Economic Data Watch and Market Outlook
Equity markets in US continued their positive trend early last week, as the ‘dovish’ tone taken by Fed Chair Jay Powell during his Jackson Hole speech continued to boost investor sentiment. Equities took solace in the fact that Powell though intimating tapering could occur sometime later in 2021, stated that a tightening of rates was off in the future. The Perma-bulls are counting on it, and Fed Fund futures support this premise, as the probably of a 25 bps rate hike first exceeds 25.0% (27.2%) for the FOMC’s November 2, 2022 meeting. The disappointing Non-farm Payroll report (235k versus 750k estimate) helped fuel the fire even more, as we recall Chair Powell’s statement that any pullback in monetary stimulus would be data dependent, and the Fed would remain accommodative till we reach full employment. So, despite the headwinds of the spread of COVID variants, taper concerns, slowing global Q3 GDP growth estimates and continued China government crackdowns, the S&P 500 rose above 4500 for the first time and the NASDAQ Composite closed at a record high. Markets though, have been seeing a rotation back from economically sensitive sectors to the strong earnings and high cash balance sheet holding “FAAMG” stocks and the defensive sectors.
Heading into next week’s holiday shortened trading sessions, it seems the momentum behind equities remains positive. The spectacular earnings posted by US companies has supported the equity market’s inexorable rise. With 99.0% (496 companies) of the S&P 500 having reported, Q2 EPS growth is 92.0% yoy, versus the 62.0% estimate provide at the end of the quarter. On the top line, revenues have risen by 25.4% yoy, while the original end of quarter estimate was an increase of 18.0%. In addition, economists believe the end of the extended UE benefits on September 6th will reverse the downward trend in job creation, and we will hopefully see evidence of this change when September’s Nonfarm payroll report is released on October 8th. Lastly, a gain by equity markets in September would go against the historical pattern since 1928 according to Yardeni Research, as the S&P 500 for the month has been negative 54.0% of the time while experiencing an average 1.00% decline.
In looking ahead to the economic calendar next week, a light schedule will be centered around the Jobless Claims and inflation with the release of August PPI. Jobless Claims out on Thursday are expected to continue its downward trend, with claims estimated to fall by 10,000 to 330,000 for the week ending September 4. Claims over the next few weeks may see a temporary rise, due to the after effect of Hurricane Ida.
Closing out the week on Friday, the estimate for August PPI is a rise of 0.7%, while the core index ex-food and energy is expected to rise by 0.6%. The July readings for headline PPI and core were both 1.00%, thus August is showing a bit of a pull back in inflation. The August rise in inflation is driven by a jump in energy PPI of 1.3% and food PPI of 0.3%.
The Week In Review
U.S. Equities
US equities were mixed last week as the S&P 500 and NADSAQ posted new all time highs, while the DJIA fell as the Nonfarm payroll report was weak but could delay the FOMC’s taper decision to later in 2021.
US Index Performance
- Dow Jones -0.14% MTD +0.05% YTD +17.10%
- S&P 500 +0.62% MTD +0.31% YTD +21.95%
- Russell 2000 +0.68% MTD +0.81% YTD +16.77%
- NASDAQ +1.55% MTD +0.68% YTD +19.21%
Drivers: I) US Nonfarm Payroll slowed dramatically in August, adding only 235,000 new jobs which was far below the consensus estimate of 750,000. The main detractors to job growth were leisure and hospitality which added no jobs, after averaging growth of 377,000 over the last three months, and 26,000 jobs were lost by public education. The Delta Variant may have weighted on traditional job growth , as telework jobs rose last month.
II) Within the jobs report, average hourly earnings rose by a better than expected 0.6%, while the average workweek remained unchanged at 34.7 hours. The labor force participation rate did not see any improvement, and remained stubbornly at 61.7%. As the Nonfarm Payroll report disappointed, the Fed may stave off an announcement related to tapering at the September meeting, and wait till either November or December.
III) The August ISM Manufacturing survey rose to 59.9 from July’s reading of 59.5, which beat the Street estimate of a drop to 58.5. A few positives found within the report include New Orders rising from 61.0 in July to 66.7, while the ISM Prices paid declined from 85.7 to 79.4 as inflation subsided a bit. The Supplier Deliveries index slowed, implying that supply chain issues have eased over the past few months.
IV) In August, the Conference Board Consumer Confidence Index fell from July’s reading of 1 to 113.8. Despite the decline, the Index had recovered close to pre-pandemic levels and is far above the lows seen in 2020. Weighting on consumer confident is the spread of the Delta variant, as well as the rise in food and gas prices. Survey respondents are positive that jobs are abundant, a boost to labor market conditions.
V) Equities Month to Date are mixed with Small-Cap, Growth, REITs, and Utilities leading equity price performance. The laggards for the period are Large-Cap, Value, Financials, and Materials
Capitalization: Large Caps +0.42% (YTD +21.24%), Mid-Caps +0.69% (YTD +20.95%) and Small Caps +0.81% (YTD +16.77%). Style: Value –0.14% (YTD +25.98%) and Growth +0.73% (YTD +16.96%). Sector Groups: REITs +2.19% (YTD +35.38%), Energy +0.44% (YTD +30.92%), Financials -0.86% (YTD +30.26%), Communication Services +0.11% (YTD +25.25%), Technology +0.36% (YTD +22.92%), Information Technology +0.38% (YTD +22.42%), Healthcare +1.21% (YTD +21.43%), Materials -0.31% (YTD +18.89%), Industrials +0.05% (YTD +18.72%), Consumer Discretionary -0.09% (YTD +14.45%), Utilities +1.35% (YTD +12.45%), and Consumer Staples +0.76% (YTD +9.18%)
European Equities
The MSCI Europe Index was higher last week as investors balanced concerns over the rise in consumer prices versus solid growth in manufacturing and services PMI.
Drivers: I) For August, Eurostat reports the flash Harmonised Index of Consumer Prices (HICP), rose by 0.8% to 3.0% over a year annualized (oya), while the core reading increased by 0.9% to 1.6% oya. Both readings were above expectations, with the rise in the core index driven by a 2.7% jump in goods prices, which in part is due to the low base effect from Q3 2020. Energy price inflation jumped by 1.1% to 15.4% oya.
II) The final report for August Composite PMI showed a decline of 1.2 points to 59.0, from July’s peak reading of 60.2. The August pullback was due to a drop in manufacturing of 1.5 points to 59.0 and services of 0.8 points to 59.0. Despite the recent fall, manufacturing PMI remains at a strong level, while the decline in services was due to a drop in new orders. New orders had accelerated in July as it was the month when restrictions were lifted.
III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was higher by +0.70% for the week (MTD +0.90% YTD +16.63%).
Asian Equities
Asian markets rallied on news that Japan’s Prime Minister Yoshihide Suga would not run for his party’s leadership at the end of September, leading to thoughts a new prime minister would seek new stimulus measures to spur growth. The DJ Asia Index rose by +3.11% for the week, (MTD +1.29% YTD +4.82%).
Drivers: I) The Ministry of Finance in Japan reported at Q2 2021 nominal capex (ex-nonfinancial corporate software) jumped by 13.2% quarter over quarter (q/q) on a seasonally adjusted annual rate. Manufacturer’s capex rose by a solid 17.5Y while nonmanufacturers’ capex increased by 11.0%. Within the report, profit margins for manufacturers rose and came close to the Q2 2018 record high, while nonmanufacturing profits are at pre-pandemic levels.
II) In China, the August Caixin/Market Manufacturing PMI dropped by 1.1 points to 49.2, below the consensus estimate of 50.1. This was the lowest manufacturing PMI reading since March of 2020, when manufacturing activity was slowly recovering from COVID-19 lockdowns. A primary drags was New Orders which declined by 1.2 points to 48.0, while exports fell by 2.3 points, highlighting a softening in domestic as well as external demand.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei rose by +5.43% (MTD +3.70% YTD +7.06%), the Hang Seng Index was higher by +2.18% (MTD +0.22% YTD -5.12%) and the Shanghai Composite advanced by +1.69% (MTD +1.07% YTD +3.13%).
Fixed Income
Treasury yields were higher on the week as the bond market fixated on the continued rise in hourly earnings in the jobs data which supports expectations of higher inflation.
Performance: I) The 10-year Treasury yield rose last week ending at 1.324% up from 1.305%. The 30-year yield climbed higher last week finishing at 1.944% rising from 1.907%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index fell by -0.06% last week, MTD -0.07% and YTD -0.76%. The Bloomberg Barclays US MBS TR was higher by +0.02% last week, MTD +0.01% and YTD -0.31%. The Bloomberg Barclay’s US Corporate HY Index rose by +0.41 for the week, MTD +0.19% and YTD +4.74%.
Commodities
The DJ Commodity Index advanced last week by +1.88% and is higher month to date +0.77% (YTD +23.20%). Commodity prices were boosted by the sharp rise in natural gas, as hurricane IDA has essentially halted natural gas production in the Gulf Coast.
Performance: I) The price of oil jumped last week by +0.75% to close at $69.25 and is higher month to date by +1.09% (YTD +42.72%). Oil was higher as the post hurricane IDA production recovery has been slow and oil inventories remain below their five year average.
II) The ICE USD Index, a gauge of the U.S dollar’s movement against six other major currencies, was lower by -0.58% closing at 92.14 for the week (MTD -0.53% YTD +2.46%). The USD declined last week due to slower than expected growth in US jobs and the sharp drop in consumer confidence.
III) The price of gold rose last week as the poor jobs report fomented thoughts the Fed may delay tapering till late 2021. Gold rose by +0.50% last week, rising to $1830.4 (MTD +0.67% YTD -3.41%).
Hedge Funds
Hedge fund returns in September are positive on the month with all core strategies Equity Hedge, Event Driven, Macro/CTA higher, and Relative Value higher.
Performance:
- The HFRX Global Hedge Fund Index is up by +0.17% MTD (+4.15% YTD).
- Equity Hedge rose by +0.24% MTD (+10.07% YTD).
- Event Driven is higher MTD +0.23% (+2.51% YTD).
- Macro/CTA has advanced by +0.11% MTD (+1.40% YTD).
- Relative Value Arbitrage is up by +0.06% (+1.03% YTD).
- Multi-Strategy is positive MTD by +0.05% (+0.75% YTD).
Data Source: Haver Economics, Standard & Poor’s, HFR (returns have a two-day lag), Bloomberg, Morningstar and FactSet
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