Pictet North America Advisors

2021 Weekly Views — July 19

Pictet North America Advisors 2021 Weekly Views — July 19
Pictet North America Advisors

2021 Weekly Views — July 19

Pictet North America Advisors 2021 Weekly Views — July 19

Market update

Earnings kick off
The S&P 500 closed the week at 4,327.16, -0.97% lower. The Dow Jones closed at 34,687.85, -0.52%, with the Nasdaq lower by -1.87%. The volatility index VIX closed the week at 18.45 up from 16.18. The Euro Stoxx 600 fell -0.64%.
The 10-year UST closed at 1.29% down from 1.36% a week before. The yield curve flattened with the yield spread between the 3-month and 10-year UST at +124bps. Corporate Bond spreads: Investment Grade widened 3bps at 126bps and High Yield widened 12bps at 384bps. German 10-year Bunds yield closed at -0.35% down from -0.29% a week ago. In Europe, Corporate Investment Grade spreads tightened 1bp at 95bps and High Yield widened 2bps at 317bps.
The US Dollar Index (DXY) appreciated +0.60% last week and closed at 92.69. The Euro closed at 1.1806 (-0.59% weekly); the Yen appreciated +0.06%, closing at 110.07 and the Swiss Franc depreciated +0.51%, closing at 0.9194. Gold closed at $1,812.05 appreciating +0.21%. Oil was down with Brent closing at $73.59 (-2.59%) and WTI at $71.81 (-3.69%).

Macroeconomy

Inflation
US June CPI inflation surprised once again to the upside as it came at 0.9% m-o-m well above consensus of 0.5%, marking the fastest monthly rise in prices since August 2008. The print also led the y-o-y CPI up to 5.4% versus expectations at 4.9%, also the strongest increase since 2008. The core CPI inflation (excluding food and energy) also surprised to the upside at 4.5% above expectations at 4.0%. Overall, the rise was mainly driven by volatile and niche categories with roughly two thirds of the increase led by used cars and travel/transport. Used cars came in at +10.5% m-o-m leading the y-o-y increase to 45.2% while hotels prices rose +7.0% m-o-m that accounts for 16.9% y-o-y.

Powell’s testimony    
Fed Chair Jerome Powell’s spoke in front of the House of Financial Services Committee reassuring that the Fed expects inflation to moderate and the economy is still a ways off from where it needs to be in order for the central bank to alter its policy and cut down asset purchases. On inflation, he noted that despite inflation increasing “notably” and higher than where the central bank was hoping to see, it is due to temporary factors, as much of the current price pressure comes from a few industries such as used cars that are sensitive to temporary conditions, adding “it’s just a perfect storm of high demand and low supply and it should pass”. On the economy, he said “conditions in the labor market have continued to improve, but there is still a long way to go.” He did mention that Fed officials are at least talking about reducing the pace of asset purchases which will be a topic of discussion at the September meeting, making it clear however, that the Fed will give the market ample warning time before any decision is made.

Other Central Banks
The Bank of Japan kept its key short-term interest rate unchanged at -0.1% and now expects the economy to expand 3.8% in the current fiscal year ending in March 2022, down from 4.0% projected in April. The BOJ also outlined its new scheme to combat climate change and will offer banks long-term loans at zero interest. It will offer funds to banks that extend green and sustainability-linked loans, as well as invest in green bonds and sustainability-linked bonds. The Bank of Canada announced that it will reduce the amount of weekly asset purchases from CAD 3bn to CAD 2bn and left rates unchanged at 0.25%. It stated that the taper reflects progress towards a recovery and increased confidence in the strength of the Canadian economic outlook. The Reserve Bank of New Zealand will halt its NZ$100bn ($70bn) bond buying program by July 23rd while leaving the reference interest rate at 0.25%.

EU emissions
The European Union proposed a 55% cut in CO2 emissions from cars by 2030 vs. 2021 levels and a 100% cut in CO2 emissions by 2035 which would translate into an effective ban on the sale of new petrol and diesel cars by then. To support EV sales, Brussels also proposed the installation of public charging points no more than 60 kilometers (37.3 miles) apart on major roads by 2025 with 3.5 million stations by 2030, rising to 16.3 million by 2050. The Commission's proposals will need to be negotiated and approved by EU member states and the European Parliament.

Economic data
US June retail sales came in strong at +0.6% m-o-m, above expectations at -0.3% and compared to a revised-down decline of -1.7% in May. The retail sales control group (all sales, excluding auto dealers, building-materials retailers, gas stations, office supply stores, mobile homes and tobacco stores) came in at +1.1% m-o-m, vs. expectations of +0.4% and a May drop of -1.4% (revised down as well). The Michigan consumer sentiment came in at 80.8, compared to expectations at 86.5 and a June reading at 85.5.

China economic data
China Q2 GDP came out at 7.9% vs. consensus expectations of 8%. Other June data came out strong with retail sales beating expectations at 12.1% vs. consensus of 10.8% and Industrial Production at 8.3% vs. 7.9% consensus. There was also stronger-than-expected trade data with June exports up by 32.2% in USD terms (vs. 23.0% expected) and up from 27.9% in May, which subsequently pushed the world’s second biggest economy’s trade surplus up to its highest since January, at $51.53bn (vs. $44.75bn expected).


Highlights

Earnings season
The Q2 earnings season started with 8% of the S&P 500 companies reported so far. Since the beginning of Q2, earnings estimated were revised up strongly by +8.5 percentage points (ppts) for the S&P 500, +8ppts for the Euro Stoxx 600. Consensus expects Q2 EPS growth of 64% y-o-y driven by a combination of 22% sales growth and 256bps of net margin expansion; the median stock is forecasted to grow EPS by a more modest 24%. As usual, Banks kicked off the season with results topping expectations in general, however the beats were perceived as lower-quality due to the release of excess reserves accumulated during the pandemic.

What to watch

Monday: 81 S&P 500 companies and 43 Euro Stoxx 600 companies expected to report Q2 earnings this week
Tuesday: Japan CPI (June); US Housing starts and Building permits (June)
Wednesday: Japan Trade balance (June); US Mortgage applications (July 16th)
Thursday: ECB Monetary decision; US Jobless Claims; US Existing home sales (June)
Friday: Markit Manufacturing, Service, Composite PMI: France, Germany, UK, Euro zone, US (July prel.); UK Retail Sales (June); Univ. Michigan sentiment (July)

Investment team ― Pictet North America Advisors