Report (Premium Edition) 09-06-2021

Key Market Trends

Tip: Use this as a quick guide on the short-term direction (1-2 weeks) of key markets. It is not a signal to buy or sell, just to show the trend. This is a quick cheat sheet to know the trend and help understand what is happening with the markets in the short term. I started making this section years ago because once had a client that would call me nearly every day asking the direction of the markets.

S&P 500 Sector Trends

Tip: Use this section to know the performance of various sectors, weight portfolios, or look for trades. Modern portfolio theory stresses the importance of diversification, but recently several sectors like technology have outperformed others like utilities. This is also a way to narrow the sectors to find investment opportunities.

REIT Alert: Due to Covid-19, there is a large percentage of people that have not paid rent or mortgages. Following the Supreme Court ruling stopping the eviction moratorium, we are very worried about the effect it could have on real estate investment trusts (REITS) value. Even though the sectors may trending bullish, we believe that REITs could have a significant drop in value.

Key Drivers for the Week of Sept. 6, 2021

TIP – This is a 1-minute brief bullet-point summary. It is a tool that gives investors and financial a fast and simple list of what to watch for and talking points for the week.

• QE tapering prospects in the spotlight with ECB, RBA, BoC meetings
• FOMC likely to push off QE tightening announcement to at least November
• Inflation fears to come back as Congress debates spending & debt ceiling
• Bonds selloff on inflation dynamics, tapering still in the cards eventually
• U.S. calendar includes Fedspeak with Williams; $120 bln in coupon auctions
• China data on trade, CPI, PPI; Japan PCE, revised GDP, core machine orders 
• German ZEW investor sentiment, manufacturing orders, production, trade
• UK reports CIPS construction PMI, home prices, production, and GDP 

Stocks & ETF Watch List

Tip: Use this section to find stocks and ETFs to add value to your portfolio by increasing the alpha (return) and decreasing beta (beta). Our list is updated monthly to help provide our readers with timely insights. Readers should do their own research before making any investment. In order to make our report easier to read, we are now including the stocks as lists for readers in separate posts.

• Inflation Stock Picks: List of stocks that we think should perform better in a rising inflation environment. Click here
• Auto Parts Stock Picks: Auto parts companies are likely to see their stocks rise as the average age of cars and light trucks increased from 11.9 years in January 2017 to 12.2 years in January 2021, according to new data from IHS Markit. Below are the top auto parts companies that investors should buy now before the profits roll in. Click here.
• Solid Picks: This group of stock/ETF picks is likely to experience growth and perform well into the near future. Click here.
• Dividend Stocks: List of stocks that have excellent dividends and business performance. Click here.
• Dividend Growth Stocks: List of stocks that have a history of growing dividends. Click here.
• Dividend ETFs Picks: This list of ETFs is selected for their ability to pay dividends. Click here.
• Dogs of the Dow: This list of DOW stocks based on H. G. Schneider’s Article in the Journal of Finance in 1951 that used the price-earnings ratio. The general idea is that blue-chip companies that pay a dividend are more likely to withstand an economic downturn. Click here.

Week Ahead: Tapering vs Inflation

NORTH AMERICA

U.S. markets were closed Monday for the Labor Day holiday. Labor was the focus on Friday after the disappointing jobs release. That report, along with other recent data, has caused us to revise our Q3 GDP forecast lower to a 5.3% clip from 7.0%, and other economists have slashed their outlooks too.

While this should be only a temporary development, it should be sufficient to keep the FOMC, and especially Chair Powell, in cautious mode. After all, it was he who recently stated there is still “significant slack” in the labor market, and this report will only support those concerns. This week’s calendar is heavy on Fedspeak and supply but light on data.

Fedspeak will be the highlight this week for insight into their perceptions on the economy. There are 8 officials on the docket, including several current and 2022 voters. Most of the attention will be on NY Fed’s Williams (Wednesday) who along with Powell and Clarida, is a key decision-maker (the NY Fed holds a permanent vote on the FOMC). His comments will be closely monitored for his perspectives in this environment. He is one of the most dovish on the Fed and we expect he will lean to the cautious side.

Williams will also give opening remarks (Thursday) at a conference on racism. Other Fed speakers won’t have any impact, and none are slated to speak on the economy. Kaplan, a hawk, and nonvoter this year or 2022 will hold a virtual town hall (Wednesday). Governor Bowman (permanent voter) will discuss community banking (Thursday). The dove Daly (Thursday), a current voter, discusses gains The Economic Gains from Equity. And Evans (Thursday), also voting dove, gives opening remarks and the Fed has already indicated he will not be discussing policy or the economy. Also, Kaplan, Kashkari (dove), and Rosengren (hawk) will take part in an event on racism and the economy. The hawk Mester (Friday) speaks virtually before a Bank of Finland conference.

The $3.5 trillion infrastructure bill hit a wall this past week as Sen. Manchin and other moderate opening refused to support it. This combined with the failure in Afghanistan has caused the Democrats to lose political steam to push their increased spending and other initiatives by using simple majority and budget reconciliation.

However, the debt ceiling has passed and Congress will need to authorize an increase soon. Insiders are telling me that Republicans are likely to stand firm and face a possible shutdown as it would be another failure on Biden and the Democrat leadership.

We think the more likely scenario will be that Congress passes a $1 trillion dollar bill similar to the Senate and increases the debt ceiling limit. It will likely increase inflation fears, but not as much as the $3.5 trillion.

Speaking of inflation, the White House quietly increased its inflation forecast to 4.8% annualized from 2%. It does expect inflation to go down next year, but this is more than double their projection.

John Paulson, famous for making billions betting against the housing market in 2008, is hedging against inflation with purchases in the energy and precious metal sectors. Paulson explains in a recent interview, “I think we have inflation coming well in excess of what the current expectations are,” showing expectations for gold by stating that “gold does very well in times of inflation.” 

Gold bugs may finally get a win. During the 1970s rising inflation, gold prices increased over 4000% and houses went up 300%. Everything I see is a repeat of history. This doesn’t mean I am suggesting to overload a portfolio with “gold coins.” Please look at our inflation stock picks and dividend ideas. If you haven’t already done so, start moving from growth to more value. As interest rates increase to stop inflation, this will pull capital from growth stocks.

I watch rental rates (which are up over 13%) for real inflation numbers and indications. The second and more common thing to watch is the 10YR. Unfortunately, the government has been playing games with the 10YR, so it may not accurately give you a true idea of the inflation trend. I suspect it will make significant jumps once inflation is “out of the bag.” It is currently up 2.15% and about to break the short-term bear trend.

Supply will be an interesting test of domestic and overseas demand. The bond market cheapened measurably on Friday, even after the poor jobs report, instead focused on inflation and auction setup. The Treasury is selling $120 bln in 3-, 10-, and 30-year maturities, including a $58 bln new 3-year note (Tuesday), along with a trimmed $38 bln reopened 10-year (Wednesday) and a reduced $24 bln reopened 30-year (Thursday). Also outlined was an unchanged $34 bln 52-week bill sale (Tuesday). The 3- and 6-month bill auctions (Tuesday) were left at $99 bln for a fourth straight week with $51 bln for the shorter bill and $48 bln for the longer.

The earnings slate is light but there are several heavyweight announcements on tap. Tuesday brings Coupa Software, while lululemon, SentinelOne, Gamestop, and RH are slated for Wednesday, with Oracle, and Affirm Holdings Thursday, and Kroger on Friday.

Canadian markets are closed Monday for the Labor Day holiday. There are two heavy hitters on the calendar — the Bank of Canada’s policy announcement and the August employment report. Our projection is for no change to the 0.25% rate setting at the BoC. The flow of data has undermined the base case scenario for a further reduction in QE to C$1.0 bln by the end of this year.

Indeed, the impact of the Delta variant has introduced fresh uncertainty to the outlook, eroding confidence in the recovery scenario. Consequently, we suspect the BoC will not alter QE next month, opting for later in the year to trim QE by another C$1.0 bln. BoC Governor Macklem delivers an “Economic Progress Report” (Thursday), which should help fine-tune policy projections following the announcement. Overall, the combination of the unexpected drop in Q2 GDP, Statistics Canada’s projection that the economy followed up a damp Q2 with a contraction in July GDP and the upcoming Federal election suggest that the BoC will not rock the boat in terms of the growth/inflation outlook or policy.

Meanwhile, the August employment report (Friday) is expected to show a 100.0k rise after the 94.0k gain in July. The jobless rate is pegged at 7.2% from 7.5%. The forecast risk remains elevated to the downside and upside on the jobs report estimates. Capacity utilization (Friday) is expected to fall to 81.0% in Q2 from 81.7% in Q1. The August Ivey PMI is due Wednesday.

ASIA

Signs of slowing in the region, and especially China, are becoming more prevalent and worrisome. covid remains a big threat in many parts of Asia, and the various restrictions and lockdowns have already shown up as slower economic activity. Japan PM Suga resigned last week after failing to get infections under control. Supply chain disruptions are also impacting severely, limiting activity with key trading partners, with bearish repercussions. The auto sector has been especially hare hit.

Additionally, China’s regulatory crackdowns are intensifying a disquieting atmosphere. Chinese data has been fading of late and is expected to remain weak, though that could see support from the PBoC. As for covid, Southeast Asia remains a hotbed of infections and slow rates of vaccination leave the region at risk. In Japan, cases have slowed some, though states of emergency remain in effect in many prefectures. This week’s regional docket is relatively light, but will feature key data from China, including the August trade report, and August CPI and PPI. Japan’s docket has July PCE and revised Q2 GDP. Elsewhere, a light dusting of prices, trade and manufacturing and employment data dot the calendar. For central banks, Australia’s RBA meets, with no change to its 0.10% OCT expected. Malaysia’s Bank Negara is seen on hold as well, with the OPR steady at 1.75%.

In China, the August trade report (Tuesday) should see the surplus widen slightly to $57.0 bln from $56.6 previously. This would mark the largest surplus of the year. August CPI and PPI (Thursday) are expected to see the former steady at 1.0% y/y and the latter accelerate to a 9.2% y/y pace from 9.0% in July. CPI turned positive in March after being negative in January and February. The headline rate has since eased from 2021 highs of 1.3% seen in May. August loan data are tentatively due Thursday as well. Japan has July consumption (Tuesday) expected to improve to a flat y/y pace, after falling -5.1% in June. The July current account (Wednesday) should widen to JPY 1,00.0 bln from JPY 905.1 bln. Revised Q2 GDP (Wednesday) is expected to improve a tick to a 1.4% q/q pace from the preliminary 1.3%. August bank loan figures are also due Wednesday. July core machinery orders (Thursday) are expected to bounce 2.3% m/m from -1.5% in June.

India July industrial production (Friday) is penciled in at a 10.0% y/y pace, down modestly from the 13.6% rate previously. Taiwan’s August CPI (Tuesday) is forecast to have cooled slightly to 1.9% from 2.0%, while August exports (Tuesday) are expected to remain solid at a 35.0% y/y from 34.7%. Risk is for some slowing. South Korea July current account (Tuesday) is penciled in at $9.0 bln from $8.8 bln in June. Thailand’s August CPI (Monday) will likely be steady at 0.5% y/y. Malaysia’s Bank Negara meets Thursday, with its 1.75% OPR seen unchanged. July industrial production (Friday) is projected dipping slightly to a 1.3% y/y clip from 1.4%. Philippines August CPI (Tuesday) is expected at a steady 4.0% y/y while July unemployment (Tuesday) is expected to tick up to 8.8% from 8.7%. The July trade report (Thursday) should see the deficit widen to $3.0 bln from $2.8 bln.

Australia’s calendar features the RBA meeting on Tuesday, where the OCR is expected unchanged at 0.10%. The focus will be on whether or not the Bank continues to taper its QE program, though most expect no further taper at this meeting. There have been some calls that due to covid lockdowns in Australia, the RBA will actually reverse its previous move in July, reducing its bond purchases from A$5 bln to A$ 4 bln. RBA governor Lowe will speak at the ANIKA Foundation on Thursday. For data, the August Melbourne Institute inflation gauge is due Monday, along with August ANZ job ads. New Zealand’s calendar is empty this week.

EUROPE

Eurozone: the focus will be on the ECB meeting (Thursday). After the minutes to the last ECB minutes indicated that one of the arguments in favor of strengthening the dovish signal on rates was that this could reduce the need for the other instruments, there have been a number of Executive Board members flagging the possibility of a slight tapering announcement.

The final decision on PEPP won’t be taken before December, though and we expect President Lagarde to play down the slight reduction in monthly asset purchase levels and focus on the very dovish guidance on rates and the fact that the ECB remains willing and ready to step up support again if needed. The updated set of forecasts meanwhile is likely to bring yet another upward revision to growth projections, with the economy now expected to reach pre-crisis levels by the end of the year.

The most forward-looking of the data releases is German ZEW investor sentiment (Tuesday), which is expected to correct to 31.0 (median 30.0) from 40.4, as investors have turned somewhat more cautious against the background of virus developments across the Asia-Pacific region, and in particular and of course amid the prospect that central banks are preparing to scale back the degree of stimulus that they are currently providing.

Real sector data meanwhile are unlikely to challenge the picture of survey findings, which have indicated that growth is moderating after the initial surge following the end of lockdown measures and introduction of vaccines. Capacity constraints and supply chain disruptions also act as a speed limits for overall growth. German manufacturing orders (Monday) are expected to show a correction of -0.5% m/m (median -0.9%) from the surge of 4.1% m/m in June. German industrial production (Tuesday) is expected to have lifted 0.8% m/m (median 0.9%), after contracting -1.3% m/m in the previous month and the German trade surplus (Thursday) is likely to narrow slightly against the background of sharply higher import prices.

The final reading for Eurozone Q2 GDP (Tuesday) could bring a slight upward revision to 2.1% q/q from q/q, but, again that would only add to signs that Eurozone output will reach pre-crisis levels earlier than initially expected. The breakdown meanwhile is likely to confirm that consumption was the main driver of activity in Q2.

U.K.: incoming UK data have also indicated a slight moderation in the pace of expansion with surveys highlighting the impact of capacity constraints and supply chain disruptions. Especially in the services sector companies are struggling to find staff and that is also adding to pay pressures. This week’s data round is mainly backward-looking and unlikely to change the overall picture. The most forward-looking number in the calendar is the CIPS construction PMI on Monday, which is expected to drop back to 55.0 (median 56.0) from 58.7 in July. House price data from the Halifax is due on Tuesday and is likely to show a sharp rise in prices despite the tapering of the stamp duty holiday.

Production and GDP numbers for July meanwhile should confirm the moderation in growth that was already evident in survey findings and we are looking for a monthly GDP rate of 0.6% (median 0.7%) – down from 1.0% in June. Q2 GDP growth meanwhile is expected to be confirmed at 4.8% q/q.

Switzerland: The calendar is very quiet this week, with only sa unemployment data due on Tuesday. The rate has already dropped to just 3.0% and is likely to continue to trend lower.

Data Week of September 6

We have only a few releases in the holiday-shortened first full week of September. We expect a moderate 0.3% August PPI headline rise with a stronger 0.5% core price gain, following gains of 1.0% for both in July and June. We expect solid growth for wholesale sales of 1.0% in July, alongside a 0.6% inventory gain.

Week of September 6

The two big surprises of this past week were that semiconductor and other supply chain disruptions were much more severe in August than was appreciated at the time, and that a sharp under-performance for the August payroll figures reversed the good news in the July data, leaving a likely sub-600k average payroll gain in Q3 after the peak-average of 615k in Q2.

The first surprise was revealed via a -10.7% August plunge in vehicle sales to a 13.1 mln pace, though industry reports are reinforcing the notion that shortages are getting worse, given big production cuts at Toyota, and reports of a German auto production plunge. Shortages are expected to extend into 2022, and the disruptions reach beyond the auto sector. Electronics for the holiday season will be in short supply, both because of semiconductor shortages as well as port closures in Asia, as holiday merchandise usually ships over the August-October period.

The second surprise brings our payroll assumptions back to where they were in June, though we’ve marked-down our forecasts for the coming months on the assumption that the delta variant is taking some toll on the service sector rebound. We have a 586k average payroll gain thus far in 2021, which is roughly in line with 6% real GDP growth. We never thought that official forecasts from the FOMC and CBO of 6%-8% real 2021 GDP growth made sense, and we still expect the FOMC forecasts to be ratcheted down. The full range of 18 FOMC GDP estimates for 2021 of 6.3%-7.8%, let alone the 6.8%-7.3% central tendency, lie above our 6.1% estimate. The release of the advance Q2 GDP figures after the June FOMC meeting largely made downward revisions inevitable, but the last jobs report should seal that deal.

Initial Jobless Claims: 335k

Initial jobless claims are expected to fall -5k to a 335k new cycle-low, after a drop to a 340k prior cycle-low from 354k. Claims tightened in early-July, widened in late-July, and tightened significantly again through August due to counter-swings relative to the auto retooling seasonal pattern, which likely didn’t occur much this year due to semiconductor shortages. Claims are poised to average 355k in August, after averages of 394k in July, 394k in June, and 428k in May. The 349k August BLS survey week reading was well below last month’s reading of 424k, as well as the 418k in June, 444k in May, and 566k in April. We assume a 475k September payroll rise, following the lean 235k August gain, but prior outsized 1,053k July increase.

Continuing claims fell by -160k to a 2,748k cycle-low in the week of August 21, following an upwardly revised 2,908k figure. We expect continuing claims to decline -8k to a 2,740k new cycle-low for the week ending August 28. Continuing claims have fallen sharply over the past three weeks, and we assume some flattening in this steep downtrend. Continuing claims fell by -404k between the July and August BLS survey weeks, after drops of -116k in July, -199k in June, -42k in May, -188k in April, -628k in March, -409k in February, and -555k in January.

PPI/Core: 0.3%/0.5%

We expect a 0.3% July PPI headline rise with a 0.5% core price gain, following gains of 1.0% for both in July and June. As expected readings would result in the y/y headline PPI metric holding at 7.8% from July, and we expect a rise in the y/y core measure to 6.6% from 6.2% in July. August looks poised to represent the peak for this metric, especially given the moderation in energy prices into late-August that implies lean September figures. The massive PPI climb since the start of 2021 exceeded the uptrend in headline and core CPI data, and both sets of gains are chasing outsized increases in the trade price measures, alongside ongoing supply constraints that have provided a powerful lift for the inflation indexes.

Wholesale Sales and Inventories: 1.0%/0.6%

Wholesale sales are estimated to grow 1.0% in July, after a 2.0% June rise, while inventories grow 0.6% after a 1.2% (was 1.1%) June gain as shown in the advance indicators report. Rising commodity prices likely continued to lift the nominal measures in July, as was likely seen in prior months. The I/S ratio should hold steady at the 6-year low of 1.22 for a second month, matching the ratio seen in March and April as well, versus an all-time low of 1.12 in June of 2008 and an all-time high of 1.66 in April of 2020. The ratio is struggling to climb back toward the pre-pandemic reading of 1.32 in January and February of 2020. Business inventories should rise 0.5% in July, with other component readings of 0.5% for factories and 0.4% for retailers. The wholesale sector has been boosted by the robust recovery in trade with China, though trade will slow in August and September given the closure of some major ports in China. International trade is disproportionately captured at the wholesale level of production.