This Monday Market Insights discusses recent U.S. economic indicators, ongoing supply chain bottlenecks, and China’s “crypto crackdown.” Our Chart of the Week highlights year-to-date share repurchase activity for the S&P 500 and where the full year could end up. Finally, we discuss the recent move higher in the U.S. 10 Year Treasury yield and discuss the most recent Federal Open Market Committee (FOMC) meeting.
Top Weekly Themes
- U.S. Confidence and GDP Downshift – The Conference Board’s Consumer Confidence Index® fell again in September to 109.3, following declines in July and August. A driver of the recent downward trend has been the spread of the Delta variant as well as consumer concerns about the economy and growth. Short-term inflation was less worrisome in September, but spending intentions for major appliances, homes, and autos all fell again. The three consecutive declines suggest that consumers are more cautious and may pull back on spending. Similarly, estimates for third-quarter Gross Domestic Product (GDP) have also started to slip lower. The real GDP estimate for 3Q provided by the Atlanta Fed Real GDP Tracker now sits at a seasonally adjusted annual rate of 3.2%, down 0.5% from 3.7% on September 21. While the downtick in some economic indicators is raising our guard, we anticipate these to level out as we move beyond the most recent Delta variant spike.
- Third Quarter Bottlenecks – While the third-quarter earnings season does not kick-off for a few weeks, a couple of companies that recently reported have continued to face supply chain and labor shortage issues. These challenges have had a negative impact on revenue and costs, with some companies unable to secure inventory and others struggling to find adequate staffing. During the most recent FedEx earnings call, management highlighted that the FedEx Ground Portland, Oregon, hub is only running with 65% of the staffing needed to handle the normal volume. The lack of labor forced FedEx to divert 25% of the volume to other locations, increasing costs and reducing efficiency. Similarly, Nike Inc. reported a challenging quarter on September 23. Nike is struggling to secure inventory as some of its factories have been closed because of local COVID-19 restrictions. The company’s Vietnam facilities have already lost ten weeks of production, and the ramp-up back to full production is expected to take several months. We expect to hear similar challenges during the upcoming earnings season but remain confident these issues will eventually abate.
- China Crypto Crackdown – China was once again in the headlines with its ban on cryptocurrency as the government continues its regulatory crackdown. On September 24, China’s central bank announced that all transactions involving virtual currencies, such as Bitcoin, were illegal. The memo referenced the concern of digital currencies disrupting the financial system as well as their use in criminal activity and money laundering. China’s banks have been banned since 2013 from dealing in virtual currencies, but these actions take a much harder line to currencies that the government cannot control. We would not be surprised to see further crackdowns on cryptocurrencies in the future, including in the U.S., where the current Securities and Exchange Commission (SEC) chairman has stated that the crypto market is filled with “fraud, scams, and abuse.” However, virtual currencies will be allowed in China when they are issued by the government, with The People’s Bank of China (PBOC) currently developing an electronic form of yuan that can be tracked and controlled. We remain on the sidelines when it comes to cryptocurrencies like Bitcoin as we see greater regulations in their future.
|Russell 1000 Value||2.8||21.3||37.2||13.00||12.11||1.84|
|Russell 1000 Growth||5.0||20.8||31.8||27.30||24.52||0.66|
|MSCI EM (Emerging Markets)||3.3||2.3||17.6||12.96||10.10||2.24*|
|Fixed Income||Week||YTD||1-Year||3-Year||5-Year||Div Yield|
|Bloomberg Barclays US Aggregate||(0.2)||(2.0)||(1.3)||5.51||2.93||1.67|
|Bloomberg Barclays US High Yield – Corporate||0.3||4.4||9.5||7.19||6.27||4.17|
|Bloomberg Barclays Municipal Bond||(0.0)||0.7||2.8||5.27||3.46||1.15|
|Bloomberg Barclays Global Aggregate x US (Country)||0.6||(5.6)||(2.1)||3.70||1.92||1.05|
|Crude Oil WTI (NYM $/bbl) Continuous||2.2||69.9||100.8||6.0||9.7||82.4|
|Natural Gas (NYM $/mmbtu) Continuous||(7.6)||101.4||82.0||16.1||9.9||5.1|
|Gold NYMEX Near Term ($/ozt)||0.6||(6.5)||(7.2)||13.0||6.9||1,769.7|
|Copper Cash Official LME ($/mt)||11.1||37.6||57.7||19.8||18.1||10652.0|
|Currencies||1 Week Ago||YTD||1-Year Ago||3-Years Ago||5-Years Ago||Current Level|
|U.S. Dollar per Euro||1.15||1.22||1.18||1.15||1.10||1.16|
|Japanese Yen per U.S. Dollar||113.61||103.25||105.47||112.50||103.31||114.27|
|U.S. Dollar per British Pounds||1.36||1.37||1.30||1.30||1.23||1.38|
Chart of the Week: Less Bang for the Buck
- S&P 500 companies have returned to share buybacks with more confidence about the future given the waning pandemic impacts.
- Midway through 2021, S&P 500 company share repurchases are already more than $377 billion. If annualized, buybacks are on pace to exceed $750 billion in 2021, just below the all-time high of $806 billion during 2018.
- While the dollar amount of repurchases may be near a new high, the impact on earnings per share (EPS) is not nearly as compelling. This is due to elevated share prices compared to prior periods, reducing the amount of shares companies can purchase for a similar dollar amount. Further, the amount of share repurchases has not been enough to fully offset the increase in share count caused by company stock issuance and the exercise of stock options by corporate management teams.
- It will be interesting to see how companies allocate capital to shareholders in the future, given various tax proposals currently being debated by Congress. As different policies are discussed, companies could accelerate repurchases towards the end of 2021, which could push this metric above 2018’s high mark.
Commentary: Treasury Yields Move Higher Post-FOMC Meeting
Long-term Treasury yields have moved rapidly higher following the most recent Federal Open Market Committee (FOMC) meeting. The 10-year U.S. Treasury yield has increased 22 basis points (0.22%) from 1.30% on September 22 to 1.52% at the close on September 29. The September 22 FOMC meeting and Chairman Powell’s press conference that followed provided clarity on many hot Federal Reserve topics, with the first being tapering. It seems very likely a tapering announcement will come at the November meeting based on Chairman Powell’s comments that a “reasonably good employment report” (referring to the September labor market report due out on October 8) would be enough for a tapering announcement in November. Powell also added that tapering could finish up around mid-2022 which would be a faster pace compared to the last time the Fed tapered in 2014.
The second hot topic was an update to the dot plot diagram. The revised quarterly Summary of Economic Projections indicated rate lift off in 2022, with three rate hikes now projected in 2023. This is a more hawkish revision with an extra rate hike projected in both 2022 and 2023. However, Chairman Powell was adamant during the press conference that the “test for lift-off is so much higher,” referring to the criteria needed to justify a rate hike. The key is the ongoing efforts the Fed has been making to decouple its quantitative easing policy from its interest rate policy. While the criteria for the former have been met, the latter has a much higher bar to clear before any rate hikes.
Overall, the most recent FOMC meeting did not change our views. We continue to expect the Fed will be patient before making any adjustments to its interest rate policy. A better understanding of future inflation is undoubtedly at the forefront regarding future monetary policy. Unfortunately, the transitory inflation debate will not be answered overnight, and current supply bottlenecks and labor market disruptions have muddied the water in the near term. Although some inflation data may prove to be more sustainable, we, like Chairman Powell, continue to be in the transitory camp.