Economic Data Watch and Market Outlook
Global equity indices, particularly those in the US, have earned the right to be described as “Teflon” protected. Despite the flood of poor economic data and negative corporate earnings, equity indices continued their inexorable rise that began in the US on March 23rd. US equity markets have risen with every positive development regarding a decline in COVID-19 cases, or news on a potential treatment or vaccine. Markets rallied last week on news from the CDC that US COVID-19 cases seemed to have peaked in mid-April, ahead of the previous prediction of mid-May for a peaking. These positive developments regarding COVID-19 more than offset the worse unemployment data we have seen post WWII, the plunge in factory orders and the sharp contraction we are seeing in Q1 corporate earnings. Investors are pushing equity prices higher, as they believe they are seeing the light at the end of the tunnel, as more countries and states in the US are re-opening. Equity markets as a forward indicator, are discounting the current flow of negative data, and are looking to a potential V shaped recovery as individuals resume a lifestyle enjoyed during the pre-COVID-19 halcyon days.
As we enter next week’s trading sessions, the US markets led by the S&P 500 are in the midst of a bull market rally that began in late March. This sizable rally has added about 670 points to the S&P 500, for an estimated 30.0% rise during this period. The bull move has pushed the “fear index”, the VIX, down from a high of 82.69 seen on March 16th, down to Friday’s close of 27.98. The sharp equity market upturn has been aided by a decline in new COVID-19 cases, as well as an abatement of trade tensions between the US and China last week. A call between the two countries last week were reported to be positive, as both countries agreed to cooperate on public health issues and to begin the implementation of Phase I of the trade deal. Equity markets are in a positive trend, and this can continue unless we see an unexpected spike backup in new COVID-19 cases.
In turning to next week’s economic calendar, in somewhat of a light calendar for data releases, the primary reports of interest will be focused on US inflation data and retail sales. We start off on Tuesday with the Consumer Price Index (CPI), which is projected to fall by 0.8% in April, following the drop of 0.4% seen in March. CPI is being dragged lower by the sharp decline in energy prices, as the energy CPI is estimated to have dropped by 11.4%.
The Producer Price Index (PPI) out on Wednesday, is estimated to have declined by 0.5% in April. Several inputs related to energy prices have weakened and the energy PPI is projected to have fallen by 8.8% during the month. Other subcategories are expected also expected to be sluggish, with food prices expected to have declined by 0.4% for April.
April Retail Sales on Friday are expected to show a decline of 8.4%. Underpinning the sharp decline are severe drops in sales caused by the spread of the coronavirus. Food services are projected to see sales fall by 26.6%, but sales at food and beverage stores are expected to have benefitted from the COVID-19 pandemic and are projected to surge by 25.5%.
Closing out the week on Friday is the release of the University of Michigan Consumer Sentiment Index, which is estimated to have fallen 6.8 points to 65.0 for May. Much of the decline is due to a deterioration in a number of consumer comfort index components.
The Week In Review
U.S. Equities
US equity markets posted their best weekly gain in a month, despite the release of the non-farm payroll report which showed the sharpest decline in the number of workers in the US since WWII.
- Dow Jones +2.67% MTD +0.05% YTD -14.03 B. S&P 500 +3.57% MTD +0.67% YTD -8.68%
- Russell 2000 +5.52% MTD +1.48% YTD -19.92%
Drivers: I) The April Non-farm payroll report showed employment in the US decreased last month by 20.5 million, which was better than the Street consensus estimate of 22.0 million. The April jobs report provides the broadest view of the massive destruction COVID-19 has brought to economic activity due to containment policies. The UE rate soared from 4.4% in March to a post-Depression high in April of 14.7 (consensus 16.0%).
II) Within the non-farm payroll report, the labor force participation rate plunged from 62.7% to 60.2%. This decline drove the employment to population ratio down from 60.0% to an all-time low of 51.3%. In addition, the number of workers that are classified as “employed, but not at work due to other reasons” jumped by 6.0 million. These two factors limited the UE rate increase, which ex-these factors would have climbed to about 23.0%.
III) The ISM Non-Manufacturing survey in April plunged to 41.8%, down from 52.5% in March. The decline interrupted 122 consecutive months of positive readings, and also sent the index to the lowest level since the survey began in 1997. The sharp decline in services activity, prompted by the COVID-19 driven shutdown of the economy, caused new orders and employment to drop to or near all-time lows.
IV) The Federal Reserve’s reading on US consumer credit, showed a sharp drop of 3.4% in March and on a dollar basis, the reading fell by $12.o billion. The decline in consumer credit was the first since August 2011, and it followed a February increase of $19.9 billion. Due to the economy being shut down by the spread of COVID-19, total retail sales in March fell by a record 8.7%. Slowing income growth and job losses are capping credit use.
V) Equities Month to Date are higher with Small-Cap, Growth, Tech and Information Tech leading equity price performance. The laggards for the period are Large-Cap, Value, Financials and Utilities.
Capitalization: Large Caps +0.96% (YTD -8.81%), Mid-Caps +1.45%(YTD -15.39) and Small Caps +1.48% (YTD -19.92). Style: Value –0.12% (YTD -26.79%) and Growth +2.48% (YTD -13.66%). Industry Groups: Technology +3.64% (YTD +3.87%), Information Technology +3.61% (YTD +2.96%), Healthcare -0.34% (YTD -1.95), Communication Services +2.65% (YTD -4.63%), Consumer Discretionary +0.53% (YTD -6.04%), Consumer Staples -0.26% (YTD -7.12%), Utilities -1.82% (YTD -12.22%), REITs -1.79%(YTD -13.14%), Materials +1.17%(YTD -13.97%), Industrials -1.67% (YTD -21.94%), Financials -2.15 (YTD -26.92%) and Energy +2.01%(YTD -33.92%).
European Equities
The MSCI Europe Index was higher last week by +0.03%, rallying on news that talks between the US and China had yielded positive results towards the implementation of Phase I of the trade deal.
Drivers: I) Retail sales dropped in March by an astonishing 11.2% month over month, which brought the Q1 decline to 11.0% below the level seen in Q4 2019. With recent reports showing that the Euro-zone economy was running at least 30.0% below normal activity levels, it was not surprising that the sales report showed a drop in fuel consumption by 20.8%. Retail sales are estimated to have fallen by 5.6% in Germany and 17.4% in France.
II) March industrial production in Germany declined in March by 9.2% and was lower by 4.8% on a quarterly basis in Q1 2020. Manufacturing output for the quarter dropped by 10.0%, but construction surged by 24.0% for the quarter and rose strongly in March. This slowdown in production is prompting Wall Street firms to estimate a decline in Q1 2020 GDP of about 8.0%. The main drag is expected to be the auto sector where production declined by 33.0% in Q1 2020.
III) Performance of European Indexes for the week, month-to date and year-to-date. The MSCI Europe Index was higher by +0.03% for the week (MTD -0.38%, YTD -20.14%).
Asian Equities
Asian equity markets were mostly higher last week, as talks between the US and China negotiators seems to have led to cooperation on trade and public health issues. Dow Jones Asia Index was lower by -0.09% for the week, (MTD -1.88%, YTD -15.00%).
Drivers: I) China’s April exports surprised to the upside, posting a 3.5% annual increase for the month, and was higher by 3.1% on a month over month basis. The increase was surprising due to concerns that a slowdown in demand would occur due to the global spread of COVID-19. The export rise, inconsistent with a global recession, may be explained by the surge in China’s export of medical equipment and care products such as surgical masks and PEP equipment to developed countries. This export category jumped by 3.7% in April.
II) Japan’s April composite PMI hit a record low, falling 2 points to 25.8. This brought the April result 10.4 points lower than the March reading. The decline, which is extraordinary during normal times, is still significant, as the index has plunged by over 10 points over the past two months. The manufacturing indicator was revised lower by 3.1 points to 34.7, as new orders were also dropped by 3.4 points to 33.3.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei rose by +2.85% (MTD -0.07%, YTD -13.84%), the Hang Seng Index was lower by -1.69%(MTD -1.69%, YTD -13.64%) and the Shanghai Composite advanced by +1.23% (MTD +1.23%, YTD -5.07%).
Fixed Income
Treasury yields rose last week as the US Treasury announced it would greatly increase its quarterly debt issuance, including a new 20-year bond sales, to fund the rapidly growing federal deficit.
Performance: I) The 10-year Treasury yield was higher last week ending at 0.689% up from 0.615%. The 30-year yield rose last week finishing at 1.383% up from 1.250%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index fell -0.33% last week, MTD -0.44% and YTD +4.52%. The Bloomberg Barclays US MBS TR was higher by +0.11% last week, MTD +0.11% and YTD +3.59%. The Bloomberg Barclay’s US Corporate HY Index advanced by +0.83% for the week, MTD +0.65% and YTD -8.16%.
Commodities
The DJ Commodity Index was higher last week by +4.85% and is up month to date +4.47% (YTD -29.17%). The commodity index rose last week as energy and industrial metals rallied on hopes for a strong 2H recovery.
Performance: I) The price of oil increased last week by +25.09% to close at $24.63 and is higher month to date by +30.73% (YTD -59.66%). Oil prices were strong last week on optimism over production cuts and rising gas demand.
II) The ICE USD Index, a gauge of the U.S dollar’s movement against six other major currencies, was up by +042% ending at 99.10 for the week (MTD +0.08%, YTD +2.81%). The USD rose last week as investors looked forward to a sharp rebound in US growth in 2H 2020.
III) Gold fell last week as investors parsed through historic non farm payroll data, and news the US and China we are laying the groundwork to begin Phase I of the trade deal. Gold was lower by -0.31% last week, dropping to $1704.8 (MTD +0.63%, YTD +11.92%).
Hedge Funds
Hedge fund returns in May are primarily higher with the core strategies Event Driven, Marco/CTA, Relative Value and Multi Strategy in positive territory, while Equity Hedge is down for the month.
Performance:
- The HFRX Global Hedge Fund Index is lower at -0.09% MTD and down -4.25% YTD.
- Equity Hedge has declined by -1.04% MTD and lower by -10.37% YTD.
- Event Driven is up MTD +0.57% and is down YTD -2.37%.
- Macro/CTA has risen by +0.42% MTD and is down -0.28% YTD.
- Relative Value Arbitrage has advanced by +0.02% and is lower -2.58% YTD.
- Multi-Strategy is up MTD by +0.02% and has dropped by -2.69% YTD
Data Source: Haver Economics
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