Weekly Market Summary

April 9, 2021 (Friday)

Markets continued their rise to fresh record highs this week as confidence in the economic recovery strengthened following last Friday's blowout March non-farm payrolls report. Despite the positive economic data, Treasury yields cooled off a bit and this allowed many high-growth technology names to rally for most of the week.

As we look ahead, first-quarter earnings season begins next week, and the major banks will kick things off with several firms reporting Wednesday morning. As important as the macroeconomic updates have been and will continue to be in terms of inflation expectations and the movements in the bond market, with earnings seasons comes a return to the fundamentals and we will gain deeper insights into how companies are performing amid the reopening/return to normal as well as expectations for the future.

Given the desire to better understand the path forward, as important as the actual results are, the conference calls and management commentary will likely be as much if not more important when it comes to making investment decisions.

Ten-year Treasury yields pulled back slightly to the mid-1.6% region, and gold prices hovered around the mid-$1,700 level. The dollar index remains around the ~92 level and WTI oil continues to price around the ~$60s per barrel region.

 

Economy

 

On Monday, the Institute for Supply Management (ISM) reported that the Services PMI, which tracks the service sector of the economy, surged 8.4 percentage points in March to an all-time high at 63.7%, exceeding expectations for a 59.2% reading. For perspective, over the past 12 months, the PMI has averaged 55.2% with a high of 63.7% and a low of 41.6%.

 

Also on Monday, the U.S. Commerce Department reported that new orders for manufactured goods, both durable and nondurable, fell 0.8% in February, to $505.7 billion. The reading missed expectations for a 0.5% decrease, though this was partially offset by an upward revision to January's reading, which was revised to a 2.7% advance (from +2.6% previously reported). Shipments decreased 2.0% to $502.4 billion, unfilled orders of manufactured durable goods increased 0.8% to $1,082.3 billion, inventories rose 0.8% to $702.4 billion. Importantly, new orders of capital goods excluding defense items and aircraft -- core capital goods -- decreased 0.9% in February, following a 0.7% advance in January and a 1.5% increase in December. Shipments for core capital goods decreased 1.1% in February, following a 2.0% increase in January and a 1.1% increase in December.

 

On Thursday, the Department of Labor reported that initial jobless claims for the week ended April 3 were 744,000, an increase of 16,000 from the previous week's revised level of 728,000 (up from 719,000 previously reported). The reading missed expectations for 694,000 claims.

Importantly, the four-week moving average for claims (used as a gauge to offset volatility in the weekly numbers) was 723,750, an increase of 2,500 from the previous week's revised average of 721,250 (up from 719,000 previously reported).

 

On Friday, the U.S. Bureau of Labor Statistics (BLS) reported that the seasonally adjusted Producer Price Index for final demand increased 1.0% in March, doubling expectations for a 0.5% increase. This follows a 0.5% rise in February. Over the last 12 months, the PPI has increased 4.2% before seasonal adjustment, also above expectations for a 3.8% annual advance following a 2.8% advance for the 12-month period ending in February. This was the largest advance since the index advanced 4.5% for the 12 month period ending September 2011. Core PPI advanced 0.6% in March, again exceeding expectations for a 0.2% rise, following a 0.2% increase in February and a 1.2% advance in January. Additionally, the core index was up 3.1% from the same time last year, above expectations for a 2.7% annual advance and coming on the heels of a 2.2% rate of increase in the 12-month period that ended in February.

 

Oil

On the commodity front, there was little news this week as WTI continues to bounce and find a home around the $60 level.

On the domestic front, on Wednesday, the U.S. Energy Information Administration (EIA), reported that in the week ending April 2, U.S. stockpiles (excluding those in the Strategic Petroleum Reserve) decreased by 3.5 million barrels to 498.3 million barrels, better than expectations for a 1.44-million-barrel increase. There was no change to the Strategic Petroleum Reserve. US production decreased by 200,000 barrels per day to 10.9 million bpd. Lastly, net imports decreased by 141,000 bpd as imports increased by 119,000 bpd and exports increased by 260,000 bpd.

Lastly, we note that the spread between WTI and Brent stands at around the $3 to $4 per barrel level. Recall, this is a key metric as the wider the spread, the more attractive U.S. based crude (WTI) becomes to foreign buyers, though we note that strength in the dollar can offset this effect as foreign buyers convert their home currencies to the dollar.

 

 

April 1, 2021 (Thursday)

Markets climbed higher this week, the S&P 500 pushed to new all-time highs, and the Nasdaq found support as we said goodbye to the first quarter and hello the second quarter of 2021. Aiding the broader move, President Biden unveiled his $2 trillion infrastructure plan and new money likely came into the market as an effect of the distribution of stimulus payments.

Markets are closed tomorrow for Good Friday, but that will not stop the release of one of the most important macroeconomic readings of the month. Investors will be paying close attention to the March non-farm payroll report, and the current expectation is for an addition of 647,000 jobs. Tomorrow's job number will give investors an updated sense of how the recovery in the jobs market is fairing against the backdrop of an improving reopening.

Looking ahead, the end of the first quarter means earnings season is on the horizon. Broadly speaking, we will be focusing on what managements have to say about demand, as well as supply chain challenges and inflationary impacts.

Ten-year Treasury yields are bouncing around the 1.7% level and gold prices are hovering around the low-to-mid-$1,700 level. The dollar index remains around the ~92 level and WTI oil continue to hold around the ~$60s per barrel region.

Economy

 

On Wednesday, the ADP National Employment Report (NER) was released, revealing a gain of 517,000 jobs in private-sector, seasonally adjusted payrolls for March, missing expectations for an increase of 525,000 jobs. Partly helping to offset the miss, February's ADP report saw an upward revision, now indicating that the economy added 176,000 jobs last month, up from a gain of 117,000 jobs previously reported. January's reading was also revised slightly higher to indicate a gain of 196,000 jobs vs. a gain of 195,000 previously reported. The goods-producing sector added 80,000 jobs last month while the service-providing sector added 437,000 jobs. By business size, small businesses (employing one to 49 workers) added 174,000 jobs, while midsize businesses (50 to 499 employees) added 188,000 workers, and large businesses (500+ employees) added 155,000 jobs.

 

Also, on Wednesday, the National Association of Realtors reported that its Pending Home Sales Index decreased 10.6% in February to 110.3 (100 representing the level of contract activity in 2001), missing expectations for a 3.0% monthly decline. Recall that pending home sales represent contracts signed for existing home sales set to close over the next month or two. With February's reading, pending home sales are down 0.5% year over year. Breaking the headline reading down further, on a monthly and yearly basis, the Pending Home Sales Index fell across the board, declining 9.2% in the Northeast (-3.9% YoY), 13.0% in the South (+2.9% YoY), 9.5% in the Midwest (-6.1% YoY), and 7.4% the West (+1.9% YoY).

On Thursday, the Department of Labor reported that initial jobless claims for the week ended March 27 were 719,000, an increase of 61,000 from the previous week's revised level of 658,000 (down from 684,000 previously reported). The reading missed expectations for 675,000 claims.

Importantly, the four-week moving average for claims (used as a gauge to offset volatility in the weekly numbers) was 719,000, the lowest level since March 14, 2020 (when it was 225,000) and representing a decrease of 10,500 from the previous week's revised average of 729,500 (down from 736,000 previously reported).

 

Also, on Thursday, the Institute of Supply Management (ISM) reported that the purchasing managers' index (PMI) for March increased 3.9 percentage points to 64.7%, exceeding expectations for a move to 61.3%, and marking the tenth straight month of expansion in both the manufacturing sector and the economy overall. To put the new number in perspective, from April 2020 through March 2021, the PMI reached a high of 64.7%, a low of 41.7%, and averaged 55.3%.

Finally, while the market will be closed, we will be watching Friday's release of March non-farm payroll numbers. As of the time of this writing, expectations are for 647,000 job additions. We will also be keeping a close eye on hourly wage inflation as this can have an impact on inflation worries and therefor move the Treasury rates.

Oil

On the commodity front, WTI oil prices continue to hover around the $60 level as there was little news this week and the market continues to search for more clarity on the speed at which the global economy will reopen and what the world will look like on the other side.

On the domestic front, on Wednesday, the U.S. Energy Information Administration (EIA), reported that in the week ending March 26, U.S. stockpiles (excluding those in the Strategic Petroleum Reserve) decreased by 0.9 million barrels to 501.8 million barrels, better than expectations for a 0.11-million-barrel increase. There was no change to the Strategic Petroleum Reserve. US production increased by 100,000 barrels per day to 11.1 million bpd. Lastly, net imports decreased by 170,000 bpd as imports increased by 523,000 bpd and exports increased by 693,000 bpd.

Lastly, we note that the spread between WTI and Brent stands at around the $3 to $4 per barrel level. Recall, this is a key metric as the wider the spread, the more attractive US based crude (WTI) becomes to foreign buyers, though we note that strength in the dollar can offset this effect as foreign buyers convert their home currencies to the dollar.

 

 

March 26, 2021 (Friday)

Markets had a volatile week, searching for direction as Fed Chair Jerome Powell and Treasury Secretary Janet Yellen spoke before the House Financial Services Committee. President Biden also hosted his first formal press conference this week. Adding to the choppy action is uncertainty regarding President Biden's tax plans, a blockage in the Suez Canal that is delaying an estimated $400 million per hour in goods, efforts to vaccinate citizens and reopen the US economy, vaccine supply woes and a resurgence of the virus in Europe and of course, yield curve dynamics as investors speculate as to where the Treasury yields go from here.


Ten-year Treasury yields pulled back to the mid-1.6% region as gold prices continue bounce around the low-to-mid-$1,700 level. The dollar index remains around the ~92 level and WTI oil are holding at around the ~$60s per barrel region.


Economy

On Monday, the National Association of Realtors reported that existing home sales -- completed transactions for single-family homes, town homes, condominiums, and co-ops -- fell 6.6% in February to a seasonally adjusted annual rate of 6.22 million, missing expectations for a 6.5 million rate. With February's reading, overall existing home sales are up 9.1% from the same time last year.

On Tuesday, the U.S. Census Bureau reported that new home sales in February dropped 18.2% month-over-month (+8.2% YoY) to a seasonally adjusted annual rate of 775,000. The reading was far below expectations for a seasonally adjusted unit rate of 870,000. Partially offsetting the large miss, January's estimate was revised higher, to a 948,000-unit rate, up from 923,000 previously reported.


On Wednesday, the Commerce Department reported that the preliminary reading for new orders for manufactured durable goods fell 1.1% in February to $254 billion. This follows a 3.5% rise in January (revised up from +3.4% previously reported) and missed expectations for a 0.5% advance. New orders for durable goods are up 3.4% from the same time last year on an unadjusted, year-to-date basis. Excluding transportation equipment, such as airplanes and automobiles, new orders were down 0.9% in February. Excluding defense, new orders fell 0.7% last month.


Shipments for manufactured durable goods were down 3.5% to $250.9 billion, unfilled orders increased 0.8% to $1,082.0 billion, and inventories increased 0.7% to $427.3 billion. With December readings, on an unadjusted year-to-date basis, shipments are up 1.8%, unfilled orders are down 5.7%, and total inventories have grown by 1.3% from the same period last year.


New orders for non-defense capital goods, excluding aircraft (core capital goods), deceased 0.8% in February, missing expectations for a 0.5% monthly gain. This followed a 0.6% increase in January and a 1.5% gain in December. Shipments of core capital goods fell 1.0% in the month following a 1.9% increase in January and a 1.1% increase in December. With the monthly readings, on an unadjusted, year-to-date basis, new orders for core capital goods are up 8.5% from the same time last year, while shipments are up 7.3% annually.

Also, on Wednesday, The IHS Markit Group on Wednesday reported that the IHS Markit Flash U.S. Composite PMI Output Index for March registered a reading of 59.1. That reading is down from 59.5 in February and marks a two-month low. Driving the headline number, the Flash U.S. Services PMI Business Activity Index advanced to 60.0 (from 59.8 in February), matching expectations and marking an 80-month high. The IHS Markit Flash U.S. Manufacturing Purchasing Managers' Index (PMI) climbed to 59.0 (from 58.6 in February), marking a two-month high, but came up short vs. expectations for a 59.5 reading. Additionally, the Flash U.S. Manufacturing Output Index fell to a five-month low at 54.5 in March (from 57.8 in February). 

On Thursday, the Bureau of Economic Analysis reported, in its "third" reading based on a more complete set of data than the "second" reading released last month, that real Gross Domestic Product -- GDP adjusted for inflation, our best gauge for economic growth -- increased at a seasonally adjusted annual rate of 4.3% in the fourth quarter of 2020, outpacing expectations for a 4.1% increase. This follows a 33.4% advance in the third quarter of the 2020. In addition to real GDP, we want to point out that the core personal consumption expenditures (PCE) price index rose 1.4% from the same time last year (4Q19), in line with the third-quarter's annual increase and unchanged from the rate seen in the "second" reading. On a quarter-over-quarter basis, the core PCE price index advanced 1.3%, down from 3Q20's 3.4% quarterly rate of advance and below expectations for a 1.4% quarterly advance. 


Also, on Thursday, the Department of Labor reported that initial jobless claims for the week ended March 20 were 684,000, a decrease of 97,000 from the previous week's revised level of 781,000 (up from 770,000 previously reported). The reading was better than expectations for 735,000 claims.
Importantly, the four-week moving average for claims (used as a gauge to offset volatility in the weekly numbers) was 736,000, a decrease of 13,000 from the previous week's revised average of 749,000 (up from 746,250 previously reported).


On Friday, the Bureau of Economic Analysis (BEA) released personal income and spending numbers for February. Personal income fell 7.1% (or $1,516.6 billion), marginally better than expectations for a 7.2% decrease, following a 10.1% increase in January. Disposable personal income decreased 8.0% (or $1,532.3 billion) in February, following an 11.4% increase in January. Notably, the PCE price index advanced 0.2% in February, slightly below expectations for a 0.3% advance following a 0.3% reading in January. The Core PCE price index advanced 0.1% in February, matching expectations for a 0.1% advance, and following a 0.2% reading in January. More importantly, on a year-over-year basis, the core index was up 1.4% in February, missing expectations for a 1.6% increase following a 1.5% increase in January.


Oil

On the commodity front, WTI oil prices continue to hover around the $60 level as the supply side was disrupted due to a shipping container blockage in the Suez Canal. While the demand side remains uncertain, though optimism over the reopening of the economy has served to support future demand expectations.

On the domestic front, on Wednesday, the U.S. Energy Information Administration (EIA), reported that in the week ending March 19 U.S. stockpiles (excluding those in the Strategic Petroleum Reserve) increased by 1.9 million barrels to 502.7 million barrels, missing expectations for a 0.27-million-barrel decrease. There was no change to the Strategic Petroleum Reserve. U.S. production increased by 100,000 barrels per day to 11.0 million bpd. Lastly, net imports increased by 338,000 bpd as imports increased by 299,000 bpd and exports decreased by 39,000 bpd.


Lastly, we note that the spread between WTI and Brent stands at around the $3 to $4 per barrel level. Recall, this is a key metric as the wider the spread, the more attractive US based crude (WTI) becomes to foreign buyers, though we note that strength in the dollar can offset this effect as foreign buyers convert their home currencies to the dollar.

 

March 19, 2021 (Friday)

Markets had a volatile week once again, ultimately trending lower as 10-year Treasury rates rose. The Fed agreed to keep its target for the federal funds rate at 0% to 0.25% while maintaining open market operations and general accommodation through what they called a "transitory" inflation period, while allowing the temporary supplementary leverage ratio changes to expire as scheduled.


Importantly, we remain in an environment where inline economic news is ideal, "good" news can be bad for markets (most specifically high-multiple tech stocks) because of its impact on yields and certain "bad" news is positive, if it serves as a reason to temper concerns about inflation. That said, as longer-term investors, we of course want a strong economy (our investments do operate in the economy after all and not the stock market) so, for now, it is a balancing act and the market is more focused on the speed and cause of change in rates (fears of rampant inflation versus real economic growth), more so than the absolute level - which is why the Nasdaq managed to put in a higher low this week, despite higher rates.


Ten-year Treasury yields have advanced to the ~1.7% level. Gold prices bounced around the low-$1,700 level. The dollar index remains around the ~92 level and WTI oil prices have fallen to the ~$60s per barrel region.


Economy

On Tuesday, the U.S. Commerce Department reported that retail and food-services sales fell 3.0% in February to $561.7 billion, short versus expectations for a 0.5% monthly decline. Last month's advance follows a 7.6% increase in January (revised up from +5.3% previously reported). On a monthly basis, excluding auto sales (which because of their high-ticket price can result in volatile monthly readings), retail sales were down 2.7%, missing expectations for a 0.1% monthly advance. Excluding autos and gas, sales were down 3.3% in February, again missing projections for a 0.5% decline. Core retail sales were down 3.5% in February, missing expectations for a 0.9% decline.


Also on Tuesday, the Federal Reserve announced that industrial production fell 2.2% in February, missing expectations for a 0.3% increase. Capacity utilization also missed expectations, coming in at 73.8% versus a 75.5% consensus for February. Total industrial production is down 4.2% from the same time last year while capacity growth is down 0.1% from the year ago period.


On Wednesday, the U.S. Census Bureau reported that housing starts decreased 10.3%, month over month, in February to a seasonally adjusted annual rate of 1.421 million. That figure was down from January's revised rate of 1.584 million and missed expectations for a 1.56-million-unit rate of starts. With February's reading, housing starts are down 9.3% from the same time last year. As for building permits, units authorized in February were down 10.8% at a seasonally adjusted annual rate of 1.682 million, also missing expectations for a move to a 1.75 million seasonally adjusted rate. With February's reading, permits are up 17.0% from the same time last year. 


On Thursday, the Department of Labor reported that initial jobless claims for the week ended March 13 were 770,000, an increase of 45,000 from the previous week's revised level of 725,000 (up from 712,000 previously reported). The reading missed expectations for 700,000 claims.
Importantly, the four-week moving average for claims (used as a gauge to offset volatility in the weekly numbers) was 746,250, a decrease of 16,000 from the previous week's revised average of 762,250 (up from 759,000 previously reported). 


Oil


On the commodity front, oil prices fell this week, hovering around the $60 level as investors try to price in the economic reopening and weigh it against efforts by OPEC+ to curb supply and questions as to how compliant the group will be as prices increase.


On the domestic front, on Wednesday, the U.S. Energy Information Administration (EIA), reported that in the week ending March 12 U.S. stockpiles (excluding those in the Strategic Petroleum Reserve) increased by 2.4 million barrels to 500.8 million barrels, better than expectations for a 2.96-million-barrel increase. There was no change to the Strategic Petroleum Reserve. U.S. production was unchanged at 10.9 million bpd. Lastly, net imports decreased by 219,000 bpd as imports decreased by 332,000 bpd and exports decreased by 113,000 bpd.


Lastly, we note that the spread between WTI and Brent stands at around the $3 per barrel level. Recall, this is a key metric as the wider the spread, the more attractive U.S. based crude (WTI) becomes to foreign buyers, though we note that strength in the dollar can offset this effect as foreign buyers convert their home currencies to the dollar.

 

 

March 12, 2021 (Friday)

Markets bounced back to fresh record highs but the bifurcation between technology stocks and cyclicals continued even as Treasury yields cooled off for much of the week, hanging around the low 1.5% area before bouncing back to the 1.6% level on Friday. While we only got two major macroeconomic reports this week -- the Producer and Consumer Price Indexes -- they were crucial ones as they speak to inflation and therefore impact investor sentiment on inflation - which is reflected by moves in the 10-year Treasury.

We have called this out previously but want to be sure to mention it again at the top of the roundup to ensure all members are aware of this crucial dynamic. While we certainly like to see solid macroeconomic reports because they speak to a growing and increasingly healthy economy (some inflation is a good thing as it speaks to economic growth), readings that come in too hot will stoke inflation fears and lead to a rise in longer-term rates. So, while the term "better than expected" is usually a good one to be using when it comes to macroeconomic reports, what we actually want to see right now, given the impact these reports will have on inflation fears and therefore rates, are reports that in line with expectations, perhaps even with a few line items coming up short. I.e., we want readings that point to an economic rebound as this is certainly a good thing for all, Wall Street and Main Street alike, but that does not signal runaway inflation.

Rates aside, President Joe Biden signed the $1.9 trillion COVID-19 relief package on Thursday and the European Central Bank said this week that it plans to ramp up its bond purchase activity to try and address the rapid rise in yields in the eurozone.

Ten-year Treasury yields are hovering around the 1.6% level but remain volatile. Gold prices bounced around the $1,700 level, the dollar index remained around the ~92 level and WTI oil prices held in the mid-$60s per barrel region.

Economy

On Wednesday, the U.S. Bureau of Labor Statistics reported that the Consumer Price Index (CPI) increased 0.4% in February on a seasonally adjusted basis, matching expectations, following a 0.3% advance in January. Over the last 12 months the CPI has increased 1.7% before seasonal adjustment, matching the consensus, following a 1.4% advance in January. The core CPI, which excludes food and energy costs due to their volatility, rose 0.1% in February, below expectations of 0.2% following an unchanged January reading. Over the past 12 months, core CPI has risen 1.3%, short vs. expectations of 1.4% and follows a 1.4% annual increase for the 12 months ending in January.

On Thursday, the Department of Labor reported that initial jobless claims for the week ended March 6 were 712,000, a decrease of 42,000 from the previous week's revised level of 754,000 (up from 745,000 previously reported). The reading was better than expectations for 725,000 claims.

Importantly, the four-week moving average for claims (used as a gauge to offset volatility in the weekly numbers) was 759,000, a decrease of 34,000 from the previous week's revised average of 793,000 (up from 790,750 previously reported).

On Friday, the U.S. Bureau of Labor Statistics reported that the seasonally adjusted Producer Price Index for final demand increased 0.5% in February, in line with expectations. This follows a 1.3% rise in January. Over the last 12 months, the PPI has increased 2.8% before seasonal adjustment, slightly above expectations for a 2.7% annual advance following a 1.7% rise for the 12-month period ending in January. Core PPI was up 0.2% in February, short versus expectations for a 0.3% rise, following a 1.2% increase in January and a 0.4% advance in December. Additionally, the core index was up 2.2% from the same time last year, short versus expectations for a 2.5% annual advance and coming on the heels of a 2.0% rate of increase in the 12-month period that ended in January.

Oil

On the commodity front, oil prices are holding in the mid-$60s region. There wasn't much news this week as the commodity consolidates around current levels thanks to efforts by OPCE+ to keep a lid on supply and expectations of future demand being supported by the economic reopening currently underway.

On the domestic front, on Wednesday, the U.S. Energy Information Administration (EIA), reported that in the week ending March 5 U.S. stockpiles (excluding those in the Strategic Petroleum Reserve) increased by 13.8 million barrels to 498.4 million barrels, missing expectations for a 0.82-million-barrel increase. There was no change to the Strategic Petroleum Reserve. U.S. production increased by 900,000 bpd to 10.9 million bpd. Lastly, net imports decreased by 918,000 bpd as imports decreased by 636,000 bpd and exports increased by 282,000 bpd.

Lastly, we note that the spread between WTI and Brent stands at around the $3 to $4 per barrel level. Recall, this is a key metric as the wider the spread, the more attractive U.S. based crude (WTI) becomes to foreign buyers, though we note that strength in the dollar can offset this effect as foreign buyers convert their home currencies to the dollar.

Stocks


Moving on to the S&P 500, fourth-quarter earnings season is underway, with 78.7% of companies reporting a positive EPS surprise. For the fourth quarter, earnings are up roughly 4.1% year over year vs. expectations for an overall 4.1% advance throughout the season. Revenues for the S&P 500 are up 2.7% vs. expectations throughout the season for a 2.7% increase; 78.7% of companies beat EPS expectations, 17.4% missed the mark and 3.8% were in line with consensus. On a year-over-year comparison basis, 61.74% beat the prior year's EPS results, 36.44% came up short and 1.82% were virtually in line. The best performing sectors have been Communication Services, Technology and Financials while the worst performing has been Utilities, Energy and Real Estate.

 

March 5, 2021 (Friday)

The broader markets were volatile this week as strong gains on Monday and Friday bookended significant pressure in the middle of the week, especially for high multiple tech stocks which saw the brunt of the weakness as the continued rise in Treasury rates signaled fears of inflation on the horizon. While the rise in rates comes on the back of strong economic data, a positive for Main Street, it means that the high-flying growth names that are priced on earnings far into the future have come under pressure. And while some of the mega cap tech names (think AAPL, MSFT, FB and GOOGL) are starting to trade at relatively attractive multiples, they have nonetheless sold off in sympathy and dragged the averages lower as they make up about 20% of the S&P 500.


Ten-year Treasury yields rose to the mid-1.5% level, though they did break above 1.6% briefly this week. Gold prices are hovering around the $1,700 level. The dollar index advanced slightly to around the ~92 level and WTI oil prices have increased to the mid-$60s per barrel level.


Economy


On Monday, the Institute of Supply Management reported that the purchasing managers' index (PMI) for February increased 2.1 percentage points to 60.8%, exceeding expectations for a move to 58.6% and marking the ninth straight month of expansion in both the manufacturing sector and the economy overall. To put the new number in perspective, from March 2020 through February 2021, the PMI reached a high of 60.8%, a low of 41.7%, and averaged 54.0%.

On Wednesday, The ADP National Employment Report was released, revealing a gain of 117,000 jobs in private-sector, seasonally adjusted payrolls for February, missing expectations for an increase of 200,000 jobs. Partly helping to offset the miss, January's ADP report saw an upward revision, now indicating that the economy added 195,000 jobs last month, up from a gain of 174,000 jobs previously reported. December's reading was also revised slightly higher to indicate a loss of 75,000 jobs vs. a loss of 78,000 previously reported.

Also, on Wednesday, the Institute for Supply Management reported that the Services PMI, which tracks the service sector of the economy, fell 3.4 percentage points in February to 55.3%, missing expectations for a 58.7% reading. For perspective, over the past 12 months, the PMI has averaged 54.4% with a high of 58.7% and a low of 41.6%.

 

On Thursday, The U.S. Commerce Department reported that new orders for manufactured goods, both durable and nondurable, advanced 2.6% in January, to $509.4 billion. The reading outpaced expectations for a 2.1% increase and was compounded by an upward revision to December's reading, which was revised to a 1.6% advance (from +1.1% previously reported).

 

Shipments increased 1.9% to $513.3 billion, unfilled orders of manufactured durable goods increased 0.1% to $1,072.8 billion and inventories rose 0.1% to $696.3 billion. With this, the unfilled orders‐to‐shipments ratio stood at 6.1, down from 6.25 in December and the inventories-to-shipments ratio came in at 1.36, down from 1.38 in December.


Importantly, new orders of capital goods excluding defense items and aircraft -- core capital goods -- increased 0.4% in January, following a 1.5% advance in December and a 1.2% increase in November. Shipments for core capital goods increased 1.8% in January, following a 1.1% increase in December and a 0.4% increase in November.


Also, on Thursday, the Department of Labor reported that initial jobless claims for the week ended February 27 were 745,000, an increase of 9,000 from the previous week's revised level of 736,000 (up from 730,000 previously reported). The reading was better than expectations for 750,000 claims.


Importantly, the four-week moving average for claims (used as a gauge to offset volatility in the weekly numbers) was 790,750, a decrease of 16,750 from the previous week's revised average of 807,500 (down from 807,750 previously reported).


On Friday, the Labor Department reported that the U.S. economy gained 379,000 jobs in February, a big beat against expectations for an increase of 210,000. There were also revisions made to the prior two months. The December reading was revised down 79,000 to a loss of 306,00 jobs from a loss of 227,000, and the January reading was revised up by 117,000 to a gain of 166,000 jobs from a gain of 49,000. In total, the two revisions represent a net gain of 38,000 jobs from what was previously reported.


The unemployment rate ticked down to 6.2% which was slightly better than estimates for an unchanged rate of 6.3%. The labor force participation rate, which accounts for the number of Americans looking for work or currently working, was unchanged 61.4% and remains 1.9 percentage points down from February 2020. A different, broader measure of unemployment and underemployment, known as the U-6, which accounts for those working part-time because they are unable to find full-time work, was unchanged at 11.1%. In February, average hourly earnings for all employees on private nonfarm payrolls increased by about $0.07 to $30.01 per hour. 

Oil

On the commodity front, WTI prices have advanced to the mid-$60s region as investors focus on the economic reopening and OPEC+ agreed, for the most part, to keep production steady, though slight production increase were agreed upon for Russia and Kazakhstan.

On the domestic front, on Wednesday, the U.S. Energy Information Administration (EIA), reported that in the week ending February 26 U.S. stockpiles (excluding those in the Strategic Petroleum Reserve) increased by 21.6 million barrels to 484.6 million barrels, missing expectations for a 0.93-million-barrel decrease. There was no change to the Strategic Petroleum Reserve. US production increased by 300,000 bpd to 10.0 million bpd. Lastly, net imports increased by 1,655,000 bpd as imports increased by 1,692,000 bpd and exports increased by 37,000 bpd.


We note that the spread between WTI and Brent stands at around the $3 per barrel level. Recall, this is a key metric as the wider the spread, the more attractive US based crude (WTI) becomes to foreign buyers, though we note that strength in the dollar can offset this effect as foreign buyers convert their home currencies to the dollar.


Stock


Moving on to the S&P 500, fourth-quarter earnings season is underway, with 78.6% of companies reporting a positive EPS surprise. For the fourth quarter, earnings are up roughly 4.1% year over year vs. expectations for an overall 4.2% advance throughout the season. Revenues for the S&P 500 are up 2.6% vs. expectations throughout the season for a 2.7% increase; 78.6% of companies beat EPS expectations, 17.6% missed the mark and 3.9% were in line with consensus. On a year-over-year comparison basis, 61.22% beat the prior year's EPS results, 36.94% came up short and 1.84% were virtually in line. The best performing sectors have been Information Communication Services, Technology and Financials while the worst performing has been Utilities, Energy and Real Estate.
 

February 26, 2021 (Friday)

Markets pulled back this week as inflation fears took hold and investors focused intensely on the sharp move up in 10-year Treasury yields, which gained momentum on the back of solid macroeconomic readings. As we've noted previously, the rise in rates is a concern because of the impact it has on the present value of growth companies, which are heavily valued on future earnings/cash flows (which members can review here). Another factor to keep in mind is that the 1.5% level that we find 10-year rates hovering at is in line with the dividend yield of the S&P 500, which makes it strong competition for the market for those investors more interested in safer income rather than the potential for capital appreciation. This all being said, we believe growth never fully goes out of style and the tech pullback sets up a buying opportunity in the highest quality of names.

 

Ten-year Treasury yields rose and approached the 1.5% level. Gold prices have pulled back to the lower-$1,700s region. The dollar index continues to bounce around the ~90 level and WTI oil prices are holding in the low-$60 per barrel level.

Economy

 

On Wednesday, the U.S. Census Bureau reported that new home sales in January advanced 4.3% month-over-month (+19.3% YoY) to a seasonally adjusted annual rate of 923,000. The reading was well above expectations for an increase to an 856,000 seasonally adjusted unit rate. Compounding the beat, December's estimate was revised higher, to an 885,000-unit rate, up from 842,000 previously reported. As for costs, the average selling price in January increased to $408,800 from $394,700 in December. The median sales price on the other hand declined to $346,400 from $353,100 in December. Inventories, at the current rate of sales, currently sit at 4.0 months, on a seasonally adjusted basis, down from the 4.1-month level seen in December. See here for our full analysis.

 

On Thursday, the Bureau of Economic Analysis reported, in its "second" reading (which is based on a more complete set of data versus the "advance" estimate), that real Gross Domestic Product - GDP adjusted for inflation, our best gauge for economic growth - increased at a seasonally adjusted annual rate of 4.1% in the fourth quarter of 2020, missing expectations for a 4.2% gain. This follows a 33.4% increase in the third quarter of 2020. In addition to real GDP, we want to point out that the core personal consumption expenditures (PCE) price index (which takes out food and energy to reduce month-to-month volatility) rose 1.4% from the same time last year (fourth quarter of 2019), in line with 3Q20's annual rate of advance. On a quarter-over-quarter basis, the core PCE price index advanced 1.4%, down from 3Q20's 3.4% quarterly rate of advance and in line with expectations.

 

On Thursday, the Commerce Department reported that the preliminary reading for new orders for manufactured durable goods increased 3.4% in January to $256.6 billion. This follows a 1.2% rise in December (revised up from +0.5% previously reported) and exceeded expectations for a 1.1% advance. New orders for durable goods are up 4.5% from the same time last year on an unadjusted, year-to-date basis. excluding transportation equipment, such as airplanes and automobiles, new orders were up 1.4% in January, outpacing expectations for a 0.7% increase. Excluding defense, new orders advanced 2.3% last month. Shipments for manufactured durable goods were up 2.0% in January to $260.6 billion. Unfilled orders increased 0.1% in January, rising to $1,072.6 billion. Finally, inventories decreased 0.3% to $424.3 billion. With December readings, on an unadjusted year-to-date basis, shipments are up 3.5%, unfilled orders are down 6.2%, and total inventories have grown by 0.3% from the same period last year.

 

On Thursday, the National Association of Realtors reported that its Pending Home Sales Index decreased 2.8% in January to 122.8 (100 representing the level of contract activity in 2001), missing expectations for a flat monthly reading. Recall that pending home sales represent contracts signed for existing home sales set to close over the next month or two. With January's reading, pending home sales are up 13.0% year over year.

 

On Thursday, the Department of Labor reported that initial jobless claims for the week ended February 20 were 730,000, a decrease of 111,000 from the previous week's revised level of 841,000 (down from 861,000 previously reported). The reading was better than expectations for 845,000 claims.

Importantly, the four-week moving average for claims (used as a gauge to offset volatility in the weekly numbers) was 807,750, a decrease of 20,500 from the previous week's revised average of 828,250 (down from 833,250 previously reported).

 

On Friday, the Bureau of Economic Analysis (BEA) released personal income and spending numbers for January. Personal income increased 10.0% (or $1,954.7 billion), exceeding expectations for a 9.5% increase, following a 1.6% increase in December. Disposable personal income - the income available for spending or saving after taxes - increased 11.4% (or $1,963.2 billion) in January, following a 0.6% increase in December. Personal consumption expenditures (PCE) increased 2.4% (or $340.9 billion) in January, below expectations for a 2.5% increase, following a 0.4% decline in December. When adjusted for inflation, real PCE increased 2.0% monthly, also below expectations for a 2.2% advance, following a 0.8% decrease in December. Notably, the PCE price index advanced 0.3% in January, matching expectations following a 0.4% reading in December. The Core PCE price index also advanced 0.3% in January, above expectations for a 0.1% advance, and also following a 0.3% reading in December. More importantly, on a year-over-year basis, the core index was up 1.5% in January, above expectations for a 1.4% increase following a 1.4% increase in December.

 

Oil

 

On the commodity front, WTI prices are holding in the low $60s region as cold weather in Texas held back production and investors are turning their focus to the economic reopening and resulting increase in demand for energy.

 

On the domestic front, on Wednesday, the U.S. Energy Information Administration (EIA), reported that in the week ending February 19 U.S. stockpiles (excluding those in the Strategic Petroleum Reserve) increased by 1.3 million barrels to 463.0 million barrels, missing expectations for a 5.19-million-barrel decrease. No barrels were drawn down from the Strategic Petroleum Reserve. U.S. production decreased by 1,100,000 bpd to 9.7 million bpd. Lastly, net imports increased by 249,000 bpd as imports decreased by 1,299,000 bpd and exports decreased by 1,548,000 bpd.

 

Lastly, we note that the spread between WTI and Brent stands at around the $3 to $4 per barrel level. Recall, this is a key metric as the wider the spread, the more attractive U.S. based crude (WTI) becomes to foreign buyers, though we note that strength in the dollar can offset this effect as foreign buyers convert their home currencies to the dollar.

 

February 5, 2021 (Friday)

After selling off last week, markets rebounded and delivered their best weekly gain since November as investors welcomed the slew of stronger-than-expected fourth-quarter earnings reports and the better than expected macroeconomic data points that suggested the economy is on the mend.

 

Also aiding the move back towards record highs were reduced fears that last week's "de-grossing" would have a contagion effect on markets. To put some context around what markets experienced last week, here is what strategists at Goldman Sachs said in a research note. "According to Goldman Sachs Prime Services, this week [so, last week ahead of this week's rally] represented the largest active hedge fund de-grossing since February 2009."

 

It is also important to acknowledge how the events like last week create opportunity. The market de-grossing resulted in unjustified selloffs in high-quality companies who recently reported strong quarters and provided bright outlooks. Remember this for the next time the market sells off in an indiscriminate fashion because it undoubtedly will at some point again.

Ten-year Treasury yields continue to hover slightly above 1% while gold prices fell to the low-$1,800s region. The dollar index strengthened slightly to the ~91 level and WTI oil prices have moved higher to the mid-$50s per barrel level.

Fourth-quarter earnings season is underway.

On Monday, the Institute of Supply Management reported that the purchasing managers' index for January fell 1.8 percentage points to 58.7%, missing expectations for a move to 60.0%, but marking the eighth straight month of expansion in the manufacturing sector and the economy overall. To put the new number in perspective, from February 2020 through January 2021, the PMI reached a high of 60.5%, a low of 41.7%, and averaged 53.1%.

 

On Wednesday, The ADP National Employment Report was released, revealing a gain of 174,000 jobs in private-sector, seasonally adjusted payrolls for January, well above expectations for an increase of 50,000 jobs. Compounding the beat, December's ADP report saw an upward revision, now indicating that the economy lost 78,000 jobs last month, up from a loss of 123,000 jobs previously reported. November's reading was revised slightly lower to indicate a gain of 299,000 jobs vs. a gain of 304,000 previously reported.

On Wednesday, The Institute for Supply Management (ISM) revealed shortly after the opening bell on Wednesday that the Services PMI exceeded expectations for January, hitting 58.7%. That's an advance of 1.0 percentage point and a beat over the expected 56.8% reading. For perspective, over the past 12 months, the NMI has averaged 54.5% with a high of 58.7% and a low of 41.6%.

On Thursday, the U.S. Commerce Department reported that new orders for manufactured goods, both durable and nondurable, advanced 1.1% in December, to $493.5 billion. The reading outpaced expectations for a 0.7% increase and was compounded by an upward revision to November's reading, which was revised to a 1.3% advance (from +1.0% previously reported). Importantly, new orders of core capital goods increased 0.7% in December, following a 1.2% advance in November and a 1.7% increase in October.

Also, on Thursday, the Department of Labor reported that initial jobless claims for the week ended January 30 were 779,000, a decrease of 33,000 from the previous week's revised level of 812,000 (down from 847,000 previously reported). The reading was better than expectations for 830,000 claims.

 

Importantly, the four-week moving average for claims (used as a gauge to offset volatility in the weekly numbers) was 848,250, a decrease of 1,250 from the previous week's revised average of 849,500 (down from 868,000 previously reported).

On Friday, the Labor Department reported that the U.S. economy gained 49,000 jobs in the month of January, a small miss against expectations for an increase of 50,000. The unemployment rate fell 0.4 percentage points to 6.3% which was better than estimates of an unchanged rate of 6.7% but comes with a caveat. The labor force participation rate, which accounts for the number of Americans looking for work or currently working, ticked lower to 61.4% as 406,000 workers left the labor force. It remains 1.9 percentage points down from February 2020. In January, average hourly earnings for all employees on private nonfarm payrolls increased by about $0.06 to $29.96 per hour.

 

On the commodity front, WTI prices grinded to a one-year high as investor optimism increased in regard to the economy rebounding and, on the supply, OPEC+ has so far adhered to previously agreed upon supply cuts.

 

On the domestic front, on Wednesday, the U.S. Energy Information Administration (EIA), reported that in the week ending January 29 U.S. stockpiles (excluding those in the Strategic Petroleum Reserve) decreased by 1.0 million barrels to 475.7 million barrels, better than expectations for a 0.45 million-barrel increase. No barrels were drawn down from the Strategic Petroleum Reserve. U.S. production held steady at 10.9 million bpd. Lastly, net imports increased by 1,315,000 bpd as imports increased by 1,443,000 bpd, while exports increased by 128,000 bpd.

Lastly, we note that the spread between WTI and Brent stands at around the $3 per barrel level. Recall, this is a key metric as the wider the spread, the more attractive U.S. based crude (WTI) becomes to foreign buyers, though we note that strength in the dollar can offset this effect as foreign buyers convert their home currencies to the dollar.

Moving on to the S&P 500, fourth-quarter earnings season is underway, with 80.7% of companies reporting a positive EPS surprise. For the fourth quarter, earnings are up roughly 5.5% year over year vs. expectations for an overall 1.4% advance throughout the season. Revenues for the S&P 500 are up 1.5% vs. expectations throughout the season for a 0.9% increase; 80.7% of companies beat EPS expectations, 15.1% missed the mark and 4.2% were in line with consensus. On a year-over-year comparison basis, 65.13% beat the prior year's EPS results, 32.77% came up short and 2.10% were virtually in line. The best performing sectors have been Information Technology, Financials and Materials while the worst performing has been Consumer Discretionary, Utilities and Real Estate.

© 2015 by Crimson

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