Economic Data Watch and Market Outlook
US equity markets posted positive results last week on strong economic data, but market pundits are debating whether the current optimism regarding accelerating economic and earnings growth have already been priced in. Equities prices were led higher by solid reports on ISM manufacturing and non-manufacturing, as well as jobless claims which hit a pandemic low of 385k. However, some doubt is creeping in on the future of US monetary and fiscal policy due to the inflation mnemonic that is now in the forefront of everyone’s mind. Recent US economic data releases have provided a constant reminder of a rise in input and raw material prices, food, and energy costs. The Fed and Washington have tried to quell these inflation fears by stating the current price rises are “transitory”, but costs have increased due to shortages in critical materials (semi-conductors), supply chain issues (delayed delivery times due to lack of supply and delivery workers) and worker shortages (workers seeking higher pay due to extended federal UE benefits). The Fed has also reported that April CPI data showed that flexible prices (cost of goods such as gas and food that can change frequently) accounted for 8.2% of the inflation rise, while sticky prices (cost of goods such as medical and personal care services that change less frequently) was only 2.3% of CPI. For the Fed to be correct in its call for inflation to abate entering the Fall, then the supply chain bottleneck needs to be resolved (via increase in production and shorter delivery times) and workers need to return to the workforce at acceptable wage levels (twenty-five states have halted the extended federal UE benefits by the end of June).
Heading into next week’s trading sessions, the future of any new fiscal stimulus legislation will hang in the balance due to last week’s ruling handed down by the Senate Parliamentarian. The ruling states that Democrats can introduce another budget via reconciliation, which would permit them to pass more spending plans as proposed by President Biden with a filibuster proof simple majority. However, the ruling as states that any new reconciliation would first need to be approved by the Senate Budget Committee, which is presently split evenly at 11-11. Thus, Democrats are put in an unenviable position of needing to convert one of the 11 Republicans to vote with them. This situation brings into question the viability of Biden’s $4 trillion total spending plan, and if a Republican convert is not found, then the plan may well be delayed till fiscal year 2022. This may explain why the White House was open to discussing the lowering of the infrastructure spending proposal from $1.7 trillion (original level was $2.3 trillion) to the Republican bid of $928 billion. It will be interesting to see which way the political winds will blow.
In looking ahead to the economic calendar next week, a light calendar will be headlined by inflation and consumer sentiment releases. On Thursday, the May reading of CPI is projected to show an increase of 0.6% m/m, and 4.9% yoy. The core inflation measure is estimated to rise by 0.6% m/m, and 3.7% yoy. Much of the inflation surge is being caused by jumps in used vehicle prices (restocking of rental car fleets), airline fares and lodging costs.
The University of Michigan consumer confidence index in June out on Friday is projected to show a rise to 85.0 from May’s showing of 82.9. The index fell unexpectedly in May due to inflation concerns, but the decline in jobless claims and record stock market performance should support the consumer confidence measure.
The Week In Review
U.S. Equities
US equity markets rallied as the weaker than expected nonfarm payroll setup a positive equity scenario of low interest rates and accelerating economic growth.
US Index Performance
- Dow Jones +0.69% MTD +0.69% YTD +14.55%
- S&P 500 +0.64% MTD +0.64% YTD +13.35%
- Russell 2000 +0.78% MTD +0.78% YTD +16.20%
- NASDAQ +0.48% MTD +0.48% YTD +7.19%
Drivers: I) The May US non-farm payroll report showed the economy added 559k jobs, which was below the consensus estimated rise of 675k. The rise in jobs per sector was mixed, as retail saw a decline as grocery stores reduced workers, construction jobs fell for a second month in a row (rising materials prices are delaying construction projects),while manufacturing jobs rose as auto sector hiring increased after recent weakness.
II) The jobs report for May showed the shortage of workers across several industries are having an effect on wages. Wage growth increased at 0.5% m/m and at a 2.0% yoy pace. Some workers are choosing to stay home and continue collecting $300 per work in federal UE benefits, causing a number of employers in hospitality and leisure to offer increased wages to lure individuals back into the workforce. This phenomenon is reflected in the decline in labor force participation, as 160k workers left the labor force in May.
III) In May, the ISM manufacturing index improved by 0.5 points to 61.2, which met Street expectations. Underneath the headline reading, new orders were higher (+2.7 points to 67.0), but employment (-4.2 points to 50.9) and production (-4.0 points to 58.5) declined. Supplier deliveries rose by 3.8 points to 78.7, which is at its highest level since 1974, while the inventory index increased by 4.3 points to 50.8.
IV) The ISM Services Index in May rose to 64.0 from April’s reading of 62.7, which was above the Street estimate of 63.2. New orders and business activity improved, rising to 63.9 and 66.2 respectively. Though the Index was higher on the month, supply shortages are dampening economic activity and continues to put upside pressure on prices. In addition, the employment component fell from 58.8 to 55.3 which is indicative of the labor shortage.
V) Equities Month to Date are mixed with Small-Cap, Value, Energy, and REITs leading equity price performance. The laggards for the period are Mid-Cap, Growth, Con. Discretionary, and Healthcare.
Capitalization: Large Caps +0.55% (YTD +12.77%), Mid-Caps +0.47% (YTD +15.10%) and Small Caps +0.78% (YTD +16.20%). Style: Value +0.86% (YTD +29.10%) and Growth -0.33% (YTD +11.76%). Sector Groups: Energy +6.77% (YTD +48.55%), Financials +1.27% (YTD +31.04%), REITs +3.05% (YTD +23.03%), Materials +0.77% (YTD +21.94%), Industrials +.23% (YTD +19.21%), Communication Services +0.48% (YTD +15.96%), Healthcare -1.15% (YTD +7.97%), Technology +1.19% (YTD +7.76%), Information Technology +1.15% (YTD +7.70%), Consumer Discretionary -1.00% (YTD +6.53%), Consumer Staples +1.02% (YTD +6.51%), and Utilities +0.38% (YTD +4.99%.
European Equities
The MSCI Europe Index was higher last week as the vaccine rollout continued to advance, and due to strong improvements in ISM and consumer confidence data.
Drivers: I) The final report for the Euro-zone composite PMI showed a strong rise of 3.3 points to 57.1. The surge in activity was seen in services (50.5 to 55.2), which closed some of the gap versus the very-strong manufacturing PMI (62.9 to 63.1). On a country basis, France (58.9 to 59.4) and Italy (60.7 to 62.3) are playing catchup to Germany which posted a strong 64.4 report. Manufacturing though is still seeing supply constraints.
II) The April report on Euro-zone retail sales showed a short term drop of -3.1% after rising by 3.3% in March. The decline in sales was due to some Euro-zone countries re-imposing restrictions due to a rise in COVID-19 cases earlier in the month. The rate of COVID-19 infections has declined sharply in May, which should lead to a rapid opening of the economy and a sharp recovery in retail sales.
III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was higher by +0.71% for the week (MTD +0.86% YTD +14.32%).
Asian Equities
Asian markets ended the week mixed due to uncertainty over the US non-farm payroll data, and on-going concerns regarding inflation. The DJ Asia Index was higher by +1.16% for the week, (MTD +1.16% YTD +7.44%).
Drivers: I) In Japan, industrial production in April increased by 2.5% m/m, which was below the consensus estimate of a 3.9% improvement. The production gain in April pushes the index above the February 2020 pre-COVID 19 level for the first time since the pandemic began. Gains were seen in 12 of 15 industries, with general machinery, electronics, and production machinery contributing the most, boosted by strong capex and tech demand from domestic and overseas markets.
II) In China, the May NBS manufacturing PMI dipped by 0.1 points to 51.0. The small decline in the May report shows steady if unspectacular short-term growth in manufacturing activity. Forward looking indicators in the report rose, as the export orders component posted its strongest result in six months at 52.3. This reading illustrates solid international demand, particularly amid a stronger global economic recovery.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei fell by -0.71% (MTD +0.28% YTD +6.15%), the Hang Seng Index was lower by -0.67% (MTD -0.77% YTD +6.12%) and the Shanghai Composite declined by -0.25% (MTD -0.65% YTD +3.42%).
Fixed Income
Treasury yields posted their sharpest decline in over seven weeks, as the US jobs report came in below expectations for a second month in a row.
Performance: I) The 10-year Treasury yield fell last week ending at 1.554% down from 1.584%. The 30-year yield dropped last week finishing at 2.229% declining from 2.263%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index rose by +0.12% last week, MTD +0.12% and YTD -2.17%. The Bloomberg Barclays US MBS TR was higher by +0.01% last week, MTD +0.01% and YTD -0.72%. The Bloomberg Barclay’s US Corporate HY Index advanced by +0.28% for the week, MTD +0.28% and YTD +2.53%.
Commodities
The DJ Commodity Index rose last week by +0.43% and is higher month to date +0.43% (YTD +22.50%). Commodity prices were modestly higher as oil rose on expectations of increased demand as global economies re-open, but metals such as copper and platinum fell on profit taking and slowing economic data out of China.
Performance: I) The price of oil advanced last week by +4.17% to close at $69.41 and is higher month to date by +4.17% (YTD +43.05%). Oil prices surged on the week, influenced by the increased global roll out of the vaccine and seasonal summer increase in demand for energy.
II) The ICE USD Index, a gauge of the U.S dollar’s movement against six other major currencies, was higher by +0.09% closing at 90.14 for the week (MTD +0.09% YTD +0.23%). The USD was primarily flat on the week as disappointing US jobs data sent interest rates lower which is a negative for the USD.
III) Gold declined last week as the disappointing US non-farm payroll report should keep the Fed in an accommodative mode, and temporarily kept inflation concerns in check. Gold fell in price by -0.63% last week, dropping to $1894.2 (MTD -0.63% YTD -0.04%).
Hedge Funds
Hedge fund returns in June are positive for the month with all of the core strategies Equity Hedge, Event Driven, Macro/CTA , Relative Value and Multi-Strategy higher.
Performance:
The HFRX Global Hedge Fund Index is higher by +0.21% MTD (+3.55% YTD).
- Equity Hedge advanced by +0.13% MTD (+6.76% YTD).
- Event Driven is up MTD +0.33% (+3.62% YTD).
- Macro/CTA has risen by +0.32% MTD (+2.50% YTD).
- Relative Value Arbitrage is up by +0.11% (+0.62% YTD).
- Multi-Strategy is higher MTD by +0.11% (+0.39% YTD).
Data Source: Haver Economics, Standard & Poor’s, HFR, Bloomberg, Morningstar and FactSet