Pictet North America Advisors

2021 Weekly Views — June 7

Pictet North America Advisors 2021 Weekly Views — June 7
Pictet North America Advisors

2021 Weekly Views — June 7

Pictet North America Advisors 2021 Weekly Views — June 7

Market update

Jobs & inflation

The S&P 500 closed the week at 4,229.89, +0.69% higher. The Dow Jones closed at 34,756.39, +0.85%, with the Nasdaq higher by +0.57%. The volatility index VIX closed the week at 16.42 down from 16.76. The Euro Stoxx 600 gained +0.80%.
The 10-year UST closed at 1.55% down from 1.59% a week before. The yield curve slightly flattened with the yield spread between the 3-month and 10-year UST at +153bps. Corporate Bond spreads: Investment Grade remained unchanged at 125bps and High Yield tightened 6bps at 393bps. German 10-year Bunds yield closed at -0.21% down from -0.18% a week ago. In Europe, Corporate Investment Grade spreads remained at 97bps and High Yield tightened 7bps at 308bps.
The US Dollar Index (DXY) appreciated +0.12% during the week and closed at 90.14. The Euro closed at 1.2167 (-0.21% weekly); the Yen appreciated +0.30%, closing at 109.52 and the Swiss Franc appreciated +0.06%, closing at 0.8994. Gold closed at $1,891.59 depreciating -0.64%. Oil was up with Brent closing at $71.89 (+3.2%) and WTI at $69.62 (+5.0%).

Macroeconomy

Non-farm payrolls
The May employment report was rather disappointing printing at 559k, versus 675k expected. Furthermore, April’s weak print was left broadly as it was initially (278k vs 266k expected). This leaves a still-considerable employment gap of 7.6 million jobs. While the figure was below consensus, the unemployment rate fell to 5.8% from 6.1%. Average hourly earnings grew just 0.5% month over month in May (2.0% y-o-y). The data highlighted the ongoing reopening of the economy with leisure/hospitality beating estimates where the wage gains were especially astonishing with 14.5% q-o-q annualized (3.7% y-o-y). It seems employers have indeed to ‘bid up’ wages to attract/retain workers.

Inflation debate
The relative softness in job creation continues to fuel the debate regarding inflation. Thursday’s CPI consensus for the headline data is 4.7% y-o-y. Policy makers argue that the current price increases are being driven by transitory anomalies created by the pandemic such as supply-chain bottlenecks and a surge in spending as economies reopen. Over the weekend, US Treasury Janet Yellen said that President Biden should go ahead with his $4 trn spending plans even if it triggers inflation that persists into next year. Secretary Yellen said during an interview that “If we ended up with a slightly higher interest rate environment it would actually be a plus for society’s point of view and the Fed’s point of view.” Adding, that “We’ve been fighting inflation that’s too low and interest rates that are too low now for a decade,” and that “we want them to go back to” a normal interest rate environment.

Inflation data
A first estimate showed that headline HICP inflation picked up to a year-on-year rate of 2.0% in the euro area in May, up from 1.6% in April, while core inflation rose to 0.9% from 0.7%. Separately, the OECD reported that annual consumer inflation in its 36 member states rose to 3.3% in April, the largest increase since 2008, while the Food and Agriculture Organization reported that global food prices rose in May at their fastest monthly rate in more than a decade.

PMI data
In the US, the services ISM survey rose to 64.0, its highest level since the series began in 1997, suggesting the (services-led) recovery remains robust. The manufacturing index still nudged up to 61.2 from 60.7. In Europe, the final May euro area composite PMI printed at 57.1, revised up by 0.2 pts. Activity was mainly driven by the services sector across all economies. Globally, sentiment in services was up strongly, by 2.4pts to 59.4, after rising by 2.3pts in April. Meanwhile, sentiment in manufacturing was relatively flat at 56.0 (+0.1). New orders continued to improve (57.3, +0.5) while export orders lost momentum (54.9, +0.2), confirming a shift towards domestic demand. Production continues to struggle to keep up with demand. A phenomenon concentrated in advanced economies as backlogs increased to 60.1 (+1.8). However, at a global level, delivery times increased by only 0.2 pts, perhaps an early sign that we are close to peak in terms of supply bottlenecks. Nevertheless, price pressure continued unabated, as input prices increased significantly, up 1.8 pts to 71.6.

Highlights

Fed & liquidity
With large amounts of cash being parked in Fed overnight repos as a result of continuing inflows into money market funds, the Fed intends to unwind the emergency corporate bond and fixed-income fund purchases it made last year. They represent a very small part of the Fed’s balance sheet of almost $8 trn.

Oil market
Oil prices hit a new post-pandemic high (close to $72/barrel). While copper had a bout of weakness (-3% on Thursday). The OPEC confirmed planned quota increases (announced in April) to gradually return 2 million barrels per day from May through July. There was no indication for H2. In fact, if OPEC+ supply remains unchanged at July levels, the oil market should be undersupplied in H2. Another element that influenced oil prices was the Presidential election in Iran. Predictions suggest that hardliners will claim victory, halting current negotiations and postponing a comeback of Iranian oil.

Indexes rebalancing
As usual, MSCI indices rebalanced their factor indices at the end of May. The momentum index (still the top factor performer over the past year) rebalancing was massive, with many value stocks entering the index on the back of their impressive performance over the past year. The addition of lower P/E value names and the decline in the number of higher P/E growth peers meant the MSCI World Momentum Index’s forward price-to-earnings ratio declined from 30 to 18 after rebalancing.

Companies linked to Chinese military
President Biden signed an order amending a ban on U.S. investment in Chinese companies naming 59 firms with ties to China’s military or in the surveillance industry, including Huawei Technologies Co. and the country’s three biggest telecommunications companies. The ban on new investments will take effect on the 2nd of August. Investors will have one year to fully divest. Many of the companies in Biden’s order were already on the Trump administration list.

What to watch

Monday: Chinese exports and imports (May); Swiss CPI inflation and employment rate (May)
Tuesday: Euro zone GDP (Q1); German ZEW survey (June) and industrial production (Apr.); Japan GDP (Q1); US NFIB small business optimism (May)
Wednesday: China CPI and PI inflation (May)
Thursday: ECB monetary policy meeting and interest rate decision; US CPI inflation (May); US initial and continuous jobless claims; China foreign direct investment (May)
Friday: G7 leaders meeting; Euro zone retail sales (Apr.); US Michigan consumer sentiment index (June); UK industrial and manufacturing production (Apr.)


Investment team ― Pictet North America Advisors