Economic data from the month of March continues to be strong while the market signal trends in April have shifted in certain areas.
On the economic front, consumption continues to be very strong, as retail sales data in March increased 9.8% month-over-month (m/m), 14.7% year-over-year(y/y) (fastest pace since February 1979) and is up 22% compared to March 2019.
Source: Hedgeye.
Source: Hedgeye.
Source: FRED.
Industrial production increased 1.4% in March compared to February and was positive on a y/y basis for the first time since August 2019. Based on the weakness in February and the high PMI data for March, the expectation for March production was higher (consensus estimate was 2.6%), and industrial production is still below the peak in December 2018.
Source: Hedgeye.
Source: FRED.
Production data is clearly lagging consumption, which is putting upward pressure on prices. This was evident in several inflation releases.
The Consumer Price Index (CPI) for March increased 0.60% m/m, the largest increase since August 2012. Most of this was driven by energy prices, which increased 5.0%. Shelter prices also increased (up 0.3%), led by a 3.8% increase in lodging away from home (largest increase since October 2005). This is a positive sign that consumers are starting to travel again, which will likely help service industries. On a y/y basis, CPI increased 2.6%.
Source: Hedgeye.
Core CPI (excluding energy and food) is not increasing at the same rate, but Core Services prices are starting to increase on a y/y basis. This is another positive sign for service industries.
Source: Hedgeye.
Import prices increased 1.2% m/m in March, which was the fourth consecutive monthly increase of 1% or greater. That is the longest such streak since April 2011. Energy was a large contributor to this increase, with fuel prices rising 6.3%. However, nonfuel prices also rose 0.8%, the second most in nearly a decade. On a y/y basis, import prices increased 6.9%, which is the highest rate since January 2012. Energy prices increased by 54% while nonfuel prices rose by 3.8%, the largest increase since October 2011.
On the market front, commodity prices continued to increase, which is not a surprise based on inflation data and the current supply/demand dynamic in the marketplace.
The commodity index is close to the recent price high and has been consolidating at higher highs and lows.
Source: Koyfin.
The same pattern applies across the commodity spectrum from oil, to copper/metals, and agriculture.
Source: Koyfin.
Oil volatility continues to decline, which is also a positive sign for commodity prices.
Source: Koyfin.
The U.S. dollar has been declining the last two weeks, after moving off a multi-year low in January. A lower U.S. dollar is usually a positive for commodities, economic growth, and cyclical stock performance.
Source: Koyfin.
U.S. 10-Year Treasury rates have been declining in the month of April, from a high of 1.75% to a low of 1.53%. This consolidation pattern is taking place at higher highs and lows. Based on our outlook for economic growth and inflation data in the second quarter of 2021, we would expect interest rates to move higher.
Source: Koyfin.
High yield credit spreads increased slightly last week, but they are still near the lowest levels since 2018 and are not suggesting a change in investor risk preferences.
Source: Koyfin.
Cyclical equities continue to outperform on a three-month basis, with Financials, Energy, and Industrials being three of the top five performing industries and all of them are currently outperforming the S&P 500 Index.
Source: Koyfin.
On a one-month basis, Energy is negative, and Materials, Financials, and Industrials are all underperforming the S&P 500 Index.
Source: Koyfin.
A similar pattern has developed when looking across factors, with small caps, value, and high beta leading on a three-month basis, while momentum and large growth are leading on a one-month basis.
This is occurring at a time when equity volatility (VIX) is declining, which is usually a positive for cyclical performance.
Source: Koyfin.
This could be mean reversion after a large amount of outperformance for cyclicals, high beta/reopening, and small cap stocks or the start of a new trend. Based on the economic, inflation, and cross asset trends as well as the volatility data, we expect this to likely be temporary and cyclicals should regain performance leadership for now.
The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance. The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.
Senior Vice President, Investment Strategy
Boyd Watterson Asset Management, LLC