Key Market Trends
Tip: Use this as a quick guide on the short-term direction of key markets. I once had a client that would call me nearly every day asking the direction of the markets. This is a quick cheat sheet to know the trend and help understand what is happening with the markets in the short term.
|S&P 500||4173.86||1.49%||61.35||4183.13||4129.58||Strong Bull|
|US Dollar Index||90.199||−0.12%||−0.105||90.428||90.177||Bear|
S&P 500 Sectors
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. 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.
|Sector Name||5-Day Return||1-Month Return||3-Month Return||YTD Return||YTD Return vs S&P 500||3-Year Return||5-Year Return||Trend|
Week Ahead: Careful What You Wish For
Key Drivers for the Week of May 17, 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.
- Inflation worries and growth optimism keep the global markets choppy
- Central banker views of “transitory” price pressures ease some investor concerns
- Covid still problematic in Asia, UK PM Johnson warned over India variant
- U.S. monitors May Empire State, Philly Fed indexes, and housing reports
- FOMC minutes unlikely to surprise, meeting held prior to jobs and inflation shocks
- Canada inflation figures in the spotlight with CPI, retail sales, housing starts due
- China’s slate includes production, retail sales, fixed investment
- Japan Q1 GDP, CPI, PPI, tertiary index, production, trade due
- Australia monitors employment, retail sales; RBA minutes
- Eurozone PMI, GDP, final CPI, trade; German PPI and PMI
- UK employment, earnings, CPI, retail sales, confidence, and PMIs due
INTRODUCTION (Quick Overview)
On May 17, 2021
“Be careful what you which for, you may get it” was on the markets’ minds last week, after U.S., Eurozone and Chinese inflation metrics for April came in much hotter than expected.
Despite central banker warnings, the markets were initially shocked. Longer-dated yields surged, which prompted strong risk-off moves, sinking equities. We noticed that the 10 Year yield rate crossed the 30 Year in March. This could be another indication of rising interest rates.
But by the end of the week, the shock value wore off and the markets regained their poise as investors took central bankers at their word that the jump in prices will prove “transitory.”
Against that background, price data will be at a premium globally this week. In the U.S., the price components of the manufacturing sentiment surveys will be of interest, along with home price figures. The FOMC minutes are due, but should not alter the view that policy is on hold for “some time.” In the Eurozone, final April CPI and German PPI highlight. In the UK, PM Johnson warned the new India Covid variant could delay reopenings. In Asia, regional CPIs and PPIs are slated but attention will also be worsening virus situation, especially in hard-hit India.
The FOMC in particular has not only been rooting for a rise in inflation but has actively participated in helping boost prices via its aggressively accommodative policies. And recent data suggests they may have gotten their wish, and then some. U.S. CPI climbed 0.8% in April and the core surged 0.9%, much hotter than expected.
It was the biggest increase in the headline since 2009 and the largest pop in the core since 1981. As cautioned by the Fed, the 12-month headline index spiked to a 4.2% y/y clip (the biggest since September 2008), and the core rate accelerated to 3.0% y/y (ties the biggest since 1995).
Transportation costs were the major culprit, surging 2.% thanks to a 10.0% jump in used car prices (which should be temporary), but various other factors (that may not be temporary) contributed, including increases in commodity, housing, and services prices.
While the Fed has attributed the climb in y/y inflation largely to “base effects,” but the monthly gains also have accelerated in 2021, suggesting an updraft in inflation even if the y/y inflation spike can be partly discounted. This monthly trend will be closely monitored, especially to see if price pressures become embedded in inflation expectations.
The U.S. data calendar is relatively thin, but does have producer sentiment reports and a few housing releases which will be monitored for more evidence on the robustness of the recovery and of sharp price gains. Of course, as the markets are more accepting of the Fed’s “transitory” view, price indicators may have lost shock value, at least for now. The May Empire State index (Monday) is seen falling to 21.0 in May from the 30-month high of 26.3 seen in April. The Philly Fed index (Thursday) is seen dropping to 40.0 in May from a 48-year high of 50.2 in April. Despite the anticipated declines, the measures will remain at robust levels. As for housing, starts (Tuesday) and existing home sales (Friday) are out this week. Housing starts are expected to pull-back to a 1.710 mln pace, after bouncing to a 15-year high pace of 1.739 mln in March from a weather-depressed 1.457 mln in February. Existing home sales are seen climbing 1.5% to 6.100 mln in April from 6.010 mln in March. These sales are tracked at closing, so there was a lagged hit in March from the harsh weather in February.
The FOMC minutes to the April 27-28 policy meeting are due (Wednesday). There were no surprises in the outcome where rates and QE were left unchanged and the Fed continued to stress officials are not even thinking about thinking about tapering asset purchases. Chair Powell reiterated ad nauseum that the Fed won’t start to taper until “substantial further progress” is made on the employment and inflation goals. Of note, the meeting was obviously conducted before recent data was released showing the spike in prices but weakness in job gains, though they will certainly spark debate at the upcoming June 15-16 FOMC. There’s a host of Fedspeak too, with VC Clarida, Bostic, Kaplan, and Bullard all slated.
Corporate earnings: Monday has Ryanair, Tencent Music, and Natura. Tuesday brings Walmart, Home Depot, Sea Limited, NetEase, Baidu, Trop.com, Take-Two Interactive, and Advance Auto Parts. Wednesday has Cisco Systems, Lowe’s, JD.com, Target, TJX, Analog Devices, Synopsys, Copart, ZTO Express, and Dr. Reddy’s Labs. Thursday has Applied Materials, Ross Stores, Palo Alto Networks, Hormel Foods, and Orix. Deere, Mitsubishi Financial, Sumitomo Mitsui, Mizuho, and Booz Allen Hamilton are due Friday.
Canada: inflation figures are in the spotlight as the market closely monitors the heat up in prices amid massive fiscal and monetary stimulus, along with a recovering economy. Granted, Canada’s recovery is trailing behind the U.S. due to lockdowns domestically, but it is only a matter of time before vaccinations in Canada catch-up to the U.S. And the commodity super cycle has sharply boosted prices, while production challenges and a shifting consumer basket has put upward pressure on consumer goods prices. The CPI (Wednesday) is expected to accelerated to a 3.3% y/y pace in April from the 2.2% clip in March (y/y, nsa), as base effects impact (April of 2020 saw a hefty -0.7% m/m decline after the -0.6% tumble in March of 2020). CPI is projected to rise 0.5% this April after the 0.5% gain in March (m/m, nsa). Uncertainty is elevated around the forecast for this release. Retail sales will also be of considerable interest, as household demand continued to surge in March ahead of what should be a temporary slackening in April as containment measures were hardened amid the surge in infections and hospitalizations. Retail sales (Friday) are expected to rise 2.3% in March after the 4.8% surge in February (m/m, sa). The ex-autos aggregate is projected to expand 2.0% in March (m/m, sa) after the 4.8% gain in February. Housing starts (Monday) are seen slowing to 290.0k in April from 335.2k in March, as the return of restrictions tapped the brakes on the housing market. Existing home sales for April are expected Monday. BoC Governor Macklem holds a press conference (Thursday) to discuss the Financial System Review.
Covid will remain front and center in Asia this week as cases continue to rise through the region. More people have been diagnosed with the disease in Asia over the past two weeks than in the Americas, Europe, and Africa combined, according to the Red Cross. Aside from India and Japan, cases and deaths continue to rise in Indonesia, Thailand and Malaysia, which ultimately will slow economic recovery, with some nascent fears it could spillover to the rest of the world. In addition, inflation threats will remain on investors’ radar screens following the jump in April prices seen globally last week. This week’s regional calendar features data from China, including industrial production, retail sales, and fixed investment. Japan releases the first look at Q1 GDP, along with trade, national CPI and PPI figures. Elsewhere, growth, prices, trade and employment data are slated around the region.
China April industrial production (Monday) is expected to slow slightly to a 21.0% y/y rate from 25.6% in March. But it would be a third straight double digit rate of growth as the global rebound boosts activity. April retail sales (Monday) are penciled in slipping to a 24.0% growth rate after spiking to a record clip 34.2% thanks to the weak 2020 Covid-related comps (base effects). April fixed investment (Monday) should post a 21.0% y/y pace versus 25.6% in March and 38.3% in February and would be the strongest 3-month period since early 2012.
Japan April PPI (Monday) is expected to spike to a 3.0% y/y pace, triple the 1.0% jump in March. That would tie the jumps in September-October 2018 after the 3.1% increase in July-August 2018. There is also the first look at Q1 GDP (Tuesday) which is likely see growth contract -5.0% q/q after rising 11.7% in Q4 and 22.8% in Q4 as the ramp up of Covid infections and accompanying lockdowns weighed on economic activity after two solid quarters of growth. The March tertiary industry index (Tuesday) is seen rising 0.5% m/m from the prior 0.3% gain. Revised March industrial production is due Wednesday. The April trade report (Thursday) should see the surplus narrow to JPY 200.0 bln from 662.2 bln. Exports should remain firm after the record gain in March. March core machinery orders (Thursday) are estimated rebounding 8.0% m/m after falling -8.5% in February. National CPI (Friday) is expected to cool to -0.4% y/y from -0.2% overall, which would be a 7th straight month in deflation. The core rate is seen dipping to -0.2% y/y from -0.1% on a core basis, and that would be a 9th month in contraction, and the 11th out of 13 months.
India April WTI is (Monday) is seen accelerating to a 10.0% y/y pace from 7.4% in March, keeping up the theme of inflation rising. Taiwan April export orders (Thursday) are forecast to have risen 36.0% y/y from 33.3% in March. Q1 current account figures are due Thursday as well. South Korea April PPI is due Friday. Hong Kong April unemployment (Thursday) seen dipping from 6.8% to 6.7%, after hitting 17-year highs of 7.2% in February. Thailand Q1 GDP (Monday) likely remained in contraction, but at a -3.5% y/y rate, versus the -4.2% contraction seen in Q4. Indonesia April trade (Thursday) should see the surplus widen to $1.8 bln from $1.6 bln.
In Australia, April employment will be in the spotlight. Total jobs are seen rising 40.0k in April after the 70.7k gain in March. The unemployment rate is seen holding at 5.6%. The wage price index for Q1 is due Wednesday. Preliminary retail sales for April are due Friday. Sales grew a final 1.3% in March after the -0.8% fall in February. The RBA releases the minutes to the May meeting (Tuesday). The bank left policy unchanged in May, as expected, but upgraded the economic outlook to a 4.75% gain in GDP this year. The RBA suggested that July will bring a review of the yield target and quantitative easing. Interest rates, however are set to remain at emergency levels until at least 2024. The RBA repeated that the “board is committed to maintaining highly supportive monetary conditions” and “prepared to undertake further bond purchases to assist with progress toward the goals of full employment and inflation”, while placing “a high priority on a return to full employment”. There was nothing unexpected from the RBA, but the comments added to speculation that central banks will begin to taper purchases in the second half of this year — depending on virus developments and vaccine rollouts. New Zealand’s calendar has PPI input and PPI output for Q1, due Wednesday.
Eurozone: the recovery continues to strengthen and inflation jitters have made a come back. With central bankers continuing to boost liquidity in the system stock markets at least manage to find buyers after each correction. The German 10-year rate however, is back at pre-crisis levels and the uptrend is likely to continue as long as there is no major setback on the virus front. Restrictions continue to be eased gradually as vaccination programs continue and hopes that the summer holiday season can be rescued this year are strengthening. That should lift services and consumer confidence and keep the ECB on course to at last scale back monthly asset purchase targets again in the third quarter, even if the decision on the future of PEPP will likely be pushed back to after the summer.
The most forward looking of this week’s calendar will be PMI confidence readings (Friday) readings and we expect the services sector to finally move into expansion territory again. The Manufacturing PMI is expected to show a slight deceleration in the headline – to 62.6 (median 62.7) from 62.9, while the services reading is seen rising to 52.1 (median 52.00) from 50.5. That should leave the composite at 55.1, up from 53.8 in the previous month and signaling not just a strengthening of activity, but also a broadening of the recovery. Preliminary Eurozone consumer confidence (Friday) is also expected to lift – but likely to remain in negative territory at -7, which means pessimists continue to outnumber optimists.
The final reading for Eurozone April CPI (Wednesday) is expected to confirm the headline rate at 1.6% y/y, still far below what the ECB would like to see and mainly propped up by base effects from energy prices. Core inflation is just 0.8% y/y, which so far at least backs the ECB’s assertion that the recent uptick will be transitory. Base effects, but also strengthening demand are fueling back increases in import and producer prices and German April PPI (Thursday), expected to jump to 5.2% y/y from, 3.7% y/y.
The rest of the calendar is mainly backward looking. Eurozone Q1 GDP (Tuesday) is expected to confirm a -0.6% q/q contraction in economic activity that quarter, largely due to virus restrictions across major Eurozone countries. The data will overshadow March trade data (Tuesday) and March current account numbers (Thursday). The jump in commodity prices has pushed up the nominal import bill, which is expected to underpin a narrowing in the trade surplus, but the current account surplus is likely to remain solid.
The calendar also has a number of ECB speakers including central bank head Lagarde and chief-economist Lane on Thursday, which are likely to continue to confirm the central banks dovish take on the inflation outlook.
U.K.: the UK economy is building up a head of steam and is on the road to fully reopening by mid June, in line with the government’s timetable (though there are nascent concerns about Indian Covid variant cropping up in some areas). There is very little prospect of another legally binding referendum on Scottish independence anytime soon after the Scottish National Party failed just short of achieving a majority in Scotland’s parliament at last week’s elections. Opinion polls show there is little appetite amongst the Scottish people for another vote on independence. The country also remains evenly divided on the issue, just as it was heading into the referendum in 2014, despite the majority having since voted to remain in the EU at the 2016 Brexit vote. All this gives PM Johnson plenty of political ammunition to resist the SNP’s calls for another vote.
The calendar this week is busy, featuring the labour market report coving March and April (Tuesday), April inflation data (Wednesday), May consumer confidence and April retail sales (Thursday), along with the preliminary May PMI survey results (also Thursday). The labour market report is expect to show an unchanged unemployment figure of 4.9%, which is artificially being held down by the government’s pandemic furlough scheme. Average household income is expected to rise by 4.6% y/y in the three months to March in both the with- and without-bonus readings. As for inflation, the well documented pandemic-era y/y base effect will start to kick in, with headline CPI expected to jump to a rate of 1.4% y/y from 0.7% y/y in March. There is upside risk to this release. Consumer confidence should show improvement in the May survey from Gfk on the back of the successful Covid vaccination program and reopening economy. April retail sales, meanwhile, are expected to rise by a solid 4.0% m/m.
Switzerland: the calendar is quiet this week.
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 weekly 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
This group of stock/ETF picks is likely to experience growth and perform well into the near future. Click here.
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 are 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.
Economic Data Calendar
We have a light mid-May release schedule, dominated by the start of the April housing and May producer sentiment reports. We expect housing starts to ease from a 15-year high in March, while permits climb toward their 15-year high from January. We expect a modest existing home sales rise as families are hesitant to put homes on the market, despite a likely median price rise from the record-high in March. We expect small May drops for the Empire State and Philly Fed indexes from a 30-month high for the former in April, and a 48-year high for the later. We expect a big leading economic index bounce.
Complete Calendar: Click here to view the complete complete calendar of all the events.
Below are the key events, forecasts and information for the week:
Week of May 17
The flat April retail sales figure, after big upward March revisions, suggest that powerful lift for sales from the vaccine distributions and stimulus deposits may have peaked at the start of Q2. We expect ongoing moderate gains in consumer spending through the remainder of 2021 as activity in the services sector ramps up. Yet, retail sales will likely initiate a prolonged pull-back through the end of Q3 as the one-off boost from stimulus unwinds. We expect monthly headline consumption gains in the more conventional 0.4% area going forward, after an assumed a 0.9% April gain as restaurant activity accelerated — as partly gauged by today’s 3.0% April climb in retail sales for food services and drinking places after an outsized 13.5% March surge.
Just as the real-sector updraft in the economy from stimulus spending may be “over the hump,” we’re seeing a dramatic climb in inflation expectations alongside the spike in the various domestic inflation gauges since the start of 2021. The preliminary May Michigan sentiment report revealed a surge in the 1-year inflation gauge to a 13-year high of 4.6% that matched highs in April and March of 2011, while the 5-10 year inflation measure jumped to a 10-year high of 3.1% from 2.7%. We now expect the 1-year inflation gauge from the consumer confidence report to reach a new 12-year high of 6.7% in May from a prior 12-year high of 6.7% in April. Widespread shortages have caused price spikes across sectors, as most recently displayed with the re-emergence of gasoline lines with the Colonial pipeline shutdown.
Households are now scrambling to find homes, building materials, vehicles, and now gasoline, while economists are writing off the spike in nearly every y/y inflation metric as the transitory impact of “base effects.” Hard comparisons for inflation are clearly important, but this is obscuring the spike nevertheless underway in a wide array of prices. Today’s May drop in the headline Michigan sentiment index, alongside a similar May drop in the IBD/TIPP index, may suggest that confidence is more generally peaking now that the “sugar-high” from massive stimulus distributions is starting to unwind. The public focus until now has been on the endless supply of federal funds, but the focus going forward may shift to the rising cost of living and the associated deterioration in “real” purchasing power.
Empire State/Philly Fed Index: 21.0/40.0
The Empire State index is assumed to slip to 21.0 in May from a 30-month high of 26.3 in April and a 7-month low of 3.5 in January. The Philly Fed index is seen easing to 40.0 in May from a 48-year high of 50.2 in April and a previous 11-month high of 30.1 in January. Despite the pullbacks, levels should remain robust. These diffusion indexes will remain elevated through at least mid-2021 as factory activity continues to ramp up. Coronavirus vaccines and two rounds of stimulus payments in Q1 have provided a solid lift for sentiment, alongside the upward pressure on output from lean inventories, and rebounding demand in many industries well above pre-pandemic levels.
Housing Starts: 1.710 mln
Housing starts are expected to ease to a 1.710 mln pace, after bouncing to a 15-year high pace of 1.739 mln in March from a weather-depressed 1.457 mln in February. Permits are expected to improve to 1.770 mln from a 1.766 mln in March and a 15-year high of 1.886 mln in January. We saw a new 15-year high for new home sales in March, and prior 14-year highs for pending and existing home sales in 2020. We saw a 12-year high for the MBA purchase index in mid-January, though these figures fell sharply into February and have posted only modest climb since, as lean inventories have crimped sales while boosting prices. Before the pandemic, permits were already following a solid growth path that began in Q2 of 2019, fueled by low mortgage rates, and this strength has been exacerbated by the migration of families to suburbs. We expect a 1.719 mln average for starts in Q2, another new high following new recent highs of 1.613 mln in Q1 and 1.584 mln in Q4. We expect a 1.772 mln average for permits in Q2 that falls short of the 1.791 mln average in Q1.
Initial Jobless Claims: 470k
Initial jobless claims are expected to fall to -3k to 470k in the BLS survey week, following last week’s drop to 473k from 507k. Initial claims have turned sharply lower over the past five weeks, following a restrained drop-back through early April from the holiday peak. Claims are expected to average 475k in May, after averages of 582k in April, 724k in March, and 800k in February. The 470k May BLS survey week reading would follow prior survey week figures of 566k in April, 765k in March, and 847k in February. We assume a 700k May payroll rise after the surprisingly lean 266k April gain.
Continuing claims fell by -45k to 3,655k in the week of May 1, following an upwardly revised 3,700k figure. We expect continuing claims to fall -55k to the 3,600k area for the week ending May 8. The downtrend in the continuing claims data has moderated over the past five weeks, just as the drop in initial claims has picked up steam. We expect a continuing claims drop of just -100k between the April and May BLS survey weeks. We saw larger prior drops of -188k in April, -628k in March, -409k in February, -555k in January, and -705k in December.
Leading Indicators: 1.5%
The leading economic index likely bounced 1.5% in April, led by claims and ISM orders data, after a 1.3% surge in March, but a weather-depressed -0.1% February drop. The index continues to reverse the huge 2020 pandemic drops of -6.3% in April and -7.5% in March. We expect gains across most components in April.
Existing Home Sales: 6.100 mln
We expect existing home sales to rise 1.5% to 6.100 mln in April from 6.010 mln in March, versus a 14-year high of 6.860 mln in October. These sales are tracked at closing, so we saw a lagged hit in March from bad weather in February. Pending home sales rebounded just 1.9% in March after a -11.5% plunge in February, suggesting only a modest bounce-back in existing home sales, as also signaled by a restrained 3.6% March rise in the MBA purchase index after a -15.4% February decline. The MBA purchase index fell -4.5% in April, as families appear hesitant to put their homes on the market despite huge price gains. The months’ supply of homes posted a 5-month string of new all-time lows through January to a particularly tight 1.9, before rising slightly to 2.1 by March. The median sales price is pegged to reach a new record-high of $332,000 in April from a prior all-time high of $329,100 in March. We expect a slowing in the y/y median price gain to a still firm 15.8% from 17.2% in March. In Q1, we saw an average sales pace of 6.303 mln, after a 6.657 mln rate in Q4, and we expect a slower 6.207 mln pace in Q2.