Economic Data Watch and Market Outlook
U.S. equity markets stayed true to form last week, shrugging off unprecedented declines in economic data while falling when negative news was released regarding COVID-19. The economic data releases for the week saw drops that were historic; retail sales plunged by -16.4%, essentially double the decline seen in March of -8.3%, U.S. manufacturing tumbled by the highest amount in over 100 years, and CPI experienced its largest monthly slump in history. Risk assets remained resilient until reports were released that new cases of COVID-19 infections were popping up in South Korea, after social restrictions were lifted. Dr. Anthony Facci also warned the Senate Health Committee that opening the US economy prematurely could lead to a second wave of COVID-19 infections. Market sentiment was also broad sided by the U.S. government’s decision to block the shipment of semiconductor chips to Chinese Telecom giant Huawei Technologies. This action prompted threats from China that they would investigate and/or restrict business with Qualcomm, Cisco Systems, Apple and Boeing. U.S. equity markets closed lower on the week as the fear index “VIX”, which had fallen below 30 on May 8th and May 11th, spiked above 40 mid-week before closing at 32 on Friday.
As we enter next week’s trading sessions, with COVID-19 dominating investor concerns and the news cycle, believe or not the Q1 corporate earnings season is coming to an end. Essentially flying under the radar, with 454 S&P 500 companies (94.0%) having reported, earnings have contracted by -7.3% y/o/y and revenues have eked out a rise of 0.1% y/o/y. The earning calendar for the week will be dominated by retail companies. The big box companies Walmart, Target and home improvement specialist Home Depot will be reporting, followed by what will the closely watched apparel retailers Nordstrom, TJX Companies, and Kohls. These reports will give us a clue as to how much damage the spread of COVID-19 reeked on the U.S. economy.
In turning to next week’s economic calendar, in a holiday shortened week, the data releases will be dominated by U.S. housing data. We begin on Monday with the NAHB homebuilders survey which is projected to increase by 3 points to 33 in May. The survey plunged in April by -42 points due to COVID-19 but has picked up recently due to an increase the mortgage purchase applications as U.S. mortgage rates remain at historically low levels.
On Tuesday, Housing Starts are expected to have fallen by 26.0% to 900,000 units on a seasonally adjusted annual rate in April, with related permits projected to decline by 14.5% to 1.155 million units. The sector has suffered from the COVID-19 disruption.
The Markit Manufacturing Flash PMI report for April, being released on Thursday, is estimated to increase from 36.1 in April to 40.0 in May. The Markit Services Flash PMI is projected to rise from 26.7 in April to 30.0 for May. With restrictions due to COVID-19 easing, the expectations are for an improvement in data in May for both surveys.
We finish Thursday with April Existing Home Sales, which is expected to fall by 14.6% to 4.50 million units on a seasonally adjusted annual rate. Sales in March and April have been depressed by the spread of COVID-19.
The Week In Review
U.S. Equities
U.S. equity markets dropped last week as U.S. health officials warned a premature re-opening of the U.S. could lead to a second wave of COVID-19 infections, and U.S./China tensions escalated.
- Dow Jones -2.61% ,MTD -2.56% , YTD -16.27 B. S&P 500 -2.20%, MTD -1.54%, YTD -10.69%
- Russell 2000 -5.42%, MTD -4.01%, YTD -24.25%
Drives: I) The US Commerce Department reported was in the process of revising an export rule to “strategically target Huawei’s acquisition of semiconductors that are the direct product of certain U.S. software and technology,” as reported by Reuters. In addition, Commerce issued a 90-day extension of a temporary reprieve of its ban on the use of equipment from Chinese telecom Huawei Technologies. These moves are to enable U.S. companies to shift to alternative suppliers of telecommunications equipment over the near term.
II) US CPI experienced its largest monthly drop in history in April of 0.8%. The core index came in below expectations of an already anticipated weak number, falling by 0.4% on the month. The record drop in the core index affirms that the spread of COVID-19 has depressed core prices. Outsized declines were seen across many sectors such as housing was down 7.1%, transportation fell by 9.4% (including airline fares).
III) US PPI in April came in under expectations, as the headline inflation reading declined by 1.3%. The primary drivers to the decline were a 19.0% plunge in energy prices as well as a more muted drop in food prices of -0.3%. Underneath the PPI report, a number of subsectors related to financial services and transportation were weak. These PPI inputs combined with the CPI data suggests the core PCE price index in April will fall by -0.4%.
IV) Retail Sales in April plummeted by a record 16.45%, worse than the projected 12.0% decline. The spread of the pandemic caused a sizable hit to retailers during the month, with only online retailers being spared from the carnage. Sales at online retailers rose by 8.4% in April, the second largest on record. Grocery store sales dropped by 29.0%, after a surge in March, and sales at bars and restaurants fell another 29.5% as it did in April as well.
V) Equities Month to Date are lower with Large-Cap, Growth, Tech and Information Tech leading equity price performance. The laggards for the period are Small-Cap, Value, Financials and REITs.
Capitalization: Large Caps -1.40% (YTD -10.94%), Mid-Caps -2.59%(YTD -18.76%) and Small Caps -4.01% (YTD -24.25%). Style: Value –8.20% (YTD -32.71%) and Growth -2.48% (YTD -17.84%). Industry Groups: Technology +2.12% (YTD +2.34%), Information Technology +1.82% (YTD +1.19%), Healthcare +0.58% (YTD -1.04%), Communication Services +0.86%
(YTD -6.29%), Consumer Discretionary -1.08% (YTD -7.54%), Consumer Staples -1.65% (YTD -8.42%), Utilities -4.19%
(YTD -14.34%), REITs -8.88% (YTD -19.41%), Materials -1.93%(YTD -16.61%), Industrials -7.35% (YTD -26.45%), Financials -7.66% (YTD -31.04%) and Energy -5.21%(YTD -38.60%).
European Equities
The MSCI Europe Index was lower last week by -4.19%, as investors are beginning to wake up to the reality that a revival of the European economy from the COVID-19 pandemic will take longer than expected.
Drivers: I) The second reading of Euro-zone Q1 GDP was mostly in line with the first update from two weeks ago, showing a decline of -14.2% on a seasonally adjusted annual rate. Economic activity in the region is running about 30% below the normal level seen in late March, before the lockdown rules were put into effect. The one silver lining looking forward has been the declining trend of new COVID-19 cases, as easing restrictions are beginning to take place across several countries.
II) Euro-zone March industrial production in declined in March by 11.3% m/m, which is the largest drop on record and shows how severe the coronavirus lock down has been on productivity. The decline would have been worse had it not been for a 15.5% rise in Ireland, where IP data can be volatile and subject to revision. The fall in IP was broad based with the transport sector down -26.0%, metals -12.0% and textile production at -17.0%.
III) Performance of European Indexes for the week, month-to date and year-to-date. The MSCI Europe Index was down by -4.19% for the week (MTD -4.55%, YTD -23.49%).
Asian Equities
Asian equity markets fell on the week as new COVID-19 cases flared up in South Korea and geo-political tensions worsened between the U.S. and China. Dow Jones Asia Index was lower by -1.72% for the week, (MTD -3.58%,YTD -16.47%).
Drivers: I) Geo-political tensions reignited last week between the U.S. and China, after COVID-19 has become a global pandemic. The revival of tensions between the two super power will remain in focus for 2020, as it is uncertain whether political rhetoric actually prompts specific actions. But the potential conflict poses many risks across trade, technology, finance and geo-political issues.
II) Japan’s PPI dropped again in April by -2.3% as the severe drop in oil prices and yen appreciation kept the index in negative territory. The decline in import price deflation was prominent in April, falling by -13.1% on an annual basis, after a -7.7% drop in March. A look at domestic goods prices shows they are also in a deflationary decline, after dropping -4.1% on the month. Consumer nondurable goods prices fell by -4.4%, while consumer durable goods prices fell -3.5%. The spread of COVID-19 and the drop in oil prices will continue to be a drag on both PPI and CPI over the next several months.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei fell by -0.70% (MTD -0.77%, YTD -14.44%), the Hang Seng Index was lower by -1.79% (MTD -3.45%, YTD -15.19%) and the Shanghai Composite advanced by -0.93% (MTD +0.29%, YTD -5.96%).
Fixed Income
Treasury yields fell last week as the flood of poor economic data and concerns over rising geo-political tensions between the U.S. and China drove rates lower.
Performance: I) The 10-year Treasury yield was lower last week ending at 0.646% down from 0.689%. The 30-year yield declined last week finishing at 1.329% lower from 1.383%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index rose +0.33% last week, MTD -0.11% and YTD +4.86%. The Bloomberg Barclays US MBS TR was lower by -0.07% last week, MTD +0.05% and YTD +3.52%. The Bloomberg Barclay’s US Corporate HY Index declined by -0.67% for the week, MTD -0.03% and YTD -8.78%.
Commodities
The DJ Commodity Index was higher last week by +0.35% and is up month to date +4.82% (YTD -28.94%). The commodity index advanced last week as industrial metals rose on hopes demand would increase as global lockdowns are being lifted, and oil rallied on cuts in production and a modest increase in demand.
Performance: I) The price of oil increased last week by +20.62% to close at $29.71 and is higher month to date by +57.69% (YTD -51.34%). Oil prices posted strong gains last week as gasoline demand increased in the U.S. as several states have begun to lift social restrictions imposed due to the coronavirus pandemic.
II) The ICE USD Index, a gauge of the U.S dollar’s movement against six other major currencies, was up by +1.27% ending at 100.36 for the week (MTD +1.35%, YTD +4.11%). The USD has rallied on the belief that the U.S. economy will be more resilient and rebound faster from the COVID-19 pandemic than other regions.
III) Gold rose last week as investors parsed through the negative U.S. economic data reports, which suggests a recovery will take longer than expected and will keep interest lower for longer. Gold was higher by +2.89% last week, climbing to $1754.1 (MTD +3.54%, YTD +15.16%).
Hedge Funds
Hedge fund returns in May are mixed with the core strategies Event Driven and Marco/CTA in positive territory, while Equity Hedge, Relative Value and Multi-Strategy are lower on the month.
Performance:
- The HFRX Global Hedge Fund Index is lower at -0.02% MTD and down -4.19% YTD.
- Equity Hedge has declined by -0.97% MTD and lower by -10.31% YTD.
- Event Driven is up MTD +0.76% and is down YTD -2.19%.
- Macro/CTA has risen by +1.00% MTD and is up +0.30% YTD.
- Relative Value Arbitrage has declined by -0.37% and is lower -2.96% YTD.
- Multi-Strategy is down MTD by -0.38% and has dropped by -3.08% YTD
Data Source: Haver Economics
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