Markets last week

The second quarter and the first half of 2021 ended on a high note. World equities rose almost 8% in Q2 and more than 13% during the first half of the year. Over Q2, once again US shares did best, followed very closely by Europe, with Japan lagging. For the year-to-date, the US led with the UK and Europe tied for second place.

The quarter was characterised by shuttling moves from growth to value sectors and vice versa, with growth claiming a 10% return vs. 5% for value. For the year-to-date, though, value eked out a 4% beat over growth. This constant rotation between sectors, styles and large- and small-cap stocks, helped markets continue their relentless ascent despite concerns of over-valuation by many and hints that economic growth may well have peaked during Q2.

Peak growth is not necessarily damaging to investments if growth peaks at a high level. Further, the second half of a year after a very strong first half in equities, tends to be better than average, so we are not worried about future returns.

Bank of England (BoE) Governor Andrew Bailey delivered a message to markets about inflation and growth, reiterating the BoE’s views that price surges are temporary and that UK growth may slow down soon, requiring easy money policy throughout. His comments had an impact on markets, weakening sterling and reducing gilt yields.

At the end of the week, US equities beat other regions with China and Hong Kong far behind, government bond yields fell further, the US dollar kept rising and oil was confused by OPEC+ internecine battles. 

The week ahead

Wednesday: US FOMC meeting minutes

Our thoughts: the last meeting of the US Federal Reserve FOMC (Federal Open Markets Committee) was quite eventful for markets, which reacted sharply to the increase in future interest rates from FOMC members in the ’dot plots‘. The Fed Chair, Jay Powell, went out of his way to offer a more dovish explanation to their discussion, but of course the markets will want to dissect every word in the minutes for possible clues to a future change in monetary policy in light of the high current inflation readings. Will there be a ’smoking gun‘ in the minutes or will the inevitable differences in opinion be no more than what the media are constantly printing from every member?

Thursday: Chinese CPI and PPI

Our thoughts: once again, inflation in China will matter to the rest of the world. The producer price index (PPI) is vital to manufacturing activity globally given the huge Chinese inputs into most industrial products. It’s hard to over-emphasise how one year ago, China was still exporting manufacturing deflation and now it is exporting inflation. The PPI is still likely to be in eye-watering territory at 8.7%. Conversely, however, the consumer price index (CPI) is expected to remain at a low 1.3%, which shows that it is possible for input costs not to reach the consumer, at least in China. If the same applies to Western economies, then part of the inflation discourse there should be less scary for markets.

Friday: UK May GDP breakdown

Our thoughts: the UK is rather unusual in providing monthly GDP statistics with a great level of granularity. Data on industrial production, manufacturing production, construction output, index of services and trade balance will be released and doubtless discussed at length by market commentators. The relative strength of services vs. manufacturing and construction will matter for investors and could impact the movement of different equity sectors involved in the reopening. Given the importance of services within the UK economy, the three month growth of the services index vs. the previous three months could be the market-moving number. The trade balance will also be scrutinised to confirm poor export surveys in the PMIs.

The numbers for the week

Sources: FTSE, Canaccord Genuity Wealth Management

Central banks/fiscal policy

Andrew Bailey deflates inflation fever

Bank of England (BoE) Governor Andrew Bailey spoke of the outlook for the UK economy cautiously, urging policy makers not to overreact to a temporary jump in inflation. He was concerned that the UK’s growth surge could fade soon, noting weaknesses in the labour market. “Our current view is that the economy will revert to the lower average underlying growth rates that we have seen since the financial crisis. Reverting to the pre-COVID-19 pattern of lower trend growth will bring its own challenges. It is important not to overreact to temporarily strong growth and inflation, to ensure that the recovery is not undermined by a premature tightening in monetary conditions”. Andrew Bailey confirmed the BoE’s forecast for inflation to peak at 3% and then fall back toward next year. With arch-hawk Andy Haldane gone from the Monetary Policy Committee (MPC), Bailey now has the opportunity to guide the MPC to a more accommodating stance.

The European Central Bank followed in the Fed’s footsteps with regards to banks and dividends, saying it may lift the dividend cap in September.

United States

Strong payrolls cap good week for data

Surveys: the Dallas Fed Manufacturing Activity Index slowed from 34.9 to 31.1, below estimates but still very close to the highs of 2018.

The Conference Board Consumer Confidence Survey improved to 127.3 in June, a 16-month high. The ‘jobs plentiful‘ index rose to the highest since 2000.

The MNI Chicago PMI fell from 75.2 to 66.1, a big drop, although the previous number was a record.

The Bellwether ISM Manufacturing PMI eased 0.6 to 60.6, still a very high number, driven by new orders and production. The employment component hasn’t picked up. Backlogs are starting to reduce. The price index has reached one of the highest levels ever at 92.1.

Housing: US home prices jumped the most in over 30 years in April. The Case-Shiller Index of Property Values climbed 14.6% from a year earlier, the biggest gain in data going back to 1988. The narrower 20-city index rose 14.9%, the biggest gain since 2005.

The FHFA House Price Index increased 1.94% in April, up 15.71% year-on-year, the fastest pace on record. US pending home sales rose 8% vs. -1% expected.

US mortgage applications fell 6.9% to the lowest level in 18 months.

Employment: layoffs fell to the lowest monthly total since June 2000. Jobless claims finally improved after a few bad weeks, falling to 364K from 415K whereas continuing claims rose from 3413K to 3469K.

Non-farm payrolls for June rose from 583K to 850K, above expectations and the strongest jobs creation since August 2020, with small upward revisions to previous months. The service sector (leisure and hospitality, state and local education) accelerated whereas the goods production sector showed the ongoing difficulty in finding skilled workers and the construction area was a little weaker. Payrolls are still 6.8 million below February 2020 levels.

The unemployment rate (U-3) edged up from 5.8% to 5.9%, but the underemployment rate (U-6) fell from 10.2% to 9.8%. Average hourly earnings numbers rose 0.3% during the month with the number of hours worked abating slightly from 34.8 to 34.7.

Public finances: US tax receipts surged 83.5% in June.

Auto sector: total vehicle sales, as reported by Wards, fell sharply from 16.99 million (annualised) to 15.36 million in June, partly due to the bottlenecks in parts, especially chips.

United Kingdom

Economy still strong

Housing: Nationwide Building Society said that UK house prices grew at their fastest annual pace for more than 17 years in June, up 13.4% compared to a year earlier, the biggest gain since November 2004. Prices rose 0.7% from May to £254,432, their third consecutive monthly increase, partly helped by the stamp duty holiday which is being phased out now.

Credit: consumer credit was down 3.2% in May year-on-year vs. -5.7% in April year-on-year. Net lending secured on dwellings more than doubled from £3bn to £6.6bn. Mortgage approvals rose slightly from 86.9K to 87.5K.

Money supply: M3 money supply growth fell from 9.1% to 7.3% year-on-year in May.

Savings: British households saved a fifth of their disposable income in Q1, as the saving ratio rose to 19.9%, up from 16.1% in Q4 2020. The average in the two years before the pandemic was less than 7%. This is the second-highest savings ratio since records began in 1963.

Employment: the number of jobs covered by the Coronavirus Job Retention Scheme (known as furloughs) stood at 2.36 million on 31 May, compared with 3.54 million at the end of April, as the government begins to wind down its programme, which has supported almost 12 million jobs at a cost of about £66bn.

Survey: the Markit Manufacturing PMI eased from 64.2 to 63.9, still a very high number.

Europe

Surveys at highs

Surveys: confidence in the euro-area economy improved to the highest level in more than two decades. The Eurozone Sentiment Index increased to 117.9, driven by surging optimism in services, although industry, retail trade and construction also improved. Industrial confidence rose from 11.5 to 12.7, an all-time high, and services confidence from 11.3 to 17.9, with employment expectations rising sharply. The Markit Eurozone Manufacturing PMI edged up from 63.1 to 63.4.

Inflation: eurozone inflation cooled in June, with the consumer price index (CPI) rising 1.9% from a year earlier, down from a more than two-year high of 2% in May. Core CPI, ex food and energy, slowed to 0.9%. The producer price index (PPI) surged from 7.6% to 9.6%, although this was expected given the comparisons.

Employment: eurozone unemployment fell from 8.1% to 7.9%, below estimates.

China/India/Japan/Asia

China seems to have peaked

China: the official CFLP manufacturing PMI was slightly lower at 50.9 vs. 51.0 and the non-manufacturing PMI fell more to 53.5 from 55.2.

Japan: the jobless rate rose from 2.8% to 3.0%, whilst the job-to-applicant ratio remained at 1.09, quite similar to the ratio in the US of job openings to unemployed. Retail sales fell in May by -0.4% after a much larger drop the previous month.

The monetary base fell slightly from 22.4% year-on-year to 19.1% as money supply growth is abating from record highs.

Oil/Commodities/Emerging Markets

The battle for crude output

The OPEC+ Joint Ministerial Monitoring Committee, which includes Russia d Saudi Arabia, recommended adding 400,000 barrels a day of output from August to December and suggested extending the duration of the cartel’s production cuts agreement to December 2022. The proposal has been blocked by the UAE and it’s unclear whether the deal will get signed.