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Market Recap

Watch David Darst, CFA - Senior Advisor, share his recap of the major events in February 2022.

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David Darst’s February 2022 Market Recap

Here are highlights of the outlook for 2022:

For more details, download our 2022 Market Outlook.

The recovery was kick-started in 2021 by unprecedented monetary stimulus that was four times larger than that during the Global Financial Crisis.

2022 Market & Economic Outlook: From Revival To Moderation

Watch David Darst, CFA - Senior Advisor, share his recap of the major events in January 2022.

David Darst’s January 2022 Market Recap

Apple and Amazon miss earnings amid supply-chain constraints

Sentiment declines amid inflation and supply chain concerns

The Fed signals gradual tapering by year-end

The Fed is preparing to announce their plan to reduce their $120 billion monthly asset purchases in the November meeting after indicating in September that the economy is near the Fed’s goals. The Fed is likely to start cutting its purchases of Treasuries in mortgage-backed securities by $10 billion and $5 billion, respectively, each month and end purchases by mid-2022 unless progress is disrupted.

The Fed also indicated that they may begin raising interest rates as soon as 2022 depending on when inflationary pressures subside. Fed chairman Jerome Powell concluded recently that longer and more persistent supply-chain bottlenecks would lead to higher inflation, but raising rates now would be premature.

On October 28, House Democratic leaders delayed the vote on the $1 trillion infrastructure bill again after President Biden unveiled a new framework for a separate, larger social spending and climate package. Democrats want to approve the new bill before voting on the infrastructure bill. Meanwhile, party leaders approved a short-term extension of highway funding pending approval of the larger infrastructure bill.

On October 28, European Central Bank (“ECB”) President Christine Lagarde announced that although inflation may remain high for longer, an interest rate hike is not expected soon. The ECB kept interest rates and monetary policy unchanged. Earlier in September, the ECB slowed the pace of asset purchases under the pandemic purchase program as consumer prices surged. Inflation in the euro zone reached a 13-year high of 3.4% in September while the inflation target and interest rates were 2% and -0.5%, respectively. ECB president Christine Lagarde indicated that easy monetary policy will be maintained for the foreseeable future with inflation forecasts of 2.2% in 2021, 1.7% in 2022 and 1.5% in 2023.

President Biden’s $1.85 trillion spending framework

President Biden unveiled a $1.85 trillion social spending and climate legislation framework, including funding for universal pre-kindergarten, renewable energy tax credits, an expansion of the Affordable Care Act, and tax increases on companies and wealthy individuals. This budget proposal still needs the support of Democrats in Congress.

The budget framework would extend and increase Affordable Care Act subsidies through 2025 and help provide healthcare coverage for the uninsured.

The budget framework allocates $555 billion to climate-related spending, including $320 billion in 10-year expanded tax credits for utility-scale and residential renewable energy, transmission, electric vehicles, and clean-energy manufacturing.

The framework features federally funded preschool for all three- and four-year–olds in the US for six years and a one-year extension of the child tax credit.

US job growth slows sharply amid labor shortage

The US labor market continued to recover but job growth fell to the slowest pace of the year in September as the Delta variant and a tight labor supply weighed on economic recovery. Unemployment fell to 4.8% in September from 5.2% in August despite the slowdown in hiring as the labor force participation rate edged lower. Non-farm payroll rose by 194,000 in September, the smallest monthly gain since December 2020, impacted by a 123,000 decline in government payrolls. Despite slower jobs growth, labor shortages are raising wages as employers try to address the tight supply. Weekly initial unemployment benefit claims fell below 300,000 in October for the first since the onset of the pandemic to 281,000 in the week ending October 23. Euro area unemployment dropped slightly to 7.5% in August from 7.6% in July, continuing its downward trend as easing pandemic-related restrictions drove economic recovery into the summer.

Labor shortages and supply chain constraints slow growth

Q3 2021 annualized US GDP slowed to 2.0% after growing 6.6% in Q2 2021, the slowest growth since the end of 2020, following months of supply chain issues, a decline in consumer spending, and the Delta variant surge. The increase in consumer spending, which makes up ~70% of the US economy, dropped to 1.6% in Q3 from 12% in Q2 as disposable personal income fell 0.7% and the personal savings rate declined to 8.9% from 10.5%. The record growth in the first half of the year was helped by government stimulus, business re-openings, and rising vaccination rates which eased in Q3. Stronger consumer demand and an easing pandemic should boost growth in Q4.

Despite rising prices, US retail sales rose 0.7% in September as consumers returned to the office and schools reopened.

U.S. seasonally adjusted annual home sales rose 7% in September to 6.29 million. Strong demand continues, but the gain may be due to a brief drop in mortgage interest rates in August.

GDP in the eurozone grew at a seasonally adjusted annualized rate of 9.1% in Q3 2021, the fastest pace in a year. The eurozone economy grew faster than the US and China in Q3, fueled by easing COVID restrictions and widespread vaccinations, but output remains below pre-pandemic levels, unlike the US and China. Economic growth in the eurozone is expected to slow due to supply-chain bottlenecks and rising inflation.

The US Consumer Price Index (CPI) increased 5.4% year on year (YoY) in September, in line with June and July and slightly above August, remaining at its highest in over a decade. Core CPI, which excludes food and energy, climbed 4.0% YoY in September, driven by strong consumer demand and labor and supply shortages. CPI in the euro area increased 4.1% YoY in October (from 3.4% in September) according to preliminary Eurostat data, to a 13-year high, surpassing the 2% target of the ECB, while core inflation increased 2.1%, driven by surging energy prices.

The IHS Markit Manufacturing Purchasing Managers’ Index (PMI) fell to 58.4 in October from 60.7 in September in the US, and to 58.5 from 58.6 in the Euro area. Production slowed this month, due mainly to supply shortages and transportation delays.

Sovereign bond yields react to Fed signals but remain low

10-year US Treasury yields rose to 1.7% on October 21 after the latest jobs report showed a tightening labor market, indicating a recovering economy and earlier tapering. Yields closed October at 1.56% amid  a volatile week with mixed corporate earnings, conflicting economic readings, and the approaching November Fed meeting. 10-year inflation expectations, measured by Treasury Inflation Protected Securities, peaked at 2.69% in October to a more than 15-year high. Germany’s 10-year bund yields rose to -0.08% ahead of US inflation data and hawkish signs from the Fed.

Equity markets rally despite mixed earnings

US equities closed their strongest month since November 2020, as investors remain encouraged by the earnings season despite negative reports from Apple and Amazon. The S&P 500 and Nasdaq Composite rose 6.9% and 7.3% in October, respectively, while the Dow rose 5.8%, its best monthly gain since March.

The STOXX Europe 600 rose 4.6% to a seven-month high in October, while the UK FTSE100 rose 2.1% amid strong earnings and interest hike expectations. Asian equities were mixed, with the Chinese SSE Composite Index and the Japanese Nikkei 225 Index falling 0.6% and 1.9%, respectively, while the Hong Kong Hang Seng index rose 3.3%.

Investment grade spreads tightened to 0.89% at the end of October from 0.87% in September as investors took advantage of the accommodative Fed policy and low-rate environment before it changes, while high-yield spreads ended at 3.08% from 3.13% in September. First-lien and second-lien spreads to maturity widened to LIBOR + 4.20% from LIBOR + 4.06% and LIBOR + 7.22% from LIBOR + 7.14%, respectively.

Oil prices reach multi-year highs amid tight supply

Spot WTI and Brent crude oil prices rose from $75.03 and $78.31 per barrel, respectively, in September to $83.57 and $83.72 at the end of October. Both benchmarks have climbed approximately 20% since the start of September, with WTI and Brent reaching their highest since October 2014 and October 2018, respectively, fueled by tight global supply and strengthening fuel demand worldwide. Fuel switching to diesel and fuel oil also supported oil prices amid worries over coal and gas shortages in China, India, and Europe.

OPEC+ agreed to maintain its plan to raise daily production by 400,000 barrels monthly until the end of 2022, which may continue to pressure prices as demand increases. OPEC+ reconfirmed their production plan despite pressure from the US and India to increase supply.

US dollar rises, gold falls, and Bitcoin rallies

The US dollar rose to a more than one-year high of 94.52 against a basket of currencies on October 12 amid inflation concerns and expectations that the Fed will announce a tapering. The dollar closed October at 94.12, down slightly from 94.34 in September. Meanwhile, gold prices fell to a one-week low of $1,782 per ounce on October 28 following a stronger dollar and rising US bond yields. By month-end, gold rose 1.5% to $1,784 per ounce. Bitcoin rallied almost 40% in October to a record $66,975, reaching a record close at $60,599.

Tech earnings mixed; Amazon and Apple miss estimates

Apple Q3 revenues increased 29% YoY to $83.36 billion but were 2% below estimates, while earnings per share (EPS) of $1.24 were in-line with estimates. The revenue miss was due to larger-than-expected supply constraints driven by an industry-wide chip shortage and COVID-related manufacturing disruptions. iPhone sales rose 47% YoY and iPad and Mac sales grew 21% and 2%, respectively. Apple CEO Tim Cook said that stronger YoY revenue growth is expected in Q4 despite supply constraints possibly worsening.

Amazon revenues grew 15% YoY in Q3 to $110.8, from 37% growth a year ago while EPS was $6.12, 46% and 1% below estimates, respectively. Sales growth slowed as consumers returned to physical stores while supply chain issues persisted. Amazon CFO Brian Olsavsky expects additional costs of $1 billion Q4 due to labor shortages, higher wages, increased shipping costs and global supply chain constraints. Andy Jassy replaced Jeff Bezos as CEO in July.

Facebook shares rose as earnings beat quarterly estimates while revenues missed. Sales grew 35% YoY, 2% below estimates, to $29 billion, while EPS of $3.22 were above the consensus estimates of $3.19. CFO David Wehner said the iOS changes were the largest headwinds in Q3, hurting the ability to target ads to users. Focus will start to shift to its full-screen video Reels feature in the next years.

Alphabet revenue of $65.12 billion in Q3 was 3% above consensus estimates, while EPS of $27.99 were 19% above estimates. Advertising revenue rose 43% YoY. YouTube revenues increased 43% YoY to $7.2 billion. Alphabet CFO, Ruth Porat, said that the new privacy features in iOS 14 earlier this year had a modest impact on YouTube revenues.

Microsoft revenues of $45.32 billion were 3% below estimates and EPS of $2.27 were 10% above estimates. Azure cloud revenues grew 50%. Productivity and Business Processes, which includes Office products and LinkedIn, grew 22%.

Tesla net income of $1.6 billion in Q3 surpassed $1 billion for a second time. EPS of $1.86 were 17% above consensus estimates of $1.59 per share and revenue of $13.76 billion was 1% above estimates, as gross profit margins improved to 30.5% in the automotive business and 26.6% on its overall business. 

Financials deliver strong earnings, signaling recovery

JP Morgan and Citi EPS beat consensus estimates by 25% and 30%, respectively. The Q3 results of JP Morgan exceeded expectations on a $1.5 billion boost from lower-than-expected loan losses. Citi reported stronger-than-expected results as trading revenue increased profits significantly. JP Morgan revenues of $30.4 billion exceeded the $29.8 billion forecast, while Citi revenues of $17.15 billion exceeded the $16.97 billion forecast.

The EPS of Morgan Stanley and Goldman Sachs exceeded estimates by 18% and 47%, respectively, amid strong trading, investment banking and asset management results. Goldman revenues of $13.61 billion exceeded the expected $11,68 billion, driven by a rise in completed mergers, debt and equity underwriting. Morgan Stanley revenues of $14.75 billion beat estimates of $14.0 billion, also driven by investment banking activity and $135 billion in added assets in wealth management.

The performance of Visa, Mastercard and American Express was stronger than expected, confirming the economic recovery. Visa revenues of $6.6 billion were above the expected $6.5 billion while the EPS of $1.65 exceeded the expected $1.56. Mastercard revenues of $5.0 billion also exceeded the expected $4,95 billion while the EPS of $2.37 was above the Wall Street estimate of $2.19.  American Express revenues of $10.9 billion exceeded analyst expectations of $10,52 billion while the EPS of $2.27 was well above the expected $1.80.

Large energy companies, such as Exxon and Chevron, reported profits for a second consecutive quarter with higher oil prices, increased operating efficiency and enhanced cost control. Both companies remain cautious over capital spending and cost reduction.

The revenues of Caterpillar, often considered a barometer for the economic cycle, of $12.4 billion were slightly below the estimated $12.48 billion with the EPS of $2.66 exceeding average analyst estimates of $2.20.

Consumer sentiment falls amid inflation fears

The Consumer Sentiment Index of the University of Michigan fell to 71.1 in October from 72.8 in September, remaining near pandemic lows amid concerns over higher inflation and changes in economic policies.

The VIX index fell to its lowest level since the start of the pandemic, closing at 16.26 in October from 23.14 in July.

The month-end Fear and Greed Index (which uses seven factors including market momentum, safe-haven demand, and junk bond demand) showed “extreme greed” at 75 as investors rotated into stocks from the relative safety of bonds.

The number of COVID-19 cases and deaths are increasing worldwide but at a slower pace.

US COVID-19 cases have fallen to half the most recent peak in September with average daily cases of 72,000 during the last week of October. 58% of Americans are fully vaccinated although vaccination rates are rising more slowly than when the first shots were given. The US Centers for Disease Control and Prevention recommended additional vaccine booster shots for fully vaccinated people. Hospitalizations decreased by half since the peak to a seven-day average of 103,000 cases in September.

In Europe, only a few countries were spared the high rise in cases from the fourth wave of the pandemic. Most countries that relaxed social-distancing restrictions during the summer are considering measures to prevent increasing cases. During the last week of September, 57% of the 3 million cases worldwide were in Europe. However, traveling within the European Union has become easier as the digital COVID certificate is widely accepted.

Southeast Asia had a major drop in COVID-19 cases which helped pave the way for recovery as easing restrictions on factories help decrease the global supply delays, but it may still can take weeks or months for full recovery of the factories. Demand for semiconductors remains high and supply continues to be tight. Indonesia, one of the hardest hit countries, is still struggling to recover, asking developed countries to increase support for poorer countries. Thailand and Australia have eased international travel restrictions with no quarantine needed after arrival.

1. Global vaccine rollout and booster shots

President Biden’s $1.85 trillion spending plan and infrastructure bill

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Want to know more about the market? Our team of experts share their Monthly Market Update for October 2021. Click to read more!

Monthly Market Update | October 2021

For more details, download our full Q3 2021 Market and Economic Review.

Learn more about the most prominent highlights of the third quarter of 2021 in our Market and Economic Review"

Market & Economic Review Of Q3 2021

The Fed signals likely policy changes this year

In its July meeting, the Fed reached a general consensus to begin reducing their $120 billion in monthly asset purchases this year. Since the pandemic hit in March 2020, interest rates were kept near zero with target inflation moderately above 2% as the economy improved with low unemployment and stable inflation.

On August 27, Fed Chairman Jerome Powell indicated that the economy no longer needs policy support, and tapering bond purchases may begin by year end despite the “near-term risk” presented by the Delta variant. Powell also reaffirmed the belief of the Fed that inflation is temporary and should moderate in the coming months.

Meanwhile, the House of Representatives approved narrowly a $3.5 budget plan on August 24 and set a September 27 deadline for the vote. The vote enables Democrats to employ the process of reconciliation to pass the budget without Republican votes.

On July 8, the European Central Bank (the “ECB”) announced a new policy framework that may prolong easy monetary policy, changing the inflation target to 2% (instead of just below 2%) while keeping interest rates at -0.5% as the Delta COVID-19 variant cases surged. ECB president Christine Lagarde indicated that easy monetary policy will be maintained for the foreseeable future. The asset purchase program will be discussed in  the September 9 monetary policy meeting. On August 31, preliminary estimates showed that inflation in the euro zone increased 3%, which represents a 10-year high. This is likely to put pressure on the ECB, especially after the indication of tapering by the Fed.

President Biden’s $4 trillion-plus budget deal

The deadline for voting on President Biden’s roughly $3.5 trillion budget deal, which is accompanied by $1 trillion of infrastructure spending on the electrical grid, transit, roads, bridges, etc., is on September 27.

The budget deal, which includes spending on antipoverty, education, childcare, and climate change over the next decade, is the result of extensive negotiations between progressive Democrats who proposed a $6 trillion package and moderates who preferred a smaller $2 trillion deal.

The budget deal includes paid family and medical leave, subsidized childcare, an extension of an expanded child tax credit, affordable housing, etc.

The proposal raises the corporate tax rate from 21% to 28% and the top capital-gains rate from 23.8% to 43.4% to cover the cost of the spending package over 15 years.

The US labor market strengthened in July despite challenges posed by the Delta variant and a tight labor supply. Unemployment fell to 5.4% in July from 5.9% in June, the lowest since the onset of the pandemic in March 2020. Non-farm payroll rose by 943,000 in July, marking the strongest monthly growth in 11 months amid the accelerating economic recovery. Weekly initial unemployment benefit claims edged slightly higher in the week ending August 21 from the previous week, to 353,000, but is still around pandemic-lows. Meanwhile, COVID-19 cases surged across the US and some local governments reinstated mask mandates and other restrictions. June 2021 euro area unemployment dropped slightly to 7.7% from 7.9% in May, the lowest since May 2020 amid the easing restrictions.

Growth continues but a slowdown is expected

Q2 2021 annualized US GDP was revised up to 6.6% from the initial reading of 6.5% in Q2 2021, driven by business reopening, widespread vaccinations, and government aid, indicating that the US economy has emerged from the pandemic despite rising COVID-19 cases. US economic growth is expected to ease gradually this year amid COVID-19 variants, rising inflation, supply chain disruptions, and a shortage of workers.

US retail sales fell 1.1% in July as consumers shifted their spending from goods to services as widespread vaccination continued and COVID-19 related restrictions eased.

Existing U.S. seasonally adjusted annual home sales rose 2% in July from June to 5.99 million. Strong demand continues, but the housing market boom is beginning to ease slightly as rising prices drive more homeowners to list their houses for sale.

Preliminary Eurostat data show that the eurozone economy grew 2% in Q2 2021, up 13.7% YoY following two consecutive quarters of contraction as COVID-19 restrictions eased and vaccinations accelerated. But the euro zone economy remains about 3% below pre-pandemic levels and further recovery depends on the surge of infections in the Delta variant in many countries.

The Consumer Price Index (CPI) increased 5.4% year on year (YoY) in July, in line with the rate in June which is the highest yearly rate since August 2008. Core CPI, which excludes food and energy, climbed 4.3% YoY, driven by booming consumer demand amid supply shortages, price recovery in the hard-hit service industry, and pent-up demand for travel and restaurants. CPI in the euro area increased 2.2% YoY in July, the highest since October 2018, surpassing the 2% target of the ECB while core inflation fell to 0.7% in July from 0.9% in May.

The IHS Markit US Manufacturing Purchasing Managers’ Index (PMI) fell to 62.1 in August from 63.4 in July. The IHS Markit Euro Area Manufacturing PMI fell to 61.5 in August from 62.8 in July.

Sovereign bonds yields fall amid COVID-19 concerns

10-year US Treasury yields dropped to 1.15% on August 2, their lowest since February 2021, after economic data indicated slowing growth and growing concerns about the Delta variant. On August 27, yields declined slightly to 1.3% after rising again from their recent lows, as Fed Chairman Powell signaled that tapering may begin before year end. 10-year inflation expectations, measured by Treasury Inflation Protected Securities, edged lower in August  since peaking at 2.54% in May (the highest since 2013), but remain high at 2.39%. On August 26, Germany’s 10-year bund yields rose to a one-month high of -0.40%, ahead of Fed Chairman Powell’s summit and after ECB officials showed optimism for the euro zone’s economic outlook.

Equity markets rally on dovish tone by the Fed

US equities drifted higher through August, driven by strong Q2 earnings and continued accommodative monetary policy. On August 27, the S&P 500 and Nasdaq Composite climbed to record highs after Fed Chairman Jerome Powell said that although tapering will begin later this year, the decision to raise interest rates remains pending. The S&P 500 index closed above 4500 for the first time, rising 2.9% in August for a seventh consecutive month of gains. The Dow and the Nasdaq rose 1.2% and 4.0%, respectively, for the month.

European equity markets also rose in August. The STOXX Europe 600 rose 1.9% in seven consecutive months of gains, while the UK FTSE100 rose 1.0%. Asian equities also rose slightly this month. The Chinese SSE Composite Index and the Japanese Nikkei 225 Index rose 4.3%, 3.0%, respectively, while the Hong Kong Hang Seng index fell 0.3%.

Credit spreads widen as investors worry about COVID-19

Investment grade spreads widened slightly to 0.92% at the end of August from 0.91% in July as investors continue to worry about the Delta variant. High-yield spreads ended at 3.17% from 3.23% in July but remain well below levels earlier this year. First-lien and second-lien spreads to maturity widened to LIBOR + 4.12% from LIBOR + 4.09% and LIBOR + 7.18% from LIBOR + 7.12%, respectively. The yield-to-maturity of first- and second-lien debt remains below year-end 2019 levels due to near-zero interest rates and unprecedented Fed support for the fixed income market.

Oil price recovers from longest losing streak

Spot WTI and Brent crude oil prices fell from $73.95 and $75.41 per barrel, respectively, in July to $68.51 and $72.96 at the end of August, in its first monthly loss since March after its worst week since October. On August 9, Spot WTI and Brent crude oil traded as low as $65.15 and $66.48, respectively, amid  a strengthening US dollar, concern over the Delta variant and demand uncertainty. Demand is expected to decline following Hurricane Ida which caused significant damage to oil rigs and refineries.

Last month, OPEC Plus agreed to raise output gradually over the next two years, which may continue to pressure prices as demand increases. OPEC will increase daily production by 400,000 barrels each month until the end of 2022. After being urged to boost output by the Biden Administration, OPEC members said that they see no need to accelerate output. OPEC Plus will meet on September 1 to discuss the agreed output increase.

US dollar falls, gold steadies, and Bitcoin rises

The US dollar rose to a more than nine-month high of 93.73 against a basket of currencies on August 19, as investors worry about the Delta variant just as the Fed begins to reverse its policy. At month-end, the dollar fell to 92.40, its lowest in more than three weeks, as investors awaited the response of the Fed to the US job report. Meanwhile, gold prices fell amid a stronger dollar to $1,779 per ounce on August 19, following indications from the Fed that stimulus would ease this year. After the dollar’s decline at month end, gold rose slightly to $1,817 per ounce at the end of August. On August 23, Bitcoin surged past $50,000 for the first time in May, before easing to $47,169 at month-end.

The Consumer Sentiment Index of the University of Michigan fell to 70.3 in August, the lowest during the pandemic and since 2011 as the spread of the Delta variant across the US led to the reinstatement of restrictions in some states.

The VIX index surged to 21.7 in August before subsiding to 16.10 at month-end from 18.24 in July.

The month-end Fear and Greed Index (which uses seven factors including market momentum, safe-haven demand, and junk bond demand) showed “greed” at 58 as investors rotated into stocks from the relative safety of bonds.

Global daily COVID-19 cases surged with the spread of the highly contagious Delta variant, first identified in India.

The Delta variant represented more than 93% of new infections in the US with unvaccinated people comprising the majority of severe cases. The US Centers for Disease Control and Prevention (the “CDC”) recommended that fully vaccinated people should return to wearing masks in public indoor spaces. COVID-19 hospitalizations in the US surpassed 100,000 in the last week of August, fueled by the Delta variant.

In Europe, governments continued to encourage vaccinations by restricting indoor dining and gym access to vaccinated people. European governments have been issuing vaccination “passports” to identify the unvaccinated population. The Delta variant became the most dominant strain across the region. On August 30,, the European Union recommended halting non-essential travel from the US due to the rise of COVID-19 cases.

Southeast Asia is now the global epicenter of the COVID-19 pandemic, as the Delta variant led to record infections and deaths in the region. The region is struggling to contain the virus as it battles low vaccination rates and limited medical supplies. Indonesia surpassed India and Brazil for having the highest rate of new infections.

On August 13, the CDC recommended vaccine booster shots to certain groups with weakened immune systems. The recommendation follows authorization by the US Food and Drug Administration of a third dose of the Pfizer or Moderna COVID-19 vaccines to immunocompromised people. Approval of all three COVID-19 vaccines (Pfizer, Moderna, and Johnson and Johnson) is expected in the US in mid-September.

President Biden’s $4 trillion budget proposal

Want to know more about the market? Our team of experts share their Monthly Market Update for August 2021. Click to read more!

Monthly Market Update | August 2021

During his semiannual economic testimony to the House Financial Services Committee and the Senate Banking Committee on July 15, Federal Reserve (“Fed”) Chairman Jerome Powell indicated that easy monetary policies will not change, and ample warning will be given before tapering begins. Despite inflation being higher than expected inflation, Powell expects prices to ease later this year as pandemic-related supply shortages moderate and the constraint on supply eases. Since March 2020, the Fed has maintained interest rates near zero, targeting inflation moderately above 2%. On July 28, the Fed improved their assessment of the economy slightly, citing progress with low unemployment and stable inflation, despite the pandemic. This indicated that the Fed may reassess its monetary policy in coming meetings.

On July 13, Senate Democrats agreed on a reduced $3.5 trillion spending budget, well short of the $6 trillion package proposed earlier this year. Lawmakers and the White House are also working on a $1 trillion infrastructure plan, cutting President Biden’s original $2.3 trillion offer to Senate Republicans. Democrats and Republicans continue to negotiate a bipartisan infrastructure plan to finalize an agreement by month end, but continued disputes over the size of public transit funding threatens to delay the already late infrastructure bill.

On July 8, the European Central Bank (the “ECB”) announced a new policy framework that will likely maintain easy monetary policy longer, changing the inflation target to 2% from “just below 2%” and keeping interest rates at -0.5% as Delta COVID-19 cases surge. Although inflation is rising in the US, it remains low in the eurozone despite easy monetary policy. At a news conference on July 22, ECB President Christine Lagarde said that the Delta variant may “dampen recovery in services, especially in tourism and hospitality.” Lagarde also stated that the ECB does not plan to change its €1.85 trillion emergency bond-buying program.

President Biden’s $4 trillion budget deal

On July 13, Senate Democrats unveiled a trimmed $3.5 trillion package for antipoverty, education, childcare and climate change spending over the next decade after several rounds of negotiations between progressives who proposed a $6 trillion package and moderates who preferred a smaller $2 trillion deal.

The $3.5 trillion package is accompanied by $1 trillion in infrastructure spending on the electrical grid, transit, roads, bridges, etc.

The deal will include paid family and medical leave, subsidized childcare, an extension of an expanded child tax credit and affordable housing, among others.

The US labor market recovery is accelerating after slowing earlier this year. Unemployment edged to 5.9% in June from 5.8% in May, reflecting higher labor-force participation as more people start seeking jobs while employers still struggle to fill job vacancies. Non-farm payroll rose by 850,000 in June, the strongest growth in 10 months as businesses react to the accelerating economic recovery and labor supply constraints ease. Weekly initial unemployment benefit claims fell by 24,000 in the week ending July 24 to 400,000. May 2021 euro area unemployment dropped to 7.9% from 8.1% in April, the lowest since May 2020, as the labor market recovers slowly amid the easing restrictions.

Annualized US GDP grew 6.5% in Q2 2021, slightly above the revised 6.3% in Q1 but below the 8.4% forecast. With business reopening, widespread vaccinations and government aid, the growth confirms that the US economy has overcome the pandemic, but the slowing pace indicates an incomplete recovery. Following an 11.8% annualized increase in consumer spending, US growth is expected to ease gradually this year with growing threats of COVID-19 variants, inflation, supply chain disruptions, and worker shortage.

US retail sales rose 0.6% in June, following a decline in May, underpinned by continued vaccinations, low interest rates, and fiscal stimulus.

Existing U.S. home sales rose 1.4% in Q2 to a seasonally adjusted 5.86 million annually. Continued strong demand pushed home prices to a record high in June, although the boom is beginning to ease slightly as rising prices tempt more homeowners to sell their houses.

Based on preliminary Eurostat data, the eurozone economy in Q2 2021 grew 2% over Q1 and 13.7% year on year (YoY) after two quarters of contraction as COVID-19 restrictions eased and vaccinations accelerated. The euro zone economy remains about 3% below the pre-pandemic level and further recovery is dependent on controlling the Delta variant as infections surged in many countries.

The Consumer Price Index (CPI) increased 5.4% YoY in June, the highest yearly increase since August 2008. Core CPI, which excludes food and energy, climbed 4.5% YoY and 0.9% from May. The large gain was driven by booming consumer demand amid supply shortages and price recovery in hard hit service industries such as air travel, hotels, car rentals, entertainment and recreation. Widespread vaccinations, easing restrictions and abundant savings further boost consumer demand. CPI in the euro area increased 1.9% YoY in June, slowing from a more than two-year high of 2.0% in May, while core inflation fell to 0.9% from 1.0% in May.

The IHS Markit US Manufacturing Purchasing Managers’ Index (“PMI”) rose to a record 63.1 in July from 62.1 in June while the Euro Area Manufacturing PMI fell to 62.6 in July from  a record 63.4 in June.

On July 19, 10-year US Treasury yields dropped to the lowest levels since February 2021, from 1.30% at Friday’s close to 1.18% on Monday, marking the biggest one-day decline since March 2020 amid concerns over the highly contagious Delta COVID-19 variant. This indicates that markets are less worried about inflation than about the pace of economic recovery. 10-year inflation expectations, measured by Treasury Inflation Protected Securities, remained high at 2.35% in July but below their 2.54% peak in May (highest since 2013). On July 26, Germany’s 10-year bund yields fell to a more than five-month low of -0.45%, amid concerns over the Delta variant and supply chain constraints

Equity markets shake off fears of rising rates

US equity markets rose in a volatile July, dominated by concerns over inflation, the Delta variant, Fed tapering and corporate earnings. On July 19, the Dow fell 2.1%, its worst day in nine months, and the S&P 500 fell 1.6%. Stocks rebounded thereafter with the S&P 500 recording its best day in almost four months, finishing the month up 2.3% for a six consecutive month of gains. The Dow and the Nasdaq rose 1.3% and 1.2%, respectively, in July.

European equity markets also rose in July, with the STOXX Europe 600 and the UK FTSE100 rising 2.0% and 0.2%, respectively. In Asia, equities fell at month-end amid rising concerns over the Delta variant followed by tightening restrictions as cases surged. The Hong Kong Hang Seng index, the Chinese SSE Composite Index and the Japanese Nikkei 225 Index fell 9.9%, 5.4% and 5.2%, respectively.

Investment grade spreads widened to 0.91% at the end of July from 0.84% in June amid worries about the effect of the Delta variant on economic recovery. High-yield spreads rose to 3.23% from 3.03% in June but remained well below the levels earlier this year. First-lien and second-lien spreads to maturity widened to LIBOR + 4.09% from LIBOR + 4.03% and LIBOR + 7.12% from LIBOR + 7.09%, respectively. The yield-to-maturity of first- and second-lien debt remains below year-end 2019 levels due to near-zero interest rates and unprecedented Fed support for the fixed income market.

Oil price recovery continues at a slower pace

Spot WTI and Brent crude oil prices increased from $73.47 and $74.62 per barrel, respectively, in June to $73.95 and $75.41 at the end of July, as rising energy demand, strong earnings, and continued vaccination reduced the risk of a global resurgence of COVID-19.

Earlier this month, OPEC Plus agreed to raise output by 400,000 barrels a day each month until the end of 2022, which would continue to rein prices as demand increases.

US dollar climbs, gold eases, and Bitcoin falls

After reaching a four-month low of 89.6 against a basket of currencies on May 25,, the ICE US dollar Index climbed through June and July. The US dollar rose to a more than three-month high of 92.97 on July 20 as the economic recovery raised expectations of tapering by the Fed, before falling to a one-month low of 91.91 on July 29 after the Fed stated that it will not begin tapering soon. Meanwhile, gold rose to a two-week high of $1,795 on July 2, driven by accommodative Fed policies, fiscal stimulus and inflation. Gold rose 2.6% to $1,817 per ounce at month end. Bitcoin dropped to $29,609 on July 20 for the first time in a month, before rising to $41,870 at month-end, the highest since May. The rally continued amid support from Tesla CEO Elon Musk and Ark Investment Management LLC’s Cathie Wood.

Technology delivers strong earnings; Amazon misses

Apple revenues increased 54% YoY in Q2 to $89.58 billion, 16% above estimates, while earnings per share (EPS) of $1.40 were 41% above estimates, with double-digit growth in all product categories. iPhone sales rose 66% YoY and iPad and Mac sales grew 79% and 70%, respectively. Apple CEO Tim Cook said that Q2 results suggest that the pandemic-driven boost may continue as economies open.

Amazon revenues exceeded $100 billion in Q2 for a third consecutive quarter but were below expectations. Q2 2021 EPS of $15.12 were 23% above estimates while revenues of $113.08 billion were 2% below estimates. Q2 2021 revenue grew 27% YoY, significantly below the 41% growth in Q2 2020. Amazon CFO Brian Olsavsky attributes this to the exceptional performance during the COVID-19 lockdowns. Andy Jassy replaced Jeff Bezos as CEO in July.

Facebook beat estimates but warned of a significant slowdown in YoY revenue growth in the second half of the year. Sales grew 56% YoY to $29.1 billion, the fastest since 2016 and beating estimates of $27.9 billion. EPS of $3.61 were above the consensus estimates of $3.03. Increased pressure is expected from regulatory and platform changes, such as iOS privacy updates. Also, the Federal Trade Commission filed an antitrust complaint against Facebook, along with 48 other cases by state attorneys general, which was dismissed by a federal court. Facebook was criticized by the Biden administration for not combatting misinformation relating to the COVID-19 vaccine.

Alphabet revenue of $61.9 billion in Q2 was 10% above consensus estimates, while EPS of $27.26 were 41% above estimates. The advertising segment rebounded with a 69% YoY increase in revenue, after being impacted by the COVID-19 pandemic. YouTube revenues increased 83% YoY in Q2 to $7 billion. Alphabet CFO, Ruth Porat, said that the revenue trend in Q3 should be more muted.

Microsoft revenues of $46.2 billion and EPS of $2.17 were 4% and 13% above expectations, respectively. Revenue from the Azure cloud business grew 51% in Q2. Productivity and Business Processes, which includes Office products and LinkedIn, grew 25%.

Tesla net income surpassed $1 billion for the first time in Q2. EPS of $1.45 were 48% above consensus estimates of $0.98 per share and revenue of $11.96 billion was 6% above estimates, nearly doubling revenues YoY. Q2 revenue was driven largely by robust growth in the semiconductor shortage was mitigated by switching software for chips made by new suppliers.

JP Morgan and Citi beat consensus estimates by 18% and 45%, respectively, as they released $1.1 billion of loan loss reserves made during the pandemic following the improved US economic outlook. JP Morgan revenues of $31.4 billion exceeded the $29.9 billion forecast, while Citi revenues of $17.47 billion exceeded the $17.2 billion forecast.

The EPS of Morgan Stanley and Goldman Sachs exceeded estimates by 12% and 47%, respectively, as their trading and market-making operations continued to be resilient during the pandemic. Goldman revenues of $15.4 billion exceeded the expected $12.2 billion, driven by the second highest quarterly revenue from investment banking amid a booming IPO market. Morgan Stanley revenues of $14.8 billion beat estimates of $13.9 billion, also driven by $2.38 billion of revenues from investment banking.

The performance of Visa, Mastercard and American Express was stronger than expected, confirming the economic recovery. Visa revenues of $6.1 billion were above the expected $5.9 billion while the EPS of $1.49 exceeded the expected $1.35. Mastercard revenues of $4.5 billion also exceeded the expected $4.4 billion while the EPS of $1.95 was above the Wall Street estimate of $1.75.  American Express revenues of $10.2 billion exceeded analyst expectations of $9.6 billion while the EPS of $2.80 was well above the expected $1.62.

Energy and Industrials return to profitability

Large energy companies, such as Exxon and Chevron, reported profits for a second consecutive quarter as global economic recovery increased demand and continued to increase prices.  Both companies remain cautious over capital spending and cost reduction.

The revenues of Caterpillar, often considered a barometer for an economic cycle, of $12.9 billion were above the estimated $12.5 billion with the EPS of $2.60 exceeding average analyst estimates of $2.41.

Consumer sentiment falls, market shows fear

The Consumer Sentiment Index of the University of Michigan fell to 80.8 in the first half of the month, the lowest since February, amid concern over inflation. By month end, the index rose to a 17-month high after positive economic data.

The VIX index surged to 22.5 in May amid inflation concerns before subsiding to 18.24 at month-end from 15.83 in June.

The month-end Fear and Greed Index (which uses seven factors including market momentum, safe-haven demand, and junk bond demand) showed “extreme fear” at 24.  Safe haven demand and stock prices show fear as investors flee risky stocks for the safety of bonds.

As of July 28, global COVID-19 confirmed cases were 195,266,156 with 4,180,161 confirmed deaths. 3.8 billion vaccine doses have been administered globally. The spread of the contagious Delta variant, first identified in India, led to a global surge in daily COVID-19 cases.

The Delta variant represented about 83% of new infections in the U.S. with unvaccinated people accounting for most of the severe cases. Cases are surging in 49 states. The US Centers for Disease Control and Prevention recommended that fully vaccinated people return to wearing masks in public indoor spaces. Dr Anthony Fauci, the top federal infectious disease expert, said that lockdowns are not expected but the situation will likely deteriorate, leading to more COVID-19 cases and deaths.

In Europe, governments continue to encourage vaccinations by introducing restrictions on the unvaccinated, such as indoor dining and gym access. European governments are issuing vaccination “passports” to identify the unvaccinated. The Delta variant has become the most dominant strain across the region.

Southeast Asia is the global epicenter of the COVID-19 pandemic as the Delta variant has led to record infections and deaths. During the first wave of the pandemic in 2020, Southeast Asian countries such as Vietnam and Thailand avoided widespread infections and maintained better control over the virus than the rest of the world. Now, the region is struggling to contain the virus with low vaccination rates and limited medical supplies. Indonesia has surpassed India and Brazil as the country with the highest rate of new infections.

Want to know more about the market? Our team of experts share their Monthly Market Update for July 2021. Click to read more!

Monthly Market Update | July 2021

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Market And Economic Review For Q2 2021

Central banks keep policy frameworks unchanged

At its April policy meeting, the Federal Reserve (the “Fed”) indicated that tighter monetary policy may be considered if economic activity surges, but it will maintain easy monetary policy until employment and inflation goals are reached, maintaining interest rates in the range of 0.00% to 0.25% and target inflation moderately above 2.0%. Fed Chairman Jerome Powell said that economic recovery remains “uneven and far from complete” and that the economy has yet to show the “substantial further progress” required to change policy, notwithstanding a rise in near-term inflation and a drop in jobless claims to a pandemic low.

On May 21, President Biden made an offer to Senate Republicans, cutting down his original $2.3 trillion infrastructure plan to $1.7 trillion, as he continues to urge spending at least $1 trillion on infrastructure. In response, Senate Republicans proposed a $928 billion counteroffer to President Biden, in hopes to strike a bipartisan deal. On May 28, President Joe Biden proposed his $6 trillion budget to Congress, with higher taxes and spending on healthcare, education, and renewable energy. Democrats and the GOP continue to negotiate a bipartisan infrastructure plan.

In its third Financial Stability Review since the COVID-19 pandemic, the European Central Bank (the “ECB”) warned that additional stimulus could be required as financial risks are elevated and uneven across the region. The recent surge in US government bond yields prompted the ECB to increase government bond purchases. On May 21, ECB President Christine Lagarde said “it’s far too early and it’s actually unnecessary to debate longer-term issues,” signaling no major policy change ahead of the June meeting.

President Joe Biden’s $6 trillion budget plan

President Biden’s budget proposal for 2022 reflects plans to spend on infrastructure and social programs in the next decade, which entail federal debt and deficits.

The budget includes $1.53 trillion for the military and domestic programs starting in fiscal 2022 (which begins in October) and proposes $4.5 trillion for infrastructure and social programs over the next decade. This includes $17 billion for repairing and improving roads, bridges, and airports, $4.5 billion for replacing lead water pipes, and $13 billion to expand high-speed broadband.

The proposal raises the corporate tax rate from 21% to 28% and the top capital-gains rate from 23.8% to 43.4%.

Other spending proposals include $132 billion for the Department of Health and Human Services, more than $36 billion in investments to tackle climate change, and a 41% increase in spending on the Department of Education.

The proposal is likely to be altered before approval by Congress, but it can be passed through the reconciliation process as Democrats control the House and the Senate, as was the $1.9 trillion COVID-19 relief plan in March.

The US labor market recovery slowed in April 2021. Unemployment edged to 6.1% in April from 6.0% in March, partially reflecting a rise in labor-force participation to its highest since August. Non-farm payrolls rose by 266,000 in April vs the Dow Jones estimates of 1 million new jobs, marking the weakest monthly growth since January 2021 amid a growing shortage of labor supply as employers struggle to find workers or remain cautious about hiring given the continued uncertainty caused by the pandemic. Weekly initial unemployment benefit claims fell by 38,000 in the week ending May 22 to 406,000, the lowest level since it hit 256,000 in March 2020. March 2021 euro area unemployment dropped to 8.1% from 8.2% in February but was still above the 7.3% in March 2020.

Vaccine and stimulus boost growth forecasts

The economic growth outlook continues to be positive. The estimate of annualized US GDP growth in Q1 2021 remains at 6.4%. Consumer spending continued to surge into Q2 2021, rising 0.5% in April driven by the widespread vaccine rollout, government stimulus, easing of business restrictions, and record personal savings.

US retail sales were unchanged in April, after jumping a revised 10.7% in March, as the effects of the stimulus payments fade.

Existing U.S. home sales fell 2.7% in April from March, marking third consecutive month of declines, to a seasonally adjusted annual rate of 5.85 million. Record-low supply amid strong demand for housing continues to push prices to near record highs.

The European Commission increased the eurozone growth forecast to 4.3% from 3.8% in 2021 and 4.4% in 2022 following an improved vaccination rollout, easing of restrictions, and expectation of additional fiscal stimulus.

The Consumer Price Index (CPI) increased 4.2% year on year (YoY) in April, the highest since September 2008, and a seasonally adjusted 0.8% month on month. Core CPI, which excludes food and energy, climbed 3.0% YoY and 0.9% from March, partly due to very low inflation during the same period last year during widespread economic shutdowns. CPI in the euro area increased 1.6% YoY in April, the highest since April 2019, while core inflation fell to 0.7% from 0.9% in March.

The IHS Markit US Manufacturing Purchasing Managers’ Index (“PMI”) rose to 62.1 in May from 60.5 in April. The IHS Markit Euro Area Manufacturing PMI rose to 63.1 in May from 62.9 in April.

Sovereign bonds yields anticipate inflation

On May 11, 10-year US Treasury yields peaked at 1.70%, the highest since April 13, before ending the month at 1.58%. US inflation accelerated at its fastest pace since September 2008, as measured by CPI. Fed officials continue to reassure that inflation is transitory. 10-year inflation expectations, measured by Treasury Inflation Protected Securities, peaked to 2.54% in May, the highest since March 2013. Germany’s 10-year bund yields closed at -0.17%, its least negative yield since May 2019, and rose as high as -0.10% earlier this month. German government bonds are the only negative yielding 10-year government bonds in the eurozone.

US equity markets rose in May in a volatile month dominated by rising inflation fears, a surge in consumer spending, continued vaccination, and growing optimism for economic recovery. The S&P 500 gained 0.6% in a fourth consecutive month of gains. The Dow rose 1.9% in May following a jump in Salesforce shares when its Q1 earnings beat expectations, while the Nasdaq declined 1.5%, breaking a seven-month streak of gains.

European equity markets also rose in May despite concerns over rising inflation, with the STOXX Europe 600 and the UK FTSE100 rising 2.6% and 0.8%, respectively, amid an improving economic outlook with rising vaccine distribution and easing restrictions. In Asia, the Hong Kong Hang Seng index, the Chinese SSE Composite Index and the Japanese Nikkei 225 Index rose 1.5%, 4.9% and 0.1%, respectively. Asian equities fell at month-end after Japan and China reported weaker-than-expected economic data.  China manufacturing PMI was 51.0 (estimate was 51.1) while Japan retail sales grew 12% (estimate was 15.3%).

Investment grade spreads tightened to 0.91% while high-yield spreads widened to 3.34% from 3.28%. First-lien and second-lien spreads to maturity contracted to LIBOR + 3.72% from LIBOR + 3.84% and LIBOR + 6.82% from LIBOR + 7.11%, respectively. The yield-to-maturity of first- and second-lien debt remains below year-end 2019 levels due to near-zero interest rates and unprecedented Fed support for the fixed income market.

Spot WTI and Brent crude oil prices increased from $63.58 and $66.76 per barrel, respectively, in April to $66.32 and $69.32 at the end of May, amid rising energy demand, promising economic data, strong earnings, and higher economic forecasts.

Sustained oil demand recovery depends on the pandemic situation. OPEC Plus is expected to keep its agreement to increase production by more than 2 million barrels a day. On April 27, OPEC Plus decided to raise oil production gradually by 350,000 barrels in May and June and 441,000 in July. Goldman Sachs predicts Brent to rise to $75 in Q2 2021 and $80 by Q3.

US dollar declines, gold rises, and Bitcoin falls

After a strong start to 2021, the US dollar continued its decline from April through May after the Fed kept interest rates near zero. The ICE US Dollar Index reached a four-month low of 89.6 against a basket of currencies on May 25, before edging higher to 90.0 at month end. Meanwhile, gold rose 7.8% in May to $1,905 per ounce at month end, exceeding $1,900 for the first time since November 2020. Gold prices should stabilize as inflation expectations subside. Bitcoin dropped 36% from $57,829 at the beginning of the month to a low of $30,000, the largest fall since November 2018, following efforts to tighten regulations and tax compliance on cryptocurrencies by Chinese and US authorities. Tesla CEO Elon Musk announced that the company will stop accepting payments in Bitcoin. Bitcoin closed at $36,731 at month end.

Want to know more about the market? Our team of experts share their Monthly Market Update for May 2021. Click to read more!

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