Weekly Stock Market Report: Jays vs. Hawks

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.

Key Drivers for the Week of Aug 23, 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.

• Fed’s Powell cools near term taper fears, but could be appropriate this year
• Focus on U.S. jobs report, strong data necessary but not sufficient for FOMC
• U.S. manufacturing/services ISMs, auto sales, home prices, confidence, trade
• Canada has June and Q2 GDP, manufacturing PMI, trade, productivity
• Japan: retail sales, unemployment, confidence, PMI, housing starts,  capex
• China CFLP manufacturing PMI, Caixin/Markit manufacturing, services PMIs
• Eurozone confidence, manufacturing and services PMIs, unemployment, CPI
• UK August manufacturing, services, composite PMIs
• Switzerland reports KOF leading index, CPI, retail sales, Q2 GDP

Stocks & ETF Watch List (Paid Subscribers)

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: Jays vs Hawks

NORTH AMERICA

Amid more signs, central banks are moving more toward normalization, the mix of Fed Chair Jay Powell’s Jackson Hole comments was very interesting. He indicated a slowing the pace of purchases could be “appropriate” this year if conditions played out as expected. But he also pushed back against the increasingly hawkish stance from several on the FOMC who worry over inflation and argue for a near-term taper announcement. Thus the door was opened for bond and stock bulls on Friday.

Now attention will turn to the U.S. August jobs report as strong data will be necessary, though not sufficient, condition for QE to start this year. Meanwhile, the rise of the Delta variant and the renewal of various mitigation measures, including lockdowns, remain significant downside risks. With global growth clearly decelerating, upcoming global data will be closely monitored given implications for central banks.

Powell’s speech ignited solid gains in bonds and stocks heading into the weekend as the remarks alleviated worries that an announcement on QE tapering would be made near term. The markets had priced in risk such a statement could be made at this week’s symposium. Short covering and dip-buying saw Wall Street rally with more fresh record highs on the S&P 500 (its 50th this year, with over 10 in August) and NASDAQ.

I agree with El-Erian that liquidity from the Federal Reserve is the only factor holding everything together. “The market is concerned the Fed is not going to be able to taper in November or October. That when push comes to shove they will wait. Why? Because COVID is slowing down growth.” On inflation, El-Erian said, “I think inflation is not going to be transitory. I think that people way underestimate inflation dynamics. But we’re not going to find that out until the end of the year.”

Consumer sentiment is failing. US consumer spending in July grew by 0.3% compared to 1.1%. Meanwhile, the core consumption expenditures (PCE) index has soared to levels not seen in 30 years. Rising inflation will be a major driver for markets for the next couple of years. Expect it to come in waves, versus a straight line.

The major indexes also climbed on the week with gains of 2.8% on the NASDAQ, 1.5% on the S&P 500, and 0.96% on the Dow.

We expect to see a push by Democrats to pass a larger infrastructure bill through Congress. At the same time, it is becoming more likely we will see a major fight on raising the debt ceiling and possible government shut down. Republicans are likely to take advantage of Biden’s Afghanistan failure to further weaken the Democrats agenda and run out the clock for 2022 elections.

U.S. nonfarm payrolls (Friday) will be the center of attention as it will help set the stage for the FOMC to announce a reduction in the pace of asset purchases. While we forecast a generally solid report, it is unlikely to be enough to make up the “significant slack” in the labor market noted by Powell last week.

We are forecasting an increase of 800k (median 725k) in nonfarm payrolls for August, after gains of 943k in July and 938k in June. The jobless rate should drop to 5.2% (median 5.2%) from 5.4% in July and 5.9% in June. The workweek is seen holding at 34.8 (median 34.8) for the fourth month. Average hourly earnings are assumed to rise 0.3% (median 0.3) after gains of 0.4% in both June and July, while the y/y wage gain should hold at 4.0% for a second month.

The manufacturing and services sentiment indexes will also be important for the overall outlook. The ISM manufacturing index is expected to tick up to 59.8 (median 58.5) from 59.5 in July, though is still off the 18-year high of 64.7 in March. The ISM services gauge is seen falling to a still-robust 63.0 (median 62) from a 64.1 all-time high in July. Producer sentiment is slowly unwinding the lofty peaks over the March-May period as the lift from stimulus wanes, though levels remain robust. Other data this week includes vehicle sales, consumer confidence, home prices, construction spending, and trade.

The earnings season is coming to a close. On tap Monday is Zoom Video. Tuesday has NetEase and CrowdStrike, while on Wednesday there is Veeva Systems, Chewy, Copart, Brown Forman, Five Below, and Campbell Soup. Bringing up the rear on Thursday are Broadcom, DocuSign, Hormel Foods, Cooper Companies, Hewlett-Packard Enterprises, and Toro.

Canadian reports for Q2 feature this week, with the focus on GDP. Of course, we are already well into Q3, making the Q2 figures less than timely. Consequently, the expected slowing in Q2 GDP (Tuesday) to a 2.5% pace (q/q, saar) from the 5.6% rate of expansion in Q1 will not be a shock given that the flow of data through the quarter points to what is assumed to be a temporary moderation in activity due to third wave restrictions. GDP is expected to accelerate to a 6.5% pace in Q3, although the rise of the delta variant is creating downside risk in terms of the second half growth outlook.

GDP (Tuesday) is anticipated to jump 0.7% in June (m/m, sa) after the -0.3% drop in May as third wave restrictions were relaxed. The Q2 current account (Monday) is seen narrowing to a C$0.5 bln surplus from the C$1.2 bln surplus in Q1. Labour productivity (Friday) is seen bounding 1.6% in Q2 (q/q, sa) after the -1.5% drop in Q1 as hours worked contracted and GDP expanded during Q2. The current account and productivity reports are typically overlooked by the market. The trade report (Thursday) is projected to show a contraction to a C$2.2 bln surplus in July following the C$3.2 bln surplus in June. July building permits (Thursday) are seen rising 2.0% after the 6.9% gain in June.

There is nothing from the Bank of Canada this week. However, the announcement looms next week (September 8), where no change to the 0.25% rate setting is widely expected. It remains the case that the flow of data and events supports the base case scenario for a further reduction in QE to C$1.0 bln by the end of this year, perhaps as soon as the September announcement. However, the impact of the delta variant has clouded the outlook, eroding confidence in the recovery scenario. Consequently, we suspect the BoC may not alter QE in September, instead opting for later in the year to trim QE by another C$1.0 bln. BoC Governor Macklem delivers an “Economic Progress Report” on September 9, which will help further fine tune policy projections following the announcement.

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