Economic Data Watch and Market Outlook
The halcyon “goldilocks” market environment that has sent major US equity indices to all-time highs, was disrupted last week by the higher-than-expected spike in US inflation. The Consumer Price Index (CPI) released on Wednesday, showed the April headline reading rise by 0.8% (4.2% on an annualized basis) month over month (highest level since June 2009), while core CPI (ex-food and energy) increased at a 3.0% annual rate (highest since 2008) which was almost double the 1.6% level in March. Inflation fears were further stoked by news that the east coast Colonial oil pipeline was shutdown by a cybersecurity attack, shutting down the nation’s largest pipeline and the flow of oil. This caused gas stations in states such as Georgia and North Carolina to run out of gas, long gas lines and price gouging (some stations raised prices to $7.00 per gallon) reminiscent of the Middle East oil embargo during the mid-1970’s. These fears caused the S&P 500 to experience its worse three-day decline since October, while the MSCI ACWI Index suffered its poorest three day drop since early March. These events sent WTI crude to an eight-week high of $66.08 per barrel before settling down to $65.51 by week’s end. Despite the flood of rising inflation data, Fed Vice Chair Richard Clarida stated that though inflation is presently elevated, “additional data over the coming months would be monitored before any premature action would be taken to remove monetary stimulus.”
Heading into next week’s trading sessions, we will see if the reversal of the negative market sentiment at the end of the week will continue to support a market price recovery. The improvement in investor outlook was prompted by the CDC announcing an easing of pandemic restrictions, as vaccinated individuals can now go mask less for both indoor and outdoor activities. Markets were also bolstered by the investor belief that “bad news is good news” as data releases for Retail Sales and University of Michigan Consumer survey came in below expectations, thus keeping plans for a current and anticipated monetary and fiscal stimulus on track. In this vein, President Biden will be unveiling his $4 trillion fiscal stimulus plan to Congress next week. We will see how markets will react to next week’s economic data releases, but we expect asset prices will continue to be sensitive to any news that could upset the euphoric scenario of accelerating global economic re-opening, vaccination rates, corporate earnings, while keeping interest rates and inflation in check.
In looking ahead to the economic calendar next week, the reporting schedule will be dominated by US housing data and the Markit PMI reports. We kick off on Tuesday with the May NAHB Housing Market Index which is expected to fall by two points to 81. The Index after hitting an all time high of 90 in November, has receded as the housing cycle may have peaked but still remains at a strong level.
On Friday, the May Markit Manufacturing Survey is projected to remain steady at 60.5 and we will see if supply chain issues that have recently lifted the Survey have improved. The Markit Services PMI for May is estimated to have slid by 0.2 points lower to 64.5. As the positive boost from March stimulus checks has waned, the growth in services is softening a bit. We close out the week with the April reading of Existing Homes Sales which is expected to rise by 2.3% to 6.15 million units on a seasonally adjusted annual rate. The recovery in sales is a reversal of the declines seen in February and March caused by severe winter weather.
The Week In Review
U.S. Equities
US equity markets declined last week as April US inflation data as measured by the Consumer Price Index, posted its strongest period increases (0.8% m/m and 4.2% yoy) since 2008 and 2009 respectively.
US Index Performance
- Dow Jones -1.08% MTD +1.61% YTD +13.09%
- S&P 500 -1.35% MTD -0.10% YTD +11.73%
- Russell 2000 -2.04% MTD -1.79% YTD +13.01%
- NASDAQ -2.50% MTD -4.01% YTD +4.20%
Drivers: I) In April, the headline measure of the Consumer Price Index (CPI) easily beat the consensus estimate of 0.2% by rising 0.8% m/m (core index increased by 0.92%). The year over year comparison versus low inflation rates in April 2020 (“base effects”) led to a sizable increase in headline CPI of up 4.2% year over year. The re-opening of the economy and expansion of travel led to a rise in the prices of used vehicles (10.0%), airfares (10.2%), and lodging (7.6%).
II) The April measure of the Producer Price Index (PPI) also exceeded Street expectations, as the headline reading was up 0.6% and the core index (ex-food and energy) rose by 0.7%. Once again, we are hearing that the sharp rise is due in part to the “base effects”, of prices rebounding from the weak levels reported in 2020. Similar to the CPI report, jumps in the prices related to vehicles and airfares were primary drives of the PPI increase.
III) In April, US Retail Sales came in below expectations as the measure was unchanged versus the projected rise of 1.3%. The sub-par showing was most likely affected by the by comparisons to the sales increase in March, boosted by the issuance of recent stimulus checks. A trend to keep an eye on is the increase in food service spending which was up 3.0% following the 13.5% spike in March, most likely elevated by stimulus and the progression of “reopenings”.
IV) The April report for import prices beat expectations by rising 0.7% versus the consensus estimated rise of 0.4%. When we exclude the volatile measure of fuels, the aggregate was also higher by 0.7%. Overall, the report showed an increase in import prices, particularly for industrial supplies and food prices.
V) Equities Month to Date are mixed with Large-Cap, Value, Energy, and Materials leading equity price performance. The laggards for the period are Small-Cap, Growth, Con. Discretionary, and Technology
Capitalization: Large Caps -0.52% (YTD +11.03%), Mid-Caps -0.71% (YTD +12.85%) and Small Caps -1.79% (YTD +13.01%). Style: Value +2.45% (YTD +27.91%) and Growth -2.35% (YTD +10.81%). Sector Groups: Energy +8.46% (YTD +42.64%), Financials +4.54% (YTD +29.12%), Materials +5.88% (YTD +21.91%), Industrials +2.76% (YTD +18.51%), REITs -1.80% (YTD +15.85%), Communication Services -1.83% (YTD +14.33%), Healthcare +1.75% (YTD +9.08%), Consumer Discretionary -4.50% (YTD +6.36%), Utilities -1.21% (YTD +5.84%), Consumer Staples +1.92% (YTD +5.61%), Technology -2.64% (YTD +4.64%), and Information Technology -2.75% (YTD +4.49%)
European Equities
The MSCI Europe Index declined last week as US inflation in April climbed at its fastest rate in over 13 years, offsetting the positive sentiment of an economic re-opening and continued flow of stimulus.
Drivers: I) In March, Euro-zone Industrial Production for March rose by 0.1% month over month, which brought the Q1 reading to a 3.2% increase versus the Q4 2020 level. The results for the sub-categories were mixed as pharmaceuticals and computing production are above levels seen pre-pandemic, while reports for textiles and semiconductors remain below. Part of the issue is the shortage of semiconductors which are negatively impacting the transportation and auto sectors. II) The April Flash report for core inflation fell by 0.1% to 0.8% on an annualized basis, which was above the consensus forecast which called for a rise of 0.5%. The decline in inflation came after an increase of 1.1% was seen in January, mostly caused by holiday related items and the increase in the German VAT rate to 19.0%. VAT was reduced to 16.0% from July and December in 2020 due to the economic malaise caused by COVID-19.
III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was lower by -0.43% for the week (MTD +2.38% YTD +11.40%).
Asian Equities
Asian markets fell on concerns that sharp rises in US inflation not seen in over a decade, could trigger a tightening of monetary policy and blunt the efforts of the Biden Administration to pass another $4 trillion in fiscal stimulus legislation. The DJ Asia Index was lower by -3.54% for the week, (MTD -1.79% YTD +2.41%).
Drivers: I) In Japan, the Bank of Japan Consumption Activity Index for March rose by 1.1% m/m. Consumption has increased after the lifting of the second state of emergency in the country. The easing of COVID restrictions boosted services consumption which rose by 2.9%. The current increase in services consumption still leaves the Index about 10.0% below the pre-pandemic level of February 2020.
II) In China, April inflation data revealed a modest rise in CPI inflation and an acceleration in PPI inflation. Headline CPI for April rose by 0.9% on an annualized basis and 0.2% m/m. Core CPI showed an increase of 0.4% m/m. The primary push to higher inflation was the 0.4% m/m increase in the price of travel related services, as pent-up demand for travel rose as pandemic restrictions continue to ease.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei fell by -4.34% (MTD -2.53% YTD +3.01%), the Hang Seng Index was lower by -2.03% (MTD -2.45% YTD +2.73%) and the Shanghai Composite advanced by +2.09% (MTD +1.26% YTD +0.50%).
Fixed Income
Treasury yields rose and the yield curve steepened as US inflation data far exceeded Wall Street projections, as both headline and core CPI came in levels not seen since 2008.
Performance: I) The 10-year Treasury yield rose last week ending at 1.625% up from 1.575%. The 30-year yield advanced last week finishing at 2.337% climbing from 2.284%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index fell by -0.37% last week, MTD -0.09% and YTD -2.70%. The Bloomberg Barclays US MBS TR was lower by -0.29% last week, MTD -0.29% and YTD -0.84%. The Bloomberg Barclay’s US Corporate HY Index declined by -0.27% for the week, MTD +0.03% and YTD +1.97%.
Commodities
The DJ Commodity Index fell last week by -1.73% and is higher month to date +2.30% (YTD +21.22%). Commodity prices declined last week as inflation concerns out of the US, and a spike in new COVID 19 cases in Japan, Taiwan and India prompted fears of a slowdown in demand for industrial metals.
Performance: I) The price of oil jumped last week by +1.01% to close at $65.51 and is higher month to date by +3.18% (YTD +35.01%). Oil prices rose as a ransomware attack on the Colonial Pipeline on the east coast shutdown the movement of oil to the US southeast causing gasoline shortages.
II) The ICE USD Index, a gauge of the U.S dollar’s movement against six other major currencies, was higher by +0.07% closing at 90.30 for the week (MTD -1.09% YTD +0.41%). The USD rose as the sharp rise in US inflation data caused rates to increase and lowered expectations for another sizable round of fiscal stimulus.
III) Gold climbed to its highest level since February as a hotter than expected CPI report supported the precious metal which is seen as an inflation hedge. Gold rose in price by +0.67% last week, rising to $1843.8 (MTD +4.24% YTD -2.71%).
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 -0.75% MTD (+2.17% YTD).
- Equity Hedge declined by -1.55% MTD (+4.08% YTD).
- Event Driven is down MTD -0.58% (+2.70% YTD).
- Macro/CTA has declined by -0.18% MTD (+1.44% YTD).
- Relative Value Arbitrage is down by -0.33% (+0.03% YTD).
- Multi-Strategy is lower MTD by -0.22% (-0.10% YTD).
Data Source: Haver Economics, Standard & Poor’s, HFR, Bloomberg, Morningstar and FactSet.
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