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BMT Monday Market Insights – September 13, 2021

In this week’s Market Insights, we cover Federal Reserve Chairman Jerome Powell’s recent speech at Jackson Hole, the record supply of investment grade corporate bond issuance following Labor Day, and the stock market’s performance thus far in 2021.  In our Chart of the Week, we take a look at the U.S. and German sovereign yield curves.  Finally, we highlight the recent labor market report and its mixed signals.

Returns Table

EquitiesWeek(%)YTD(%)1-Year(%)3-Year(%)5-Year(%)Div Yield(%)
S&P 500(4.0)21.725.019.9117.701.26
Russell 1000 Value(5.1)16.619.911.1010.111.90
Russell 1000 Growth(3.7)22.727.028.4524.890.64
Russell 2000(7.9)9.718.113.3311.760.93
MSCI EAFE(1.3)8.312.211.0310.102.48*
MSCI EM (Emerging Markets)(2.1)(2.9)2.610.0910.282.24*
Fixed IncomeWeekYTD1-Year3-Year5-YearDiv Yield
Bloomberg Barclays US Aggregate1.0(1.2)(0.7)5.553.751.68
Bloomberg Barclays US High Yield – Corporate(0.1)3.55.37.456.334.74
Bloomberg Barclays Municipal Bond0.31.42.05.104.471.11
Bloomberg Barclays Global Aggregate x US (Country)1.6(5.9)(4.1)3.733.201.01
CommoditiesWeekYTD1-Year3-Year5-YearCurrent Level
Crude Oil WTI (NYM $/bbl) Continuous(16.4)35.147.28.85.165.6
Natural Gas (NYM $/mmbtu) Continuous(16.7)68.647.8(2.6)4.04.3
Gold NYMEX Near Term ($/ozt)(0.1)(5.9)(1.8)13.48.81,781.6
Copper Cash Official LME ($/mt)(2.9)23.625.215.310.69,571.0
Currencies1 Week AgoYTD1-Year Ago3-Years Ago5-Years AgoCurrent Level
U.S. Dollar per Euro1.121.221.201.131.061.13
Japanese Yen per U.S. Dollar115.45103.25104.49113.55114.41112.97
U.S. Dollar per British Pounds1.331.371.341.281.261.33
As of 12/1/21 (close). Three-year and 5-year returns are annualized. *Dividend Yield For MSCI EAFE and MSCI EM are from 10/29/2021.

Top Weekly Themes

  • Are we there yet? – The Federal Reserve (Fed) is close to scaling back its monthly bond purchases but more progress is still needed.  Federal Reserve Chairman Jerome Powell spoke on the topic “Monetary Policy in the Time of COVID” at the Jackson Hole Symposium in Wyoming on August 27.  Investors were looking for any indication that the Fed would begin altering its roughly $120 billion monthly bond purchases.  Although progress towards the Fed’s goals of maximum employment and price stability had indeed been made, the former still required more improvement before Chairman Powell was ready to flash the green light for tapering.  Interestingly, the subsequent August labor market report came in weaker than had been expected.  In addition to the labor market needing more improvement, the further spread of the Delta variant was another likely deterrent keeping the Fed on the sidelines for now.  Regardless of the tapering start date, the Fed has made it clear that today’s low policy rate has a much more stringent test to pass before any lift off should be expected.  Although tapering may be around the corner, we continue to believe the Fed will be patient when changing its interest rate policy, a positive for economic growth as we begin setting the stage for 2022.
  • Bond supply picks up after the long Labor Day weekend – A shortened week due to the long Labor Day weekend wasn’t enough to deter issuers from bringing deals to the market.  On Tuesday alone there were twenty-one investment-grade companies hitting the bond market, a record for a single day.  Low borrowing costs along with expectations in the months ahead that the Fed will begin winding down its monthly bond purchases were enough to get issuers off the sidelines.  The U.S. Treasury also tapped the bond markets to the tune of roughly $120 billion.  Overall, issuance was well received by market participants although yields did rise a few basis points early in the week to help investors digest the influx of debt.  Bond supply has thus far been well absorbed this year.  However, it’s important to keep in mind that the Fed, a significant U.S. Treasury buyer and monthly liquidity provider is expected to begin stepping away from the bond market in the months ahead.  With this in mind and coinciding with our expectations for above-average growth this year and into 2022 we believe yields are well-positioned to continue to trend higher as we approach the final the quarter of the year.
  • S&P 500 marches higher –The S&P 500 index recorded another record high on September 2 that followed seven consecutive monthly advances.  This is impressive, considering some economic data has been missing expectations to the downside, geopolitical risks have been increasing, and Fed talk has been geared towards providing less accommodation as opposed to more.   This occurred despite consumer confidence sinking to a 6-month low in August on the heels of the spreading delta variant and consumer inflation concerns.  We certainly believe an equity pullback is possible given the potential risks, and to some extent, probable given the amount of time we’ve had since a substantial drawdown.  However, we continue to believe that economic growth, although at off-peak levels, will still trend higher this year.  We agree that the Fed will be scaling back additional stimulus in the months ahead, however monetary policy remains very accommodative.  Consumer balance sheets are healthy while the labor market continues to improve.  Bottom line: we believe equities will continue to benefit from an economic expansion that has room to run.

Chart of the Week

Source: Bloomberg Inc.; BMT
  • The chart above displays the U.S. and German sovereign yield curves on September 8, 2021.  As one can see, the German sovereign yield curve is below the U.S. curve and displays negative yields for maturities twenty years and less.
  • Similar to the Fed’s bond purchasing program, the European Central Bank (ECB) has been purchasing 1.85 trillion euro ($2.2 trillion) via its Pandemic Emergency Purchase Programme.  With vaccine distribution widely picking up, economic growth and inflation have been rising which have contributed to ECB discussions around the future of its bond purchases.  In Germany, the 10-year bund yield has increased about 14 basis points (0.14%) from July 31 through September 8.
  • The ECB and the Fed set a monetary policy based on the overall strength, or lack thereof, in their respective economies.  It’s important to recognize that although independent, policy implications can certainly spill over and impact other financial markets.
  • With this in mind, we are sensitive and monitor policy dynamics overseas that can very well influence U.S. markets.  Specifically, any hawkish changes to ECB monetary policy may not only lead to higher yields in Europe but potentially in the U.S. as well.  Looking at the chart above, it’s obvious that German bund yields have room to increase.  Given our expectations for global economic growth and continued improvement in vaccination rates, potentially hawkish sentiment out of Europe furthers the rationale for U.S. yields to increase this year.

Commentary

Source: Bloomberg Inc.; BMT
  • The August jobs report offered a mixed message after U.S. companies added a meager 235,000 jobs to their payrolls when expectations were for over 700,000.  The spreading delta variant was partly to blame given its negative impact on economic sectors most exposed to the reopening.  In fact, the hospital and leisure sector added zero jobs in August, breaking six consecutive months of job gains. 
  • On the positive side, the unemployment rate dropped to 5.2%, compared to 5.4% the prior month. And, although August Nonfarm payrolls missed expectations, the three-month average was still at a very healthy 750,000.  
  • Overall, we are inclined to look beyond the August report and believe the job market will maintain its positive momentum through the end of this year and into 2022.  We aren’t overly concerned with a single month’s report:
    • The delta variant is certainly a cause for concern although based on new cases in the U.S., there are signs of stabilization.
    • Pandemic unemployment benefits ended in early September while many schools have resumed in-person teaching.  We expect the supply of labor to increase. 
    • The Labor Department’s Job Openings and Labor Turnover Survey (JOLTs) released on Wednesday, September 8, indicated a record of 10.9 billion job openings – there is certainly demand for labor. 
    • And lastly, the underlying fundamentals of the U.S. economy provides a favorable backdrop for the U.S. labor market.

All eyes will be on next month’s jobs report…especially Jerome Powell’s.

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