%), Industrials +10.53% (YTD -7.46%), Financials +12.23% (YTD -13.92%) and Energy +15.61% (YTD -23.57%).
European Equities
The MSCI Europe Index was higher last week by +8.92%, rallying on unexpectedly strong jobs data out of the US and the ECB’s surprise increase in stimulus to €1.35 trillion ($1.52 trillion) from €750 billion.
Drivers: I) The ECB announced it was expanding the Pandemic Emergency Purchase Programme (PEPP) by €600bn (from €750bn to €1,350bn) and extended the purchase timeline by six months to mid-2021. It also announced that maturing bond proceeds would be reinvested till the end of 2022. PEPP has been enacted to combat the economic carnage caused by COVID-19, and the program can be expanded to help foster a revival and expansion of euro-zone economic growth.
II) Signs that an economic recovery is beginning to take hold, was seen in Germany’s auto production data. After the closing of virtually every auto factory in April, production clawed its way back in May. There was an increase in production of 11,000 units from April’s level, to 157,000 in May. While this is encouraging, output in May remains about 60.0% below its norm. As such, Q2 output is still 100% annualized below Q1 2020 levels.
III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was up by +8.92% for the week (MTD +8.92%, YTD -8.72%).
Asian Equities
Asian equity markets were higher on the week, as better than expected US jobs and the increase in stimulus from the ECB pushed up equity prices. The Dow Jones Asia Index was higher by +6.27% for the week, (MTD +6.27%, YTD -9.66%).
Drivers: I) China’s Caixin/Markit manufacturing PMI rose 1.3 points to 50.7. The normalization of manufacturing activity continued as the government remains supportive of the resumption of factory work. Within the report, the new orders and exports orders components rose in May, but export orders remained muted as external demand remains a concern for the economy’s near-term recovery.
II) The PBOC last week announced a number of new initiatives to support SMEs, including the extension of the deferral of principal and interest payments on outstanding loans till March 31, 2021 (was previously June 30, 2020), an increase in the re-lending facility of 400 billion yuan to purchase loans from regionals banks and support 1 trillion yuan in SME lending, and guidelines to improve financial services for SMEs.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei rose by +4.51% (MTD +4.51%, YTD -2.38%), the Hang Seng Index was higher by +7.92% (MTD +7.92%, YTD -11.71%) and the Shanghai Composite advanced by +2.75% (MTD +2.75%, YTD -3.91%).
Fixed Income
Treasury yields rose last week, as the unexpected increase of 2.5 million jobs in the non-farm payroll report sent treasury prices lower, with the 10-year and 30-year yields rising by 24bps and 26 bps respectively.
Performance: I) The 10-year Treasury yield was higher last week ending at 0.901% up from 0.659%. The 30-year yield advanced last week finishing at 1.672% up from 1.412%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index fell -0.49% last week, MTD -0.49% and YTD +4.95%. The Bloomberg Barclays US MBS TR was lower by -0.08% last week, MTD -0.08% and YTD +3.51%. The Bloomberg Barclay’s US Corporate HY Index was higher by +2.95% for the week,
MTD +2.95% and YTD -1.78%.
Commodities
The DJ Commodity Index was higher last week by +4.66% and is up month to date +4.66% (YTD -13.35%). The commodity index rose last week as better than expected economic data out of the US revived hope for a V shaped economic recovery, and an increase in demand for energy and industrial metals.
Performance: I) The price of oil increased last week by +10.33% to close at $38.97 and is higher month to date by +10.33% (YTD -36.18%). Oil prices rallied on news major oil producers were meeting on Saturday to extend production cuts, while stronger than expected US jobs data bolstered hope for a recovery in energy demand.
II) The ICE USD Index, a gauge of the U.S dollar’s movement against six other major currencies, was lower by -1.37% ending at 96.95 for the week (MTD -1.37%, YTD +0.58%). The USD fell again last week and is now down about 6.0% from its mid-March high, as global economies continue to re-open after lifting of COVID-19 restrictions.
III) Gold declined last week as the surprisingly strong US jobs report and rally in risk assets, send gold down to its lowest closing price in two months. Gold was lower by -3.12% last week, falling to $1688.5 (MTD -3.12%, YTD +10.86%).
Hedge Funds
Hedge fund returns in May are higher with the core strategies Equity Hedge, Relative Value and Multi-Strategy in positive territory, while Macro/CTA is lower on the month.
Performance:
- The HFRX Global Hedge Fund Index is higher at +0.75% MTD and down -2.06% YTD.
- Equity Hedge has advanced by +1.32% MTD and lower by -7.12% YTD.
- Event Driven is up MTD +0.73% and is down YTD -0.30%.
- Macro/CTA has fallen by -0.88% MTD and is lower by -1.31%
- Relative Value Arbitrage is higher by +1.21% and is up +0.55% YTD.
- Multi-Strategy is up MTD by +1.17% and has risen by +0.40% YTD
Data Source: Haver Economics
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