Key Private Bank Investment Brief
The global spread of COVID-19 has caused significant market movements and uncertainty among investors.
Your investment brief houses our experts' latest analysis and strategies for navigating the turbulence created by the outbreak—keeping you updated on our thinking and how these changes might impact your portfolio.
Key Private Bank Investment Briefing Notes
- Friday, 10/15/21
The September Federal Reserve (Fed) meeting minutes were released this week. The minutes revealed no significant changes from previously published comments, although the minutes took on a slightly more hawkish tone. Asset purchase tapering by the end of the year still seems likely. The Fed’s next meeting is in early November.
The JOLTS survey published by the Bureau of Labor Statistics still indicates a high number of job openings relative to history. Small businesses continue to report trouble filling open positions and are being forced to raise wages as a result. Last week, US initial unemployment claims fell below 300,000 for the first time since the pandemic began.
In addition, according to a recent survey by the National Federation of Small Businesses (NFIB), about 2/3 of companies are experiencing either significant or moderate supply chain issues.
The September Consumer Price Index (CPI) report was released. The year/year change ticked up to 5.4%, from 5.3% the prior month. Core CPI increased 4% year/year, in line with expectations. Producer prices (PPI) also continued to rise, with core PPI rising 2.9% year/year.
Average hourly earnings rose 4.9% (3-month annualized rate) in the United States, a 40-year high for this metric. Commodity prices continue to increase as well. The Bloomberg Commodity Index has risen about 76% from its pandemic lows.
Inflation is also affecting international markets. The UK continues to have supply chain issues/labor shortages, exacerbated by continued Brexit pressures on trade with the European Union.
Germany, the manufacturing hub of Europe, is also experiencing labor shortages and worker strikes. German business expectations have dropped to pre-pandemic levels.
Japan is also experiencing supply-related consumer price increases affecting eggs, dairy, coffee, etc. It has been many years since Japanese consumers have experienced price inflation.
Chinese producer prices (PPI) rose 1.2% in September and 10.7% year/year (a record high). Nevertheless, Chinese CPI rose only 1.2% year/year. China remains the world’s largest product exporter and is generally able to pass higher commodity costs onto overseas buyers.
The Delta wave appears to have peaked around September 1st. The 7-day moving average of cases continues to decline, along with hospitalizations.
Stocks rose in early Friday trading. The S&P rose about 0.7%, while small caps rose over 1%. International shares also rose.
Yesterday saw a significant move higher in the S&P 500, with the index rising 1.7%. It appears that the S&P 500 is putting in a near-term head & shoulders bottoming formation. 4465 is a key resistance level. If 4465 is cleared, the setup looks positive going into the seasonally strong fourth quarter.
About 10% of the S&P 500’s market capitalization has reported 3Q:2021 earnings. On balance, earnings have beaten expectations, led by the financial sector. This earnings season will play out over the next three to four weeks. If the current "beat rate" continues, 3Q:2021 earnings will have grown by over 30%, which should help underpin the stock market.
Leadership within the stock market has a cyclical tilt. Supply chain problems are affecting specific traditional cyclical sectors (industrials, materials). The financial, energy, and REIT sectors are leading the market. Growth stocks are lagging on a relative basis.
Fixed Income Takeaways:
At one point earlier in the week, the 10-year Treasury yield topped 1.60% before dropping back down towards 1.52% throughout the week. Friday morning, the 10-year yield was 1.57%, 5 basis points higher on the day.
Corporate credit spreads remain well behaved, and Investment-grade (IG) spreads moved slightly tighter on the week. Investors are showing a high appetite for new deals, especially from financial companies, with these deals seen as a hedge against rising inflation.
High-yield bonds tend to be correlated with equity prices. With the strong rally in stocks on Thursday, high-yield bonds put in their strongest daily performance in 5+ weeks.
Municipal bond inflows picked back up over the past week after a slight pause. Money is flowing out of high-yield municipal bond funds and into higher-quality funds. Overall, the pace of inflows has slowed.
Secondary municipal trading activity is increasing and is concentrated towards the front-end of the curve. 1-year municipal bonds yield about 120% of comparable Treasuries, which is relatively cheap. 3-year municipals yield about 37% of comparable Treasuries, which is quite expensive.
- Friday, 10/8/21
Employment update: September US non-farm payrolls disappointed, rising 194,000 vs. expectations of over 500,000. The prior month was revised upwards by 131,000 jobs.
The US labor market is still tight. According to the National Federation of Independent Businesses (NFIB), job openings abound, companies are being forced to raise wages. In addition, an increasing number of worker disputes and strikes are adding to the disruption in labor markets around the globe (including Germany).
Despite choppiness in the labor market, surveys of trucking activity continue to indicate strong GDP growth. The path to growth may contain fits and starts, and companies seem to believe that supply chain issues will not normalize until the second half of 2022 (later than prior expectations).
The Senate approved a bill to raise the US debt ceiling to avert default. However, the extension seems to be for only about six weeks (until approximately early December). The government is now expected to run out of funding between two important Federal Reserve (Fed) meetings.
COVID-19 Update: Cases continue to decline, and it appears that the recent Delta wave spike has likely peaked. Vaccinations continue to increase modestly. Approximately 66% of the US population over the age of 12 has been vaccinated.
China update: there has been no change to US/China trade policy after the election of 2020. For a reduction in tariffs to occur, more communication needs to happen between the US and China.
October 1st was National Day, the birth of the People’s Republic of China in 1949. China flexing its muscles over Taiwan is not surprising during this patriotic “Golden Week” celebration. Taiwan’s National Day is October 10th, so their recent response likely does not portend an impending skirmish.
After some initial volatility after this morning’s non-farm payrolls report, equities settled back into their range before the report. US stocks were essentially flat in early trading, while international stocks (both developed and emerging markets) rose about 0.25%.
After the employment report, the US dollar weakened slightly, resulting in a rally in precious metals, with gold rising over 1%.
Implied volatility (VIX) declined Friday morning. After trading around 20 overnight, the VIX was 18.9 in early Friday trading. Market participants seemed to anticipate some volatility in the non-farm payrolls number and were not surprised by the lower-than-expected print.
The European Central Bank (ECB) remains adamant that the recent spike in Eurozone inflation is transitory (likening it to a “sneeze”). After the Great Financial Crisis of 2008-2009, the ECB overestimated inflation, and they don’t want to make that mistake again. Unlike their central bank counterparts in the US and UK, the ECB is not planning any tapering of asset purchases.
Fixed Income Takeaways:
The yield curve steepened this week, with the 10-year Treasury note yield rising to 1.60% in early Friday trading. Yields initially moved lower after the non-farm payrolls report but quickly reversed higher.
We don’t believe today’s employment report will prevent the Fed from announcing a tapering of asset purchases at their November meeting. The unemployment rate dropped to 4.8% in September (partially reflecting a drop in the labor force participation rate). In short, today’s report was likely strong enough to allow the Fed to stick to its current plan.
We continue to see unusual trading activity within the Treasury-bill markets. Treasury bills with certain maturities near the impending debt ceiling deadline are trading at slightly higher yields due to concerns about technical default provisions.
Investment-grade (IG) corporate bond funds saw significant outflows this week (the largest since April 2020) after eight consecutive weeks of inflows. Concerns about inflation and the debt ceiling debate likely caused investors to pull funds from the corporate bond markets.
Municipal bond fund flows have also begun to moderate. High-grade municipal funds saw essentially flat flows on the week, while high-yield municipal funds saw outflows.
Municipal secondary trading activity, which is down 35% year/year, is also beginning to pick up with the recent increase in volatility.
- Monday, 10/4/21
- As we reported on Friday, the $1 Trillion Infrastructure Bill has been tabled; over the weekend, no progress was made, and as a result, the status remains the same.
Regarding the $3.5 trillion spending bill, on Friday, it seemed the outcome was way up in the air; over the weekend, it appears the direction of negotiation is now trending toward a $1.5 trillion package. Senator Joe Manchin (D-WV) referenced prior talks earlier this year with Democratic party colleague Chuck Schumer (D-NY) that provided an outline/agreement for spending at the $1.5 trillion level.
- The deadline for government funding was extended to December 3rd.
- The debate on the debt ceiling continues to loom larger with respect to the timing of the resolution before October 18th, which is now only two weeks away. The last time something similar occurred on the debt ceiling was in July 2011, when the US Government experienced a debt downgrade.
The S&P 500 Index lost 9.8% in the month before the downgrade and declined another 2.5% in the month following.
Over the next 3, 6, and 12 months, the market recovered with positive returns of 5.3%, 12.1%, and 16.3%, respectively.
- On Friday, Merck and Ridgeback Biotherapeutics announced early results of an oral antiviral (“Mjolnir”) that reduced the rate of deaths and hospitalizations among newly diagnosed COVID patients by roughly 50%, including those with the variants Delta, Gamma, and Mu.
The early results among 729 patients were so promising that an independent data monitoring committee, in consultation with the FDA, recommended the study be stopped so as not to injure those in the placebo group unnecessarily. Merck will now seek emergency use authorization for the drug, and they have already begun discussions with generic drug manufacturers to produce significant quantities of the drug globally.
If confirmed, this could make the virus “treatable” like the flu and could have significant, positive impacts on the ability of the global economy to return to normal.
- Over the weekend, it appears China has stepped up efforts to limit contagion of the China Evergrande situation without necessarily intending to save the company.
- China Evergrande is also trying to raise external capital to provide liquidity. It’s too early to tell exactly how this plays out, but it will have some impact on China’s economy and slow the country’s economic output.
- In addition, China is affecting its own energy prices by limiting and/or rationing electricity, which has implications for inflation and other items.
- Lastly, over a longer time period, we believe China is too big to ignore as it represents approximately 20% of global GDP and has vastly expanded its trading partners with many countries around the world. From a pure portfolio diversification perspective, it remains an attractive opportunity. Also, investors should not forget that even if the economy is slowing and faces demographic challenges, China’s middle-class is still rising noticeably, which portends a potential tailwind for growth over the next few decades.
US Economy continues to boom
- Salaries and wages increased 5.7% at a month/month annual rate, and spending increased at a 10.4% annual rate.
- Savings rates are coming down, but consumers are still flush with +$2 trillion in savings due to rising home prices and investment portfolio values.
- Manufacturing activity reaccelerated and beat forecasts, with indicators continuing to show expansion. Supply chain delivery times remain elevated but eased slightly over the past month.
- On Friday, inflation expectation data also remained elevated and has not changed much since last month, with one-year forward expectations hovering at around 4.6% and longer-term (5-years +) expectations at approximately 3.0%, which is at the upper end of historical ranges, rather than at a level considered worrisome.
- Third-quarter earnings season starts next week and will be an important one. Estimates have come down slightly, and several factors should be considered:
(a) supply chains
(b) labor costs
(c) energy prices
(d) Washington DC uncertainty
(e) and China uncertainty
US equity markets were down in early Monday trading. The S&P 500 declined 1.4%, while the NASDAQ slipped further, down 2.2%. Small caps also retreated, losing 1.0%.
Last week ended well, but the S&P 500 was still down 2.2%, representing the 18th weekly loss of at least -2% since the start of 2019. During this time frame, the benchmark index was higher the following week 12 of 17 times (71%-win rate) with an average move of +2.1%.
Also, since the start of 2019, there have been back-to-back -2% weekly declines twice: the weeks ending 9/4/20 - 9/11/20 and 3/13/20 - 3/20/20. Both sets of consecutive declines happened during the two largest drawdowns experienced over the last two calendar years.
That makes this week a rather important one. If we stabilize here, then a resumption of the bull move is likely imminent; however, another -2% decline could be a harbinger of a deeper correction unfolding.
Wall Street analysts have been cutting their third-quarter US corporate earnings expectations for four straight weeks now, and the trend has begun to spill over into their 4Q expectations as well. These are not top-down guesses based on macro inputs, such as the estimates that come from the Street’s strategists – instead, they are the result of adding up every consensus estimate for all 500 companies in the S&P Index.
Clearly, a subdued backdrop as we head into the lull before earnings season truly kicks off on October 13/14. Note: analysts have been excessively cautious on US corporate earnings power all year, suggesting that the market believes we are heading into another reporting period where results will far exceed expectations. Time will tell.
Historically, correlations between the S&P500 Index and bond prices have been negative, which bodes well for portfolio diversification and a typical 60/40 portfolio of stocks/bonds. More recently, correlations have hit a 14-year low (1-year) and are problematic because yields are low. While we are not concerned to any degree right now, it is something that bears watching.
Fixed Income Takeaways:
Treasury yields experienced a bear-steepening this morning, with the 10-year treasury yield increasing 2 basis points (bps) higher to 1.47%, while the 2-year treasury remained unchanged. This continues the steepening that we saw last week with yields down on the front-end and belly of the curve, as the long end saw yields move higher.
All eyes this week will be on the payroll data to be announced on Friday. This will be telling on the direction the Federal Reserve (Fed) may take.
Credit spreads remain well-behaved. Investment-grade (IG) spreads were unchanged on Friday and almost 3 basis points wider for the week. High yield spreads were about 4 basis points wider on Friday and nearly 17 basis points wider for the week.
We expect approximately $20 billion in IG new issuance for the week and $100 billion for October. We anticipate issuers will continue to come to market under the premise that interest rates will move higher in the last quarter of the year and want to take advantage of where rates are now.
Flows into IG funds have been strong this year, with 32 consecutive weeks of inflows.
Demand for the Fed’s overnight reverse repo facility is poised to resume today after a drop last week due to quarter-end. Volumes are expected to increase this week. Investors are demanding more yield for bills due in late October due to the debt ceiling remaining unresolved.
Eighteen of the FOMC members commented last week and centered around support for tapering, likely to be announced in November. Inflation and rate lift-off expectations remained more dovish.
- Friday, 10/1/21
The third quarter of 2021 ended yesterday and generally followed its tendency for seasonal weakness. For the month, global stocks fell 4.1%, while US stocks dropped 4.7%. Global bonds fell around 0.9%. Year to date, global risk assets are still in the green, while global bonds continued at around –1%.
Meanwhile, earnings are getting cheaper but are still elevated. There are not many signs of stress in corporate bond spreads (a measure of market risk). However, credit default swaps have widened, most likely due to political volatility in Washington DC.
This week, there was much noise from Washington, including discussions over the pending infrastructure and spending bills and the looming debt ceiling. While the odds of a deal have fallen, we believe it is still the most likely scenario because failure is not an option. While we endure this volatility, we remind investors to tune out Washington – and the media – as much as possible until the ink is on paper.
On the monetary front, eyes are on the Federal Reserve leadership as Jerome Powell, and seats within the Fed board come up for re-nominations.
The story of the year continues to be inflation. As we mentioned in our 2021 outlook, “after a demand shock, COVID created a supply shock. With many key goods in short supply, inventories are lean. Too, resiliency is replacing efficiency, and ‘just in time’ is replacing ‘just in case.’ This is a recipe for inflation.”
Stocks have traditionally faced valuation headwinds when inflation crests above 4%. We're getting closer to that number. Inflation expectations going forward are elevated but still contained. On the plus side, price increases lift company revenues and profits, and wage increases lift consumer incomes.
It seems that supply chain bottlenecks could continue to put pressure on upward inflation. If this is the case, the Fed may have fewer tools in its toolkit to limit inflation. However, Powell continues to emphasize that he believes this is a temporary phenomenon.
Finally, we remind clients of the upcoming national calls:
October 7 @ 3:00 pm ET – National Client Call focus on China
October 12 @ 2:00 pm ET – National Client Call focus on potential Tax Changes
The month of September held true to form in its traditional stock weakness. The S&P 500 was down 4.8%, its worst month since March 2020. Even with the September weakness, 412 companies within the 500-company index ended in the green year to date going into the final quarter. We also suspect earnings estimates will be less confident this quarter due to supply chain pressure and looming inflation.
Within international markets, the European Central Bank (ECB) and Bank of Japan (BOJ) continue to signal accommodative policy, while the Bank of England (BOE) signals a more hawkish stance. We also saw recent elections in both Germany and Japan. In Germany, the plurality landed with a center-left lean, while Japan saw a new figurehead in Fumio Kishida, though continued leadership by the Liberal Democratic Party.
In China, Evergrande ripples continue to work their way through markets. It seems that onshore (not offshore) investors are advantaged in the bond market.
Fixed Income Takeaways:
US Treasuries rose across the yield curve in September in what’s been called a delayed taper tantrum. Treasury markets saw their biggest losses since March 2020. The 10-Year Treasury spent most of September in a holding pattern, around 1.30% - 1.36%. Amid continued corporate bond issuance, crude oil spikes, UK yields increasing, and upcoming payroll numbers, eyes will be watching the 10-Year. Even with this volatility in the market, spreads have been resilient, and the demand for corporate credit continues.
In the municipal market this week, munis cheapened in sympathy with Treasuries. Inflows were still positive, but the pace has slowed a bit. For the year, average weekly inflows stand around $1.5 billion; this week, inflows were about a third of that. High yield muni funds had outflows of $100 million. The muni market stands ready to finance the potential $1 trillion infrastructure bill, but as mentioned, the ink has to hit paper.
See all of our insights and updates in our archive.