Economic Update 6-28-2021
- Economic data for the week included unchanged GDP growth for the prior quarter, as well as stronger durable goods orders and jobless claims, while both existing and new home sales fell along with continued low inventories.
- Global equity markets gained last week, led by the U.S., and particularly in small cap, due to news of a broader infrastructure agreement framework and more dovish Fed talk. Bonds were mixed, with higher rates holding back U.S. debt, while foreign bonds were boosted by a weaker dollar. Commodities gained across the board, with strength in energy and metals.
U.S. stocks fared far better than the prior week, experiencing one of the stronger weeks in several months, and new highs for several indexes. In addition to a broad outline for a bipartisan infrastructure plan announced, Fed Chair Powell’s testimony to Congress relayed a more dovish tone than was presumed by the earlier FOMC statement, which seemed to help sentiment. Weakness and ongoing repair in labor markets has been a key focus of the Fed, and a reason for the continued long accommodative timeframe.
Every sector gained last week, led by energy and financials, up over 5% each, while defensive utilities and consumer staples lagged with meager returns. Financials were helped by positive government stress test results, which implied bank solvency would not be hampered by a severe recession (this outcome opens the door for resumed increases of dividends and buybacks). Real estate also gained 2%, in the middle of the pack, despite interest rates rising a bit, with continued strength in malls and retail. With a ‘risk on’ week, small caps sharply outperformed large caps.
A framework for a revised Biden/Congressional infrastructure deal appears to have been reached, with several more controversial progressive measures now removed (in areas of ‘human infrastructure’ targeting education, heath care, and poverty). It still features a lengthy road ahead, with possible passage over the summer, but the rough numbers are about $580 bil. in spending over the next five years, and $1.2 tril. over the next eight. Of the total 8-year figure, about a quarter ($312 bil.) appears allocated to transportation, with other large portions dedicated to waterways, broadband, and the power grid. The desired clean energy component, including funding for electric vehicles was reduced to about 10% of the package. The ‘pay for’ component of the bill so far looks to exclude personal tax increases for middle-income filers or reversals of business taxes from the Trump era, although specifics remain to be determined. The anticipated smaller size does put less pressure on tax increases than prior versions (which pleased financial markets as much as anything last week).
Foreign stocks performed positively across the board, following the positive sentiment in U.S. equity markets, but lagged U.S. returns. As with the U.S. Fed, European central banks continued their dovish accommodative tones in terms for near-term monetary policy. The U.K. and emerging market groups outperformed Europe and Japan, while not meaningfully. While equity sentiment between the U.S. and other global developed markets has been positively correlated in recent months, higher Covid infections and lower vaccination rates outside the U.S. have continued to weigh on the GDP growth recovery. Japanese sentiment has deteriorated, though, with the typical economic boost from an upcoming Olympic games a potential mixed blessing this summer with low local vaccination rates and limited international visitors.
The same pro-risk pattern was seen in emerging markets, where China, Mexico, and South Korea experienced sharper gains than the broader group. The central bank of Mexico raised interest rates by 0.25% in a surprise move to counterbalance recent inflation pressures. Emerging market central bank activity has, even recently, been far less ‘managed’ through forward guidance communications than the U.S., European, and Japanese central banks.
U.S. bonds fell back last week as interest rates ticked upward again. While treasuries and investment-grade corporates declined in similar fashion, high yield bonds gained a fraction of a percent as credit spreads continued to tighten along with a bullishness for risk assets. A weaker dollar last week helped developed market bonds slightly, which ended with positive returns, and local currency emerging market debt, which earned gains of nearly a percent.
Commodities reversed course by gaining ground last week, led by energy and industrial metals. Metals prices (copper in particular) had fallen in recent weeks, due to the Chinese government release of key industrial metals reserves, as well as some pullback in general inflation fears in the U.S. and globally, which reduced financial speculation in the asset class. The price of crude oil ticked up by 4% to just over $74/barrel, as global inventories declined. Natural gas prices rose 9% upon intensified cooling needs due to warmer-than-normal weather, especially in the West. Other less-financially traded futures have tempered—with lumber down -50% from peak prices in the last two months. Year-over-year spot prices remain up over 90% for crude oil and 60% for copper, both of which still exceed the S&P 500’s total return of 40%.
|Period ending 6/25/2021||1 Week (%)||YTD (%)|
|BBgBarc U.S. Aggregate||-0.41||-2.00|
|U.S. Treasury Yields||3 Mo.||2 Yr.||5 Yr.||10 Yr.||30 Yr.|
Sources: LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research. Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends. Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.
The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness. All information and opinions expressed are subject to change without notice. Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.
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