Evergrande and the Impact on the Markets

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Evergrande and the Impact on the Markets

U.S. equities overcame a rough start the week, due to Evergrande uncertainty, then finished higher. Stocks went on a roller coaster ride, with the VIX soaring then crashing post-Fed, whom provided expected monetary policy guidance. Questions remain how quickly tapering may be completed and how early rate hikes may appear. Last week all indexes finished up; Dow 0.62%, S&P 0.52%, and Nasdaq 0.03%.

Evergrande Impact Last Week

A volatile week for stocks turned positive mid-week. Initially major indexes dropped 2-3% on fears of systemic risk from Evergrande, the Chinese
real estate company. Indexes rallied later as the Fed downplayed rate hikes while furthering taper discussion. On Monday, investors were skittish by the debt crisis at property developer China Evergrande Group. China President Xi Jinping is trying to reduce property-sector leverage to make housing more affordable for the people of China.

Back in the US, Federal Chair Powell took note of the global supply chain disruptions. Powell said Friday, “I’ve never seen these kind of supply-chain issues, never seen an economy that combines drastic labor shortages with lots of unemployed people and a lot of slack in the labor market.” His comments come after Wednesday’s post meeting statement outlining the Fed’s reduction of monthly asset purchases as soon as its next meeting in November. The other notable projection was half of the 18 officials expect to raise interest rates by the end of 2022. This contrasts with the June meeting where most Fed officials expected rate increases in 2023.

In other news, U.S. housing data was mostly positive, with housing starts and new home sales rising in August, while existing home sales slipped 2% as surging prices hampered first-time buyers.

Week Ahead

Durable Goods Orders released today and showed positive signs. Inventory data follows later in the week. Inflation may be on the backburner right now, but it is not forgotten. With prices potentially staying elevated and the labor market moving back towards full employment, questions remain on how quickly tapering may be completed and how early rate hikes may appear. Futures markets have priced in the first rate increase for December 2022. Year-to-date index performance; Dow up 13.69%, S&P up 18.62%, and Nasdaq up 16.75% through the close on Friday.

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Inflation Expectations Rising

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Inflation Expectations Rising

U.S. equities fell into the weekend despite strong manufacturing data, as inflation expectations weighed. Stocks dropped for a second straight week. Last week all indexes finished down. The Dow down 0.05%, S&P 0.55%, and Nasdaq 0.46%.

Last Week

The S&P 500 and Nasdaq finished down less than 1%. Volatility rose with the VIX closing at a 1-month high. U.S. manufacturing numbers surged, and optimism for the next 6 months remained high. The Empire State index leapt 16 points to 34.3 in September. The Philly Fed index rose 11 points to 30.7, above estimates. Industrial production increased 0.4% in August after a revised 0.8% gain the prior month. The miss was largely due to Hurricane Ida and supply chain inefficiencies. Capacity utilization climbed to 76.4%, the highest rate since December 2019. U.S. retail sales surprised with a 0.7% gain in August despite supply chain issues and escalating Covid-19 cases.

Consumer inflation still showed a significant bump but came in less than feared. A New York Fed household survey showed inflation expectations continued to ramp up in August. Internationally, August wholesale prices sustained gains in Germany and Japan on solid global demand. CPIs in Canada and the UK surged to multi-decade highs. Weak Chinese data also contributed to the market’s choppiness. Retail sales only grew 2.5% in August versus forecasts of 7%. Industrial production came in slightly below predictions at 5.3%. British retail sales fell for a fourth straight month in August, even as payrolls increased by a record 241,000. Australia’s employment dropped more than expected, supporting the Reserve Bank’s decision to delay a review of weekly bond purchases.

Week Ahead – Inflation Expectations

All eyes will be on the FOMC as they wrap up their two-day meeting on Wednesday. Pressure is mounting for more specifics on tapering given recent U.S. economic data. According to a Bloomberg survey of economists, tapering is expected to begin in November 2021. Chairman Powell has indicated the decision to taper is independent of any decision to raise interest rates. With unemployment still above 2019 levels, the Federal Reserve is expected to be patient with increasing rates.

U.S. housing reports will also drop this week. The NAHB Index reported positive numbers. Housing start data reports on Tuesday, existing home sales on Wednesday, and new home sales on Friday. The S&P 500 is only down about 2% this month. More volatility may be on the horizon if issues like the debt ceiling gain momentum. Treasury Secretary Yellen has urged Congress to increase the debt limit as soon as possible to avoid any economic turmoil. The debate could influence the Fed’s actions as well.

Investors will focus on next week’s Fed meeting and the timing of tapering. Tapering is often viewed as a potential negative catalyst in the near term. However, strong economic growth coupled with record corporate profits can potentially keep the market moving higher. Investors will also be watching to see if Evergrande, the Chinese real estate company with a mountain of debt, poses any systemic risks to global markets. Year-to-date index performance; Dow up 13.00%, S&P up 18.02%, and Nasdaq up 16.73% through the close on Friday.

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Impact of a Slowing September

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Impact of a Slowing September

Stocks pulled back, but the S&P 500 and Nasdaq still sit firmly above their respective 50-day moving averages. U.S. equities eased off record highs as slowing growth prospects and persistent inflation led to some profit taking. With all the global central bank commentary last week, anticipation is building for the Fed’s next meeting on September 21-22. In the meantime, this week presents plenty of additional data for consideration. Last week, all indexes finished lower. The Dow finished down 2.1%, S&P down 1.7%, and Nasdaq down 1.6%.

Last Week – Slowing Data

U.S. equities eased off record highs as slowing growth prospects and persistent inflation led to some profit taking. The S&P 500 and Nasdaq both slipped 1.5%+. Market breadth was quite weak, as all 11 S&P 500 sectors finished in the red, with consumer discretionary the outperformer. The S&P 500 Index returned -1.68% last week, with all four days in the shortened holiday week posting declines. Including the previous Friday, the index has marked five consecutive losing days after hitting an all-time closing high. Equity markets have followed an upward trend most of the year.

Goldman Sachs downgraded its 2021 U.S. growth estimate to a 5.7% annual rate, below the 6.2% consensus. The Fed’s Beige Book noted that growth had “downshifted slightly to a moderate pace”, slowing led by escalating inflation and a shortage of goods. On the labor front, U.S. job openings hit record highs for the fifth straight month, climbing to 10.9 million in July and exceeding total unemployed by 2.5 million. Workers continued to quit jobs at historically high rates, and new unemployment claims fell to another pandemic low of 310,000. The four-week moving average of 339,500 was also a pandemic low, indicating there has not been a rise in layoffs due to the Delta variant.

Producer prices in the U.S. surged 0.7% in August, above estimates but below July’s 1% pace. Excluding food and energy, core PPI only increased 0.3% Month-over-Month, but still 6.3% higher Year-over-Year. August’s year-over-year increase in producer prices is the largest on record. Labor and materials
shortages and supply chain bottlenecks contributed to the price increases. Regarding inflation, the CEO of Union Pacific said in an interview last week that “it doesn’t look like it’s temporary,” and that cargo congestion will likely continue well into next year.

Week Ahead

With all the global central bank commentary last week, anticipation is building for the Fed’s next meeting on September 21-22. This week presents plenty of additional data. U.S. CPI is reported on Tuesday, and consumer inflation updates from Germany, the UK, and Canada will also filter in this week. U.S. manufacturing numbers are expected to decline, with updates coming in the Empire State and Philly Fed indexes along with the industrial production report. U.S. retail sales have stalled over the past 3 months, and Thursday’s August report is anticipated to show a continued drop. China’s retail sales are likely to weaken considerably Year-over-year. The week finishes up with UK retail sales and U.S. consumer sentiment.

Year-to-date index performance; Dow up 13.07%, S&P up 18.7%, and Nasdaq up 17.28% through the close on Friday.

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Job Data Disappoints, How did Markets React

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Job Data Disappoints, How did Markets React

U.S. equity indexes managed to close mostly higher despite disappointing job data. The S&P 500 and Nasdaq established new weekly closing highs. Investors weighed the impact of rising Covid-19 cases on the recovery. Growth outpaced value as the Nasdaq (+1.5%) led the advance last week. A holiday-shortened week is here and the economic calendar will be more focused on events abroad. The U.S. economic data is light. The most anticipated announcement will come from the ECB on Thursday.

Last Week Highlighted by Job Data

The S&P 500 finished August with its 7th straight monthly gain. Financial stocks dropped 2.3%. The dollar continued its slide after the economy added just 235,000 jobs in August. This number was far below expectations of 720,000. The ADP report showed that private payrolls also increased much less than forecast. The labor numbers cast doubt on the Fed’s next move on tapering. Manufacturing jobs rose, but services hiring slowed as the market braces for several jobless aid programs expiring this week. On the positive side, the unemployment rate fell to 5.2%. The underemployment rate dropped sharply to 8.9% from 9.6%, and jobless claims hit 340,000, a new pandemic low.

Other U.S. data reflected a still expanding economy that nonetheless is showing some cracks. Consumer confidence fell in August to the lowest level since February. Chicago PMI deteriorated more than expected to 66.8 from 73.4. Factory orders and the ISM Manufacturing PMI picked up in August. However, the services PMI fell from its July all-time high reading, consistent with the jobs report. U.S. home prices rose 18.6% Year-over-Year in June. The largest annual gain in history. Crude oil saw little volatility despite shutdowns from Hurricane Ida. OPEC decided to keep its modest production increases in place. China’s August manufacturing activity fell to 50.1 from 50.4. But a rebound in Chinese stocks lifted the emerging markets index by 3.4%. Canada’s economy unexpectedly contracted by 1.1% in Q2 as pandemic restrictions weighed.

Week Ahead

A holiday-shortened week and the economic calendar will be more focused on events abroad. The most anticipated announcement will come from the ECB on Thursday. Despite hot inflation data, the committee is expected to wait several more months before deciding on tapering pandemic-related asset purchases, which are due to end in March 2022. Additional monetary policy updates will come from Australia tonight and Canada on Wednesday.

In the U.S. more job data, the JOLTS Job Openings report comes out on Wednesday. Producer prices are expected to ease in Friday’s PPI report. In Asia, China will deliver trade balance and inflation numbers. Japan’s final Q2 GDP reading is released late on today. The Eurozone will present revised Q2 GDP and the UK’s monthly GDP update comes in Friday. The week also closes with Canada’s employment account.

Equity markets will look at the Covid case and death rates for how bad this variant will be, and how much economic activity will be slowed by it. Year-to-date index performance; Dow up 15.56%, S&P up 20.7%, and Nasdaq up 19.2% through the close on Friday.

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Markets Reach All-Time Highs

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Markets Reach All-Time Highs

The S&P 500 and Nasdaq Composite Indexes closed at all-time highs after the Fed Chair reassured markets. Equity indexes rallied as investors weighed the tragic events in Afghanistan against more transparency from the Fed’s monetary policy timeline. The Nasdaq rose nearly 3% and the Dow and S&P 500 added 1-1.5%.

Last Week All-Time Highs

U.S. equity indexes rallied as investors weighed the tragic events in Afghanistan against more transparency from the Fed. Crude oil rebounded with an 11%+ jump, and gold prices rose modestly. Treasury yields held their weekly gains. The U.S. dollar dropped after Fed Chair Powell calmed markets with his comments on inflation and tapering. PCE Core Price Index data show annual price increases at a 30-year high of 3.6%. However, Powell reiterated that higher prices are not broad-based. Surge-price categories are moderating, and that both wages and long-term expectations do not suggest “excessive inflation”. Powell affirmed that asset purchase tapering is likely to begin later this year. (Tapering is the central bank’s plan to start gradually reducing bond purchases by the end of the year.) He also said that interest rate hikes aren’t on the table until the more stringent maximum employment test is met.

In other U.S. economic news, August Flash PMIs showed continued expansion. However, this reading is at a slower pace than July and slightly below expectations. Existing home sales rose 2% in July. All the annual gains in homes priced above $500K, while new home sales ticked up 1% in July. Durable goods orders for July fell 0.1% Month-over-month. These numbers did exceed forecasts, while the second Q2 GDP estimate came in slightly higher at 6.6%. Corporate profits increased at a 9.2% quarterly rate to a record $2.8 trillion, supported by historically tight credit spreads. Overseas, Germany’s August PMIs fell from July but remained solidly in expansion as Q2 GDP grew more than expected at 1.6%. Finally, minutes from the ECB’s latest policy meeting showed some concern of understating inflation risks that may or may not be durable.

Week Ahead

Based on the market’s reaction to Powell’s Jackson Hole speech, investors seem to feel they have more clarity around the Fed’s intended path and can avoid another “taper tantrum”. Geopolitical tensions and coronavirus variants may affect economic growth or dent consumer sentiment. Powell made it clear how strong the link is between jobs and potential rate hikes, and this week will bring several updates on the labor front, with the ADP report on
Wednesday followed by non-farm payroll report on Friday.

China’s Manufacturing PMI arrives Monday, where the government continues regulatory crackdowns that keep Chinese stocks under pressure. Tuesday is busy with German employment numbers, Canadian and Australian GDP updates, and U.S. consumer confidence. Oil’s recent volatility will focus traders on Wednesday’s OPEC meetings. Global growth concerns have eased somewhat, and increased crude production is expected. Lastly, U.S. ISM manufacturing and services PMIs are anticipated to fall Month-over-Month while remaining firmly in growth mode.

Year-to-date index performance; Dow up 15.84%, S&P 500 up 20.06%, and Nasdaq up 17.39% through the close on Friday.

Let’s connect if you would like to learn more about your options and if we can assist you with your wealth management, investment, and retirement planning.

This website is for informational purposes only and is not intended to be specific advice or recommendations. For specific advice or recommendations you would need to meet directly with one of our advisers.