- The three major equity indexes, S&P 500, Dow Jones and NASDAQ Composite, all rose for the first time since the week of April 16th.
- It was a very quiet May, as the S&P 500 posted its quietest May since 2002, gaining only 0.70%.
- The U.S. junk market had an extremely busy May, as issuers sold almost $47B in new supply, its busiest May on record.
- President Biden officially unveiled his $6T budget proposal, funding many of his initiatives with tax increases. However, the plan is still expected to run a $1.3T annual deficit.
- WTI crude jumped over 2% in Monday’s session as OPEC+ agreed to maintain their plan of hiking oil output in July.
- The increase of roughly 841K/bpd in July is not expected to bring the global oil market back into equilibrium as demand continues to outpace supply.
- Positive economic data included ISM Manufacturing which climbed to 62.1 in May, its strongest level in 14 years, while new manufacturing orders climbed to their highest levels in 17 years.
- However, the ISM employment number posted its lowest reading since November, signaling that there could be some downside risk in employment data released later this week (Non-farm payrolls on Friday).
- The JPMorgan Global Manufacturing PMI improved in May from 55.90 a month earlier to 56.00.
- In Brazil, the two-year inflation breakeven rose to 5.39%, the highest level since 2016. The Brazil Ibovespa Index gained 0.58% last week.
- In India, the government extended its lockdown to May 31st and suspended vaccines on the 18-to-44-year-old population due to a shortage of doses.
U.S. stocks pushed higher after overcoming weakness (particularly in the NASDAQ) over the last few. The three major equity indexes, S&P 500, Dow Jones and NASDAQ Composite, all rose for the first time since the week of April 16th, led by the tech-heavy NASDAQ, which gained 2.06%.
The gains came after several Fed speakers continued to reiterate that they believe recent inflationary pressures are transitory and that the group will remain accommodative for as long as needed, keeping the “lower for longer” narrative intact. The comments came even as core PCE (the Fed’s widely watched inflation indicator), which was released on Friday, climbed 3.1%, more than expected on a year-over-year basis.
The equity rally throughout the week was broad-based; however, there was outsized focus on momentum names, with the so-called January “meme rally” coming back into favor, pushing names like AMC, GameStop, Virgin Galactic, BlackBerry and Express significantly higher.
The Communication Services sector, which has significant exposure to online web (Google) and social media names (Twitter, Facebook), was the best performing space on the week, adding 2.46% buoyed in large part by social media platforms and content providers. The Technology sector also outpaced broader market gains and was led by Semiconductors, as the Philadelphia Semiconductor index gained 4.7% on the week.
BIDEN BUDGET REVEALED
President Biden officially unveiled his $6T budget proposal on Friday with very few surprises. As many expected, the administration plans to increase spending significantly on infrastructure, public health, and education, while looking to fund the initiatives with higher taxes on corporations and the wealthy. Even with the increase in taxes, President Biden’s plan is projected to run an annual deficit of around $1.3T.
A high-level summary of the plan includes:
- 1.6% increase in military spending
- 16.5% increase in domestic programs such as scientific research and renewable energy
- $4.5T to be spent over the next decade on infrastructure and social programs
- $3.5B on universal preschool and installing a $15 minimum wage for teachers at those schools
- $8.8B for direct spending on families, including $6.7B for affordable childcare and another $750M on paid leave
- Taxes would climb to 28% from 21% for corporations
- The top capital gains rate would move to 43.4% from 23.8%, while unrealized capital gains could be taxed at death
EQUITY MARKETS SELL IN MAY & GO AWAY
As the month of May closed out, we reflected on what was a lackluster month in terms of news, volume, and performance. The S&P posted its quietest May since 2002, as its price changed less than 1% on a monthly basis, compared to its long run average of 3% since 1990. Volumes traded as equity exchanges declined nearly 26% on the month, averaging 10.5B shares/ daily versus the 13.3B shares averaged leading up to the month (Monday’s session on 5/24 was the lowest volume day of the year).
JUNK BOND MARKET IN MAY
While equity markets had a largely uneventful May, the U.S. junk market posted its busiest month of May on record in terms of supply, with almost $47B issued. The $47B headline figure is up ~$4B from a year earlier, with 2021 now having seen four of the top 10 busiest months ever in terms of high-yield sales. The ramp up in supply comes as issuers look to continue to take advantage of historically low rates and an accommodative (for the time being) Federal Reserve.
U.S. equities were mixed to start the week with the Dow and the Russell 2K advancing, while the S&P 500 and NASDAQ fell marginally. During Monday’s session, the S&P moved within four points of its all time high of 4,232 before closing around the 4,200 level. Headlines leaned to the positive side as investor optimism rose after a report outlined the EU planned to lift all quarantine requirements beginning in July. Despite the news, it was another quiet day on Wall Street following the long Memorial Day holiday.
Energy and the Russell 2K were the standout performers in Monday’s session, gaining 3.93% and 1.14% respectively. Re-opening sectors also outpaced the work-from-home names with airlines, casinos, and movie theaters all climbing.
WTI Crude prices jumped 2.11% to close at $67.95, their highest prices since October 2018. The move higher came after OPEC+ forecasted a tightening oil market as the group agreed to stick to its plan of hiking oil output by around 841K/bpd come July. After July’s expected output increase, the current expectation is for the group to hold production steady until April 2022.
While the demand picture for oil has clearly improved, the big question for investors remains – will the group add more supply later this year to keep pace with the accelerating global recovery? However, investors will be left in limbo with the wait and see approach the cartel appears to be taking, as OPEC+ has spent more than a year rescuing oil prices from historic lows. Estimates from the International Energy Agency (IEA) show that oil demand is expected to jump roughly 5mbpd, which is equivalent to the current monthly production of Kuwait and the UAE combined.
Investors continued to assess the release of economic data, which did little to provide a clarity for investors. Headline U.S. Manufacturing data released on Tuesday topped estimates; however, some underlying components that comprise the data came in weaker than anticipated. ISM Manufacturing climbed to 62.1 in May, its strongest level in 14 years, while new manufacturing orders climbed to their highest levels in 17 years.
Dampening the positive data was the ISM employment number, which came in at 50.9, its lowest reading since November (prior to the second stimulus package), signaling that there could be some downside risk in employment data ahead of Friday’s non-farm payroll release.
Last week, global equities gained 1.37%, boosted by a broader market rally amid reopening optimism. Health care and utilities were the laggards, down 0.20% and 0.98% respectively. The JPMorgan Global Manufacturing PMI improved in May from 55.90 a month earlier to 56.00. The World economy weighted inflation year- over-year climbed to 3.63% on June 1st, up from 3.13% a month earlier. Later this week, the Group of Seven finance ministers will meet in London to discuss President Biden’s proposal regarding global minimum tax on corporate profits.
In May, the Euro area posted its highest manufacturing PMI reading in the survey’s history with a 63.1 print and strong demand for consumer and investment goods encouraged companies to strengthen their workforce, and in turn, companies rose their prices to offset rising input costs. In its press release, the survey provider IHS Markit pointed out that “the economy looks set for strong growth over the summer but will likely also see a sharp rise in inflation”. The Euro STOXX index gained 1.13% last week.
In Germany, consumer prices increased 2.4% in May, which is the highest level since October 2018. Demand was boosted by softer COVID-19 restrictions, as infections per 100,000 people dipped below the 100 level mid-May. German Chancellor, Angela Merkel, said that she is open to give up “special lockdown powers” as long as the virus remains under control. According to Bloomberg, 43% of German population has received as least one dose of the COVID-19 vaccine. The DAX index gained 0.53% last week.
In the United Kingdom (UK), house prices increased the most since 2014 with 10.9% year-over-year appreciation in May. Policy maker Jon Cunliffe attributed this surge to the tax holiday. He said, “We’ve seen very fast rises in house prices and transactions before tax holidays in the past. There are some signs that people are making different housing choices that may affect the future.” The FTSE 100 index gained 0.06% last week as the pound rallied to a three-year high against the U.S. dollar at $1.42.
In China, Liu Guoqiang, Vice Governor of the People’s Bank of China (PBOC), said that while he expects the Producer Price Index (PPI) to go up in the coming months, the pass-through from PPI to Consumer Price Index (CPI) will be temporary. He added, “as a large economy, the increase in international commodity prices is not, on its own, likely to trigger any obvious imported inflation in China as long as it is not accompanied by overheating domestic demand”. The China Manufacturing PMI edged down in May from 51.10 a month earlier to 51.00. The Shanghai Composite Index gained 3.28% last week.
In Japan, Bank of Japan (BOJ) slowed down asset purchases as May data showed no monthly ETF purchase for the first time since Governor Haruhiko Kuroda took office in 2013. The Japan Manufacturing ticked down from 53.6 a month earlier to 53.00 in May amid new COVID-19 restrictions. Inflation remains muted compared to other developed economies due to weaker consumer demand and lower capital expenditure. The Nikkei 225 advanced 2.94% last week.
In Brazil, the economy grew faster than anticipated in the first quarter, with 1.2% quarter-over-quarter growth and 1% year-over-year expansion. Goldman Sachs revised its annual growth forecast from 4.6% to 5.5% and highlighted that “concerns about the slowdown in the first quarter activity were exaggerated”. The Brazil Manufacturing PMI improved to 53.70 in May, from 52.30 a month earlier. The Brazil Ibovespa Index gained 2.42% last week.
In South Korea, exports surged 45.6% year-over-year, magnified by last year’s weaker economic environment. Exports to China surged 22.7% while semiconductor exports jumped 24.5%. Korean auto manufacturers’ sales jumped more than 40% despite the chip shortage. The Manufacturing PMI moderated for the second consecutive month to 53.70 in May. Bank of Korea estimates that the economy will grow 4% this year and that inflation will move closer to 1.8%. The KOSPI index gained 1.02% last week.
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