Weekly Commentary - 18 August 2021
Weekly Market Commentary
US and European equities remain close to record highs, while bond yields soften
US and European equities were at, or close to, record highs, having recorded modest gains over the past week. The constructive equity backdrop held on Friday, despite US Michigan Consumer Sentiment survey data showing a much gloomier outlook than expected, are thought to be driven by COVID-19 delta variant concerns. In bond markets, US 10-year treasury yields slipped back on Friday to finish the week under 1.3%. Keeping concerns around the pace of the post-pandemic economic reopening, China Retail Sales and Industrial Production (both out this morning for July) have missed expectations, in part on the back of recent COVID-19 outbreaks that have led to further lockdowns and restrictions. As a result, Asian markets are mostly trading lower this morning, and this weakness is feeding into European markets as well.
Weaker than expected US consumer sentiment points to COVID-19 case outbreaks weighing on the outlook
The latest University of Michigan’s US Consumer Sentiment survey for August was released on Friday. The preliminary reading of the August sentiment index slumped to a reading of 70.2, down sharply from July’s 81.2 final reading, and well short of all estimates in a Bloomberg survey of economists. It was also below the 71.8 recorded at the height of the pandemic in April 2020. The reading was the lowest since December 2011. The COVID-19 delta variant appeared to take the blame for the fall in the consumer outlook, as separately, OurWorldInData.org reported over the weekend that US daily new confirmed COVID-19 cases per million people was back at levels last seen in early February this year.
US Federal Reserve (Fed)’s July meeting minutes due out this week have markets waiting for any signs of tapering and inflation
This week’s remaining data calendar is looking relatively quiet as we head into the back half of August. Data still due this week includes final readings on July inflation from Japan, the EU and the UK, as well as US retail sales data. One highlight will be the release of the minutes from the Fed’s July meeting which will be out on Wednesday, from which markets will be looking for comments around tapering and inflation. Otherwise, for central bank watchers, this week feels a bit like a holding pattern, ahead of next week’s annual US Jackson Hole Economic Policy Symposium, which runs from 26 to 28 August. This will be an important event to keep an eye on, as Jackson Hole has been a venue in the past for the Fed in announcing policy changes.
In terms of what it means for markets, the US (not unlike other countries globally) is seeing somewhat conflicting signals at the moment. On the one hand, Friday’s US Michigan Consumer Sentiment data was clearly disappointing and points to a more cautious consumer as well as the implications that this might have for a fall in inflationary pressure and the pace of recovering economic growth. On the other hand, the US Initial Jobless Claims data last Thursday saw the third weekly fall in a row, suggesting that concerns around the delta variant are not necessarily derailing the labour market recovery. This back and forth, across a range of economic data and market signals is creating a tug-of-war in sentiment for investors. As we have said before, this is not the time to try to swing the asset allocation ‘bat’ decisively behind any one particular investment style preference. Instead, it’s one of the reasons why we continue to stress the importance of balance in portfolios.
1 Bloomberg, 16 August 2021 (https://www.bloomberg.com/markets/rates-bonds/government-bonds/us)
2 Bloomberg, 13 August 2021 (https://www.bloomberg.com/news/articles/2021-08-13/consumer-sentiment-in-u-s-plunges-to-lowest-since-2011)
The Week In Numbers