Fresh Records Despite China Concerns
At the close of business last Friday, global equities were little changed for the week after climbing further into record territory as the S&P 500 Index was on track for its sixth consecutive positive month.
China continued to stiffen its regulatory grip, corporate earnings were impactful, and the US Fed said it has more ground to cover before changing its easing policy.
Treasuries continued their roller coaster ride as the yield on the 10-year note dropped to 1.23% from 1.30% last week. The price of a barrel of West Texas Intermediate crude oil rose from $71.60 last week to $73.61. Volatility, as measured by the Cboe Volatility Index (VIX), jumped to 18.6 from 17.1.
In a reversal of an earlier policy, the Centers for Disease Control and Prevention recommended that fully vaccinated people wear masks indoors in places with high COVID-19 transmission rates. The CDC also warned that the delta variant is as contagious as chickenpox and may make people sicker than the original COVID virus.
“X” marks the spot for global unemployment
According to a new report by the non-profit group Generation, Gen X workers aged 45 and older may be bearing the brunt of a global unemployment crisis as the pandemic adds to existing challenges for older workers. Despite the varied international jobs landscape– from the US to the UK and India to Italy–the findings were broadly the same: 45- to 60-year-olds are the most overlooked employee bracket.
For the past six years, mid-career individuals have made up a consistently high percentage of the long-term unemployed. Among hiring managers’ top concerns were a perceived reluctance among older workers to try new technologies (38%), an inability to learn new skills (27%) and difficulty in working with other generations (21%).
CANADIAN ECONOMIC NEWS
In Canada, businesses say they’re struggling to find workers, and it’s not because potential hires lack training in their field. Rather, it’s a lack of “soft skills” that is holding workers back. Almost sixty per cent of Canadian businesses say they can’t find qualified employees to fill vacancies. And a third of those businesses say one big reason is because prospective hires don’t have soft skills such as dependability, flexibility and a willingness to learn.
US ECONOMIC NEWS
The US Senate voted to advance a bipartisan infrastructure plan, which opens the process to debate and amendments. The proposal is set to invest $550 billion into transportation, broadband and utilities.
The US economy contracted at a record average annualized rate of 19.2% from its peak in the fourth quarter of 2019 through the second quarter of 2020, government data showed, confirming that the COVID-19 recession was the worst ever.
We are halfway through second quarter earnings season, with results beating forecasts and estimates for the remainder of 2021 and into 2022 continuing to rise. Earnings are up 86% year over year, which is the strongest rate of growth since the fourth quarter of 2009. Second quarter revenues have grown a record 21%. Earnings came in 18% above expectations, well above the historic norms of 3% to 5% above expectations. Similarly, revenues have come in 4.6% above expectations, more than four times the historical average of 1.1% above estimates.
Many companies have reported substantially higher commodity and (in some cases) labour costs, but most have been able to pass on the higher costs to cash-heavy consumers. S&P 500 profit margins were at a record 13% in the first quarter, and they remained just below 13% for the second quarter. As these companies globally continue to exceed earnings expectations, they are increasing their dividend payments to owners of the stock, and therefore dividend- paying global equities are posting strong returns.
US housing boom turns corner
The US Department of Commerce said sales of new single-family homes dropped to a 14-month low in June, and sales in the prior month were weaker than initially estimated. Sales of new single-family homes fell to an annualized rate of 676,000, 6.6% below May’s rate of 724,000 and 19.4% below the June 2020 level of 839,000.
The inventory of new homes for sale jumped from a 5.5-month supply in May to a 6.3-month supply in June. Last fall, it sat at a low of just 3.5 months. In addition, 30-year fixed mortgage rates fell back to the lowest level since February last week, and the 15-year fixed rate set a record low, sending refinancing applications up 9% for the week. Pending sales of existing homes in June, as measured by signed contracts, fell 1.9% from May, according to the National Association of Realtors.
Fed holds steady despite concerns
As expected, the United States Federal Open Market Committee concluded its two-day meeting by keeping interest rates in a target range near zero. The Fed said the economy continues to progress despite concerns over the pandemic spread. The post-meeting statement explained that inflation has risen, largely reflecting transitory factors, and overall financial conditions remain accommodative.
The statement also acknowledged that the economy has made progress toward the Fed’s goals, though it will continue its monthly bond purchases. Chairman Jerome Powell cautioned that the Fed still has a ways to go before it adjusts policy. In a related matter, the US Department of Commerce said the GDP rose 6.5% in the second quarter, which was well below expectations of 8.4%. Even so, the economy has rebounded and is now bigger than it was pre-pandemic. Economists mostly expect strong gains in the second half.
EUROPEAN ECONOMIC NEWS
The nineteen-member European economy grew by 2% in the three months through to the end of June The region contracted 0.3% in the first quarter and 0.6% in the final quarter of 2020. The Eurostat said that annual inflation is projected to reach 2.2% in the euro zone this month. This would be up from 1.9% in June.
JAPAN, CHINA and EMERGING MARKETS ECONOMIC NEWS
Over the last few weeks, we have been reducing emerging market equity exposure in our client portfolios. Chinese stocks listed in Asia and the US plunged early in the week as China turned the focus on its own tech companies in an effort to bring about greater domestic competitiveness, marking the first major revision of its kind since the directives were first put in place in 2000.
In addition, the government has taken aim on foreign IPOs, preferring Chinese companies listed in Hong Kong, rather than the US, in order to shield domestic companies from foreign corporate compliance. A more recent crackdown on Chinese private education companies suggests that few industries are out of Beijing’s reach. Beijing stepped up efforts to soothe investors over the last couple of days amid concerns that a sharp sell-off in equities could have a spillover effect to other asset classes, including bonds and foreign exchange.
US-China talks at a stalemate
A high-level meeting between US and Chinese officials concluded with criticism from both sides. Before the talks even ended, China’s Vice Foreign Minister Xie Feng reportedly said the two countries’ relationship is now in a stalemate and faces serious difficulties.
Under President Joe Biden, the US has increased its criticism of Beijing over alleged human rights abuses in regions such as Xinjiang and Hong Kong. Beijing considers these matters part of its internal affairs. The leaders of both countries are expected to work toward the first meeting of Chinese President Xi Jinping and Biden, likely around the G-20 summit in October.