Economic Data Watch and Market Outlook
US equities posted mixed results last week, as investors tried to identify the real truth between the “noise” coming out of Washington versus hard economic data. Markets have rallied to new all-time highs (DJIA achieved its 23rd record high) as the lifting of COVID-19 restrictions in major US cities and the EU’s decision to permit vaccinated tourist to travel through the region have boosted investor hopes for an acceleration in the re-opening of the global economies. However, investors have been worried that rising stock valuations could hit a wall should an unexpected spike in interest rates occur. This fear was brought to light as a normally media savvy Treasury Secretary Janet Yellen committed a faux pas by suggesting early in the week, that interest rates may need to increase in order to prevent an economic overheating, due to the massive fiscal stimulus plans proposed by President Biden. This sent equities markets down, causing Secretary Yellen to recant her statement and clarify her words by saying she was neither “predicting nor recommending” the central bank hike rates in response to Washington’s spending program. In addition, a parade of Fed officials reiterated their stance that any inflationary pressure seen in the near term were transitory. These statements and a disappointing US jobs report has sent the bond vigilantes to the sidelines for now.
Heading into next week’s trading sessions, we will see if the words out of Washington regarding inflation are true or just political speak as we will get readings on April CPI and PPI. The stark reality regarding inflation is seen in the economic data we alluded to above. The supply chain gridlock has caused supply/demand imbalances across many industrial sectors, which have caused material prices to reach their highest levels since July 2008, per the ISM Manufacturing survey. Copper and lumber prices have hit historical highs, while agricultural commodities including corn and coffee have soared in price due to dry weather conditions. These price rises have sent the Bloomberg Commodity Spot Index to its highest level in over a decade. The market is expecting a sharp rise in CPI and PPI, but how much will they rise, and will they be transitory?
In looking ahead to the economic calendar next week, the markets will be fixated on the release of April CPI and PPI data as well as April Retail Sales. On Wednesday, the April CPI is expected to rise by 0.2% m/m and by 3.5% year over year. Contributing to the rise are food prices (0.1%), lodging (2.2%) and transportation (1.8%). The core CPI is expected to show a 0.25% m/m increase and 2.3% year over year.
The release of April PPI on Thursday is estimated to show an increase of 0.3%, which would be the slowest monthly gain for the year as energy prices abated in April. The core PPI is projected to rise by 0.4%, which is below the March level of 0.7%.
Retail Sales for April out on Friday is expected to rise by 1.3%, following the 9.7% surge seen in March. The pullback in sales will be the result of the wanning effect of fiscal stimulus paid out in March.
Closing out the week on Friday will be the preliminary May report for the University of Michigan consumer sentiment index, which is projected to improve by 1.2 points to 89.5. The rise in sentiment reflects the positive view consumers associate with fiscal stimulus and the vaccine rollout.
The Week In Review
U.S. Equities
US equity market indices reached new all-time highs, as the sub-par non-farm payroll report supports the call for further fiscal stimulus and the Fed to continue its “dovish” policies.
US Index Performance
- Dow Jones +2.72% MTD +2.72% YTD +14.33%
- S&P 500 +1.26% MTD +1.26% YTD +13.25%
- Russell 2000 +0.25% MTD +0.25% YTD +15.35%
- NASDAQ -1.51% MTD -1.51% YTD +6.70%
Drivers: I) In April, the Non-farm payroll rose by 266,00, far below Street estimates of one million new jobs. The unemployment rate rose from 6.0% to 6.1%, the first increase since April. Hourly wages beat expectations, rising by 0.7%, which may be a consequence of federal stimulus which is causing employers to pay higher wages to attract workers. Bank of America economists reported in a study that Federal benefits of $600 to $805 per week, is far above minimum wage and is more after tax than a job paying less than $32,000 per year.
II) The April survey for ISM Manufacturing showed a slowing of activity, falling from 64.7 in March to 60.7 in April. The decline though, is a drop from a historical high level, which was prompted by a decrease in new orders from March’s level of 68.0 to 64.3 in April. Supply chain snags have caused delivery times to increase, with the reading remaining at a high of 75.0 in April, though lower than the 76.6 in March.
III) In April, the ISM Services survey dropped to 62.7 from 63.7 in March. The decline though disappointing the survey is strong on a historical basis, as the service level was the second highest all-time after March’s reading. Services remain strong as the increase in vaccine distribution has supported the rise in economic activity.
IV) March New Orders for Factory goods jumped by 1.1%, and related shipments rose by 2.1%. The report showed an increase in core capital goods orders of 1.2% for the month, while core shipments increased by 1.6%. The monthly gains in orders and shipments were solid contributors to Q1 GDP growth.
V) Equities Month to Date are higher with Large-Cap, Value, Energy, and Materials leading equity price performance. The laggards for the period are Small-Cap, Growth, Utilities, and REITs
Capitalization: Large Caps +0.89% (YTD +12.60%), Mid-Caps +0.69% (YTD +14.43%) and Small Caps +0.25% (YTD +15.35%). Style: Value +3.41% (YTD +29.12%) and Growth +0.05% (YTD +13.53%). Sector Groups: Energy +8.80% (YTD +43.09%), Financials +4.21% (YTD +28.71%), Materials +5.84% (YTD +21.87%), Industrials +3.37% (YTD +19.21%), REITs -0.86% (YTD +16.96%), Communication Services -0.53% (YTD +14.94%), Consumer Discretionary -0.65% (YTD +10.66%), Healthcare +2.88% (YTD +9.66%), Technology -0.44% (YTD +7.01%), Information Technology -0.53% (YTD +6.88%), Utilities -1.03% (YTD +6.04%), and Consumer Staples +1.54% (YTD +5.21%)
European Equities
The MSCI Europe Index rose last week due to strong corporate earnings and expectations the re-opening of the Euro-zone economies will pick up in pace as the vaccination rollout accelerates.
Drivers: I) In March, Euro-zone retail sales rose by a strong 2.7% month over month, which beat the consensus estimated of a 2.4% rise. The solid showing follows the 4.2% month over month surge in February. The sharp recovery is evident of the changes made in COVID-19 restrictions across countries. The current rebound in sales leaves the indicator 1.5% above the pre-pandemic levels seen in January to February 2020.
II) The March release of Euro-zone Industrial Production showed a month over month increase of 0.3%. There were solid contributions from the primary countries, with Germany and France seeing a 0.8% rise, while Spain was up 0.4%. Auto production lagged in Germany and France as supply chain delays have caused a shortage of semiconductor chips, curtailing output.
III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was higher by +2.82% for the week (MTD +2.82% YTD +11.88%).
Asian Equities
Asian markets were mixed last week boosted by the strong China and Taiwan export data, while the rise in new COVID-19 cases in Indian and Thailand were a damper on equity prices. The DJ Asia Index was higher by +1.81% for the week, (MTD +1.81% YTD +6.17%).
Drivers: I) In China, trade exports continued to growth, as the indicator rose by 32.3% year over year in April. This rise followed a drop of 6.7% month over month in March. Export growth was led by shipments to emerging market countries in Asia, rising by 8.5% month over month, which showed an improvement in supply chain activity and global demand increases. The most sought-after products were high tech and consumer goods.
II) In Taiwan, export growth soared in April by 7% year over year rate, and 7.2% month over month. The demand for technology led the way, as tech exports rose by 6.8% month over month, sending the three-month growth rate to 41.2% on a seasonally adjusted annual basis. Tech demand accelerated due to continued concerns over the shortage of electronic components and the need to restock inventories to meet rising demand from manufacturers.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei rose by +1.89% (MTD +1.89% YTD +7.68%), the Hang Seng Index was lower by -0.43% (MTD -0.43% YTD +4.86%) and the Shanghai Composite declined by -0.81% (MTD -0.81% YTD -1.56%).
Fixed Income
Treasury yields fell last week as the jobs report fell far below Street consensus estimates, leading to expectations that the Fed will keep interest rates lower for longer.
Performance: I) The 10-year Treasury yield fell last week ending at 1.575% down from 1.625%. The 30-year yield declined last week finishing at 2.284% dropping from 2.293%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index rose by +0.28% last week, MTD +0.28% and YTD -2.34%. The Bloomberg Barclays US MBS TR was higher by +0.00% last week, MTD +0.55% and YTD -0.55%. The Bloomberg Barclay’s US Corporate HY Index rose by +0.29% for the week, MTD +0.29% and YTD +2.24%.
Commodities
The DJ Commodity Index rose last week by +4.45% and is higher month to date +4.45% (YTD +22.95%). Commodity prices continued their strong surged as copper and lumber hit new highs, and agriculture including coffee and corn jumped on draught condition concerns.
Performance: I) The price of oil jumped last week by +2.14% to close at $64.85 and is higher month to date by +2.14% (YTD +33.65%). Oil prices rose on the week as expectations for an accelerated re-opening of the US and European economies more than counter balanced concerns over the rise in COVID-19 cases in India.
II) The ICE USD Index, a gauge of the U.S dollar’s movement against six other major currencies, was lower by -1.16% closing at 90.24 for the week (MTD -1.16% YTD +0.34%). The USD declined as the poor jobs report should permit the Fed to remain accommodative and provide an impetus for further US fiscal stimulus.
III) Gold climbed to its highest level in three months as the highly disappointing non-farm payroll report sent both interest rates and the USD lower, which is positive for the precious metal. Gold rose in price by +3.54% last week, rising to $1831.5 (MTD +3.54% YTD -3.35%).
Hedge Funds
Hedge fund returns in May are negative for the month with all of the core strategies Equity Hedge, Event Driven, Macro/CTA , Relative Value and Multi-Strategy lower.
Performance:
- The HFRX Global Hedge Fund Index is lower by -0.26% MTD (+2.68% YTD).
- Equity Hedge declined by -0.53% MTD (+5.16% YTD).
- Event Driven is down MTD -0.10% (+3.19% YTD).
- Macro/CTA has declined by -0.31% MTD (+1.31% YTD).
- Relative Value Arbitrage is down by -0.05% (+0.31% YTD).
- Multi-Strategy is lower MTD by -0.02% (+0.10% YTD).
Data Source: Haver Economics, Standard & Poor’s, HFR, Bloomberg, Morningstar and FactSet.
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