Monday Market Review August 17, 2020
Economic data for the week included further gains in retail sales, and industrial production, among other measures. Consumer sentiment and jobs results also showed improvement, all of which look to a stronger showing for the third quarter over the second.
Global equities experienced gains last week as investors look ahead to economic growth beyond Covid, especially as prospects for a vaccine improve (and Russia approving a vaccine). Bonds fell back, however, as interest rates crept up along with this same news. Commodities gained, with price increases for agriculture and natural gas, and less so for crude oil, which has been more stable as of late.
U.S. stocks gained last week, with the S&P again nearing prior highs from February. This movement appeared to coincide with stronger economic results, including reports about dramatic improvements in air travel numbers, as well as continued optimism over progress towards a Covid vaccine. This seemed to offset continued uncertainty over legislative action towards further fiscal stimulus, as well as Chinese retail sales data that fell short of expectations that assumed continual recovery. By sector, cyclical groups industrials and energy led with gains of several percent, while defensive utilities lagged with declines of an equivalent amount.
Foreign stocks experienced stronger gains than domestic, led by Japan, and more tempered results for emerging markets. The positivity in equity results echoed that in the U.S., despite rising virus numbers in several European locations and enhanced travel restrictions. Chinese retail sales fell far short of expectations for July, bucking improvement elsewhere, so served as a disappointment to global investors looking to the nation as a ‘template’ for a V-shaped pandemic recovery. Reports of an approved Russian Covid vaccine helped sentiment in that region.
U.S. bonds fell last week as interest rates ticked higher along the longer end of the yield curve, with economic data showing improvement. Such a speeding up of expectations for stronger economic growth sooner also raise the probabilities of interest rates moving up sooner as well (although ‘soon’ in this case is certainly relative). U.S. government bonds fared slightly better than corporates, as both investment-grade and high yields spreads widened, while bank loans showed positive results in keeping with the higher rates. Foreign bonds were similarly flat to down on net.
Commodities gained a bit across the board, led by agriculture and energy, while precious metals fell back by nearly -4%. The price of crude oil rose by about 2% to around $42/barrel, continuing in a recent trading range, as inventories fell a bit—tempered by continued weak demand. Natural gas prices gained over 5%.
(0) Retail sales rose for the third month in a row, up 1.2% in July, but fell short of the 2.1% increase expected by consensus. Under the hood, declines in auto sales and building materials were offset by a 6% sales increase from gas stations. On a core/control basis, results improved slightly to 1.4%, which was better than the 0.8% expected, and included several positive revisions on the magnitude of about a half percent for each of the last three months. In the core group, sales in electronics/appliances and miscellaneous stores experienced strong gains of over 20%, along with restaurants, while sporting goods/hobby/book/music declined. Such results are reflective of the current environment that has been favoring home improvement activity but also re-openings of restaurants/bars (even if take-out). Perhaps surprisingly, retail sales have moved from a significant deficit from a year ago to now up nearly 3% over the trailing 12 months.
(0) Industrial production increased by 3.0% in July, which was on par with expectations, with improvement in consumer durables largely, as well as business equipment and utilities. Capacity utilization rose by 2.1% during the month to a level of 70.6%. The improvement in these groups reflected continued recovery growth in manufacturing activity.
(-) The producer price index for July rose by 0.6%, beating expectations calling for 0.3%, and the second-highest monthly increase in nearly a decade. On a core level, removing food and energy, PPI still rose 0.5%, which was far ahead of the 0.1% forecast level. Energy rebounded again by over 5%, as did household-related consumer goods, while auto prices rebounded into the double-digits, to explain the price strength across the board. This improved the year-over-year PPI decline to -0.4% on a headline level, and translated to a 0.3% 12-month increase in core PPI.
(0) The July consumer price index rose by 0.6% on both a headline and core level, its fastest month-over-month headline increase since 1991, and twice the increase expected. Energy prices rose a few percent, which was offset by food prices falling due to some supply chain issues being apparently corrected. Core results were driven by a recovery in consumer and business spending items, several of which gained a few percent, as reopening activity progressed. These included apparel, airfares, hotels, and car prices; this was in addition to car insurance and cell phone service rates increasing, which likely included some quality adjustments. The larger real estate and medical price categories also remained firm, as did education, surprisingly. The year-over-year rates increased to 1.0% for headline, and 1.6% for core—both still well below target.
(0) Import prices rose 0.7% in July, beating the median forecast by a half-percent. Removing the influence of 8% higher petroleum prices resulted in this being pared back to a 0.2% increase. This core result was led by gain in imported prices for industrial supplies and other capital/consumer goods, while food and auto prices fell. Import prices remain down -3.3% from a year ago.
(0) The labor statistic of nonfarm productivity came in showing an annualized quarter-over-quarter increase of 7.3% in Q2—far surpassing expectations calling for 1.5%. Unit labor costs, which represents compensation per unit of output, rose by 12.2% in Q2 on an annualized basis, and rose over three percent to 5.7% for the year-over-year figure. These metrics were obviously heavily skewed by layoff activity and sharp changes downward in output, so should be taken with a grain of salt, as should Q3’s data, most likely. Then again, working remotely can be very ‘productive’ from an economic standpoint, as work output can remain consistent (or better, in some cases), while cost input could be theoretically reduced.
(+) The preliminary Univ. of Michigan index of consumer sentiment reading for August rose by 0.3 of a point to 72.8, beating expectations calling for 72.0. Assessments of present conditions in the economy ticked down a few tenths, while expectations for the future rose by over a half-point. Inflation expectations for the coming year were flat at a still-high 3.0%, while those for the next 5-10 years rose by a tenth to 2.7%.
(+) The government JOLTS job openings report for June showed an increase of 518k to 5.889 mil., beating expectations calling for a slight decline to 5.300 mil.—following prior month revisions. Under the hood, the rate of job openings rose by two-tenths to 4.1%, while hiring fell by a half-percent to 4.9%. On the departure side, the layoffs rate was unchanged at 1.4%, while the quits rate rose by 0.3% to 1.9%. While nowhere near a recovery, the employment situation appears to be slowly improving.
(0/-) Initial jobless claims for the Aug. 8 ending week fell by -228k to 963k, below the 1.100 mil. level expected by consensus, and also experienced a decrease when removing seasonal adjustments (which was is one criticism of labor numbers, particularly during potential periods of transition). Continuing claims for the Aug. 1 week came in -604k lower to a level of 15.486 mil., below the expected level of 15.800 mil., similar to the decline on a non-seasonal-adjusted level. Claims decreased the most sharply in NY, FL, and CA. While jobless levels remain very high, any movement in the direction of improvement is welcome.
Have a good week.
Ryan M. Long, CFA
Director of Investments
FocusPoint Solutions, Inc.
Sources: FocusPoint Solutions, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Citigroup, Deutsche Bank, FactSet, Financial Times, First Trust, Goldman Sachs, Invesco, JPMorgan Asset Management, Marketfield Asset Management, Morgan Stanley, MSCI, Morningstar, Northern Trust, PIMCO, Standard & Poor’s, StockCharts.com, The Conference Board, Thomson Reuters, T. Rowe Price, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wall Street Journal, The Washington Post. Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends. Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.
The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness. All information and opinions expressed are subject to change without notice. Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product. FocusPoint Solutions, Inc. is a registered investment advisor.
Notes key: (+) positive/encouraging development, (0) neutral/inconclusive/no net effect, (-) negative/discouraging development.