Economic Data Watch and Market Outlook
Global financial markets last week, acted as if they were involved in a final set tiebreaker at Wimbledon played between House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin, as both sides volleyed back and forth statements on perceived progress or setbacks concerning the fifth coronavirus relief measure. Unfortunately, the match has yet to see a winner, as both sides are still far apart on state and local government financial relief and the overall size of the bill. Markets were lower on the week, as they are coming to the realization that a pre-election relief bill is highly unlikely, and are now speculating a much larger post-November 3rd bill will be approved before year-end. With a relief bill at an impasse, investors turned their attention to Q3 corporate earnings, as 27% of the S&P 500 companies have reported. The early results show earnings have declined by a blended -16.5% according to FactSet, which is better than the September 30 estimate of -21.0% (June 30th projection was -25.1%). Thus far 84.0% and 81.0% of companies reporting have beaten their earnings and revenue projections. Should the earnings projection beat percentage hold through the entire reporting season, this would be the highest on record. In addition, though it is a small sample size, 19 companies have provided positive earnings guidance and 5% negative guidance, a good sign for Q4 earnings and equity prices.
As we enter next week’s trading sessions, though remote, investors will monitor the negotiations between House Speaker Pelosi, Treasury Secretary Mnuchin and White House Chief of Staff Meadows. Rumors have the parties coalescing around an estimated $2 trillion plus package, that will include a $1,200 stimulus check, enhanced unemployment benefits, relief for the airline industry, an extension of the paycheck protection program and financial assistance for state and local governments. The issues to overcome to get a bill done before November 3rd include finalizing the provisions of bill, getting it approved by the House and Senate and getting it signed by President Trump. Sounds very much like a Tom Cruise “Impossible Mission”. On the earnings front, several mega caps will be reporting, including Alphabet, Microsoft, Amaxon.com and Facebook. Also, in the earning queue are Mastercard and Visa, and the pharmaceutical companies Pfizer, Merck & Co., and Eli Lilly. We suspect markets will continue to vacillate between up and down days with heightened levels of volatility.
In turning to the coming week’s economic calendar, the data releases will be center around housing data, and the all-important personal income and personal spending reports. On Monday, we begin with New Home sales for September which is estimated to have increased by 3.9% to 1.050 million units. This would be the fifth straight month of positive gains for new home sales, fueled by mortgage rates that have remained below 3.0%.
September’s Durable Goods orders out on Tuesday, are projected to have increased by 0.2%, with core-capital goods (ex-aircraft and defense) forecast to climb by 0.4%. Core capital goods such as computers, machinery and autos have rebounded smartly since their COVID-19 declines.
On Thursday, the long-awaited Q3 real GDP report is expected to show a surge of 35.1% saar. The sharp rise in GDP is estimated to have been boosted by gains in real equipment spending (60.2% saar) and housing (91.0% saar). On Friday, September Consumer Spending is estimated to have risen by 0.8%, supported by the increase in services spending which has risen as COVID-19 restrictions have been partially lifted. The PCE Price Index also out on Friday, is projected to rise by only 0.1% for September or 1.4% on an annual basis.
The Week In Review
U.S. Equities
US equity markets declined last week as COVID-19 relief talks stalled and disappointing earnings or revenue results were reported by tech stalwarts IBM and Intel.
- Dow Jones -0.90% MTD +2.09% YTD +1.17%
- S&P 500 -0.51% MTD +3.14% YTD +8.88%
- Russell 2000 +0.42% MTD +8.85% YTD -0.60%
Drivers: I) September Housing Starts jumped by 1.9% to 1.415 million units (saar), and permits soared by 5.2% to 1.553 million units (saar). The solid housing data has been supported by single-family unit growth. Starts and permits were at their highest level since the survey began in 2007, with an 8.7% rise in starts and 7.8% increase in permits. Multifamily starts have lagged, dropping by 16.3% in September, and permits down by 0.9%.
II) For September, Existing Home sales surged by 9.4% to 6.54 million units (saar). The rise, which was above Street estimates, was the strongest monthly showing for sales since 2006. Since hitting bottom in Q2, existing home sales have soared by 307% saar in Q3. The sharp rebound in home sales has been supported by historical low mortgage rates, pent up demand, and the rise in relocations from the cities to suburbs due to the pandemic.
III) In October, the National Association of Home Builders survey rose from 83 to 85, beating Street expectations. The measure hit a new all-time high and is indicative of the strong data we have seen through the housing market. The report also highlighted “increased buyer interest in the suburbs, exurbs and small towns,” more than likely related to the negative reactions to the coronavirus lockdowns.
IV) The Markit manufacturing PMI rose slightly from 53.2 to 53.3 in October, while the services PMI climbed from 54.6 to 56.0. Both readings have rebounded strongly from the depressed levels seen during the pandemic’s early days. Both reports though on the plus side, showed some weakness in the sub-employment indexes, while there were positive outlooks for a jump in activity for the services PMI.
V) Equities Month to Date are higher with Small-Cap, Value, Utilities, and Industrials leading equity price performance. The laggards for the period are Large-Cap, Growth, Energy and REITs.
Capitalization: Large Caps +3.48% (YTD +10.10%), Mid-Caps +6.65% (YTD +4.15%) and Small Caps +8.85% (YTD -0.60%). Style: Value +10.34% (YTD -12.22%) and Growth +7.22% (YTD +5.81%). Sector Groups: Technology +1.44% (YTD +30.41%), Information Technology +1.77% (YTD +29.13%), Consumer Discretionary +4.07% (YTD +23.09%), Communication Services +5.31% (YTD +14.90%), Materials +3.69% (YTD +9.21%), Healthcare +2.13% (YTD +7.20%), Consumer Staples +1.94% (YTD +5.86%), Utilities +9.00% (YTD +2.86%), Industrials +5.42% (YTD +1.21%), REITs +0.92% (YTD -5.94%), Financials +4.93% (YTD -16.23%) and Energy +1.31% (YTD -46.70%).
European Equities
The MSCI Europe Index were lower last week, negatively impacted by the sharp rise in new COVID-19 cases and the decline in the region’s services PMI which has suffered from increasing social restrictions.
Drivers: I) The Euro-zone manufacturing output index in October increased by 0.7 points to 57.8, which is the best performance since the start of 2018. Conversely, the services output reading dropped 1.8 points to 46.2, which is its worst showing since late 2012 not including the COVID-19 lock-down period. Manufacturing new orders were up 1.1 points to 58.1, while the services new business index dropped 3.2 points to 44.9.
II) With the sharp increase of COVID-19 cases in the Euro-z0ne, investor interest in next week’s ECB meeting has risen. It is not so much as expecting immediate action from the central bank, but the assumption that after reviewing recent economic and coronavirus data, they may offer a glimpse of potential policy changes that may take place at December’s meeting. Economists believe the ECB will expand the PEPP program by €500bn in December.
III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was lower by -0.31% for the week (MTD +1.45% YTD -7.52%).
Asian Equities
Asian equity markets rose last week as US earnings have beaten expectations, and investors are still hoping for a new US stimulus package. The DJ Asia Index advanced by +0.33% for the week, (MTD +2.91% YTD -4.28%).
Drivers: I) In Japan, the real exports index from the BOJ jumped by 5.5% m/m in September, following the 6.6% surge seen in August and 7.7% for July. These reading brought the Q3 rebound to a 65.0% quarter over quarter (saar) rate. The sharp rise has been fueled by auto exports, tech exports and capital good shipments. As the increase in exports is widening, this should help the expected sharp rebound in Q3 GDP growth.
II) In China, the Q3 GDP came in at a 9%, below the expected 5.5% rate. On a quarter over quarter saar, the result was 7.5% versus the projected 10.4% rate. The drivers of growth were industrial production which rose by a solid 6.9% annual rate, and fixed investment growth increased by a strong 8.7% annual rate. On the retail side, sales rose by 3.3% on an annualized basis, led by unit auto sales which jumped by 13.0% on an annualized basis.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei rose by +0.45% (MTD +1.43% YTD +1.18%), the Hang Seng Index was higher by +2.18% (MTD +6.22% YTD -11.18%) and the Shanghai Composite advanced by -1.75% (MTD +1.86% YTD +7.47%).
Fixed Income
Treasury yields reached a four-month high as fixed income markets were still anticipating another round of US stimulus in excess of $2 trillion.
Performance: I) The 10-year Treasury yield was higher last week ending at 0.842% up from 0.745%. The 30-year yield rose last week finishing at 1.643% climbing higher from 1.532%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index fell -0.42% last week, MTD -0.41% and YTD +6.36%. The Bloomberg Barclays US MBS TR was lower at -0.06% last week, MTD -0.10% and YTD +3.52%. The Bloomberg Barclay’s US Corporate HY Index climbed higher by +0.16% for the week, MTD +1.58% and YTD +2.21%.
Commodities
The DJ Commodity Index rose last week by +0.07% and is up month to date +4.19% (YTD +1.66%). Commodity prices were mixed last week, but the index rose on increased demand for copper as it is a prime industrial metal used in the production of electric vehicles.
Performance: I) The price of oil declined last week by -2.45% to close at $39.78 and is lower month to date by -1.09% (YTD -34.85%). Oil prices dropped on the week as Libya increased its export of oil, and uncertainty over the next round of stimulus from the US government.
II) The ICE USD Index, a gauge of the U.S dollar’s movement against six other major currencies, was lower by -1.03% ending at 92.75 for the week (MTD -1.21% YTD -3.78%). The USD declined on the week, as hopes for a fifth coronavirus relief package faded due to the negotiating stalemate between the House and White House.
III) Gold was flat last week, as precious metal prices have vacillated based on COVID-19, US stimulus and USD news. Gold rose in price by +0.02% last week, rising to $1903.4 (MTD +0.42% YTD +24.97%).
Hedge Funds
Hedge fund returns in October are positive with the core strategies Equity Hedge, Event Driven, Macro/CTA, Relative Value and Multi-Strategy all higher for the month.
Performance:
- The HFRX Global Hedge Fund Index is higher at +0.82% MTD and up +2.46% YTD.
- Equity Hedge has advanced by +1.22% MTD and is lower by -1.77% YTD.
- Event Driven is up MTD +0.83% and is up YTD +5.45%.
- Macro/CTA has risen by +0.40% MTD and is higher by +0.51%
- Relative Value Arbitrage is higher by +0.66% and is up +4.85% YTD.
- Multi-Strategy is up MTD by +0.61% and has risen by +4.37% YTD
Data Source: Haver Economics
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