Weekly Brief: Malaysia LEI, Delta Variant, Jackson Hole Signals, and Japan Stocks Rise
- WEFF Research Team
- Aug 29, 2021
- 9 min read
Updated: Aug 30, 2021
Economics
Malaysia's June 2021 leading economic index declined by 2.8 percent month-over-month, prior to a 2.9 percent drop in May
In the continued COVID-19 disruption, this is the third consecutive month of negative readings, and seven out of the ten components of the leading economic index have fallen. On a yearly basis, the leading economic index rose 0.5 percent, from a 6.9 percent jump in May 2021.
The 0.1 percent growth in June was mainly contributed by real imports of other basic precious & other non-ferrous metals (-0.1% in June 2021 vs -1.1% in May 2021). However, the general decline of 2.8% was mainly reflected by the decrease in the number of housing units approved (-0.9% in June 2021 vs -0.3% in May 2021), new companies registered (-0.8% in June 2021 vs -0.2% in May 2021), and the real imports of semiconductors (-0.4% in June 2021 vs -0.01% in May 2021).
Unfortunately, the leading index indicates that Malaysia’s recent economic outlook continues to face challenges. Nonetheless, there are possible positive outlooks in the near future. Along with the progress of COVID-19 vaccinations and government initiatives to support businesses, this stimulates business confidence and hence helps support some economic recovery.
*For those unfamiliar with the Leading Economic Index (LEI), it is a composite index published monthly by the Conference Board. It is used to predict the direction of the global economic movement. The index is made up of 10 economic components, and changes in these components often precede changes in the overall economy. Companies and investors can use the index to help plan their activities around the expected performance of the economy and protect themselves from the effects of economic downturns.
The total construction work done in Australia rose by 0.8 percent in Q2 (April to June 2021), which was less than the 2.4 percent gain in the previous quarter and less than the market prediction of a 2.5 percent increase.
Growth was mainly driven by engineering construction (1.8 percent), non-residential (0.3 percent), and building work (0.1 percent). On the other hand, residential work done fell by 0.1 percent.
Due to increases in the delta variant of the coronavirus, construction activities in the Greater Sydney area were temporarily suspended from July 19 to July 30, 2021, and subsequent lockdown measures, we expect that the industrial production will face downside risks. On the bright side, the Australian government is focusing on an infrastructure-led economic recovery plan. The fiscal year 2021/2022 (July 2021-June 2022) budget announced an additional investment of AUD15.2 billion for infrastructure works over the next 10 years. The government also extended three schemes--the First Home Loan Deposit, The New Home Guarantee schemes, and the Family Home Guarantee scheme--that are expected to support the construction industry. It is suitable to expect the industry to gain further momentum and growth.
Delta variant deals blow to U.S. economy in August
Two surveys show that due to the rise of the delta variant and ongoing shortages of labor and materials, U.S. businesses growth in August has eroded for the third month in a row.
A survey of service-oriented companies (such as restaurants, hotels, and theaters) that deal with customers face-to-face fell to an eight-month low. IHS Markit reported that the index dropped to 55.2 in August from 59.9 in the prior month. Another measure of American manufacturing dipped to a four-month low of 61.2 from 63.4 but remaining at an all-time high. Manufacturers can better control their work environments and are hardly subject to government restrictions.
Companies are still expanding but are not growing as fast as they were several months ago. The main reasons are the continuing shortage of supplies and labor; high demand and disruptions to global trade (making it harder for businesses to acquire critical materials); and millions of people who worked before the pandemic are still left out of the labor force. The upsurging delta variant complicates these problems and makes situations particularly worse for service providers. Customers are again wary of being in crowds, and some states are requiring certain businesses to check for vaccine proof. Executives at service companies and manufacturers are not as upbeat as they had been a few months ago due to growing customer concerns about the delta variant, and the slowest expansion rate in a year.
Unfortunately, we suspect that the expansion of the US economy may still remain slow as the spread of the delta variant has led to a certain weakening of the demand growth for services that require consumers to be face-to-face.
The unemployment rate in South Africa rose to 34.4% in the second quarter of 2021 from 32.6% in the previous period. This is the highest jobless rate since comparable data began in 2008, reflected in the worsening pandemic crisis and a week of deadly unrest and looting last month in parts of the country.
The number of unemployed increased by 584 thousand to 7.8 million, employment fell by 54 thousand to 14.9 million and the labor force went up by 530 thousand to 22.8 million. Job losses were concentrated in the financial sector (-278 thousand), followed by community and social services (-166 thousand) and manufacturing (-83 thousand).
In the face of the third wave of COVID-19 inflections, the South African government has tightened more restrictions which hinders efforts in recovering the economy. We expect the unemployment rate in the third quarter to deteriorate. Furthermore, taking into consideration the eruption of deadly riots in the Gauteng and KwaZulu-Natal provinces, which are the two major economic hubs, may place more job positions at risk.
Finance
Jackson Hole Signals
In our view, the most important takeaway from Chair Powell's Jackson Hole speech is that he explicitly disconnected the taper and rate decisions.
He said that the taper will not be intended to carry a direct signal regarding the timing of interest rate liftoff. In addition, he strongly argued that inflation will soften. Powell said he agreed with most of the Committee that it is likely appropriate to start tapering later this year. We think this acknowledgment strengthens the view of a Q4 formal taper announcement.
What This Means for the U.S. Dollar
The eventual Fed tapering announcement should not have a particularly long-lasting impact on the dollar, However, should a slightly earlier than expected Fed taper push this gap well wider, the dollar can find greater support, particularly so against emerging market currencies.
What This Means for Equities
The S&P 500 reacted positively to Powell's comments, focusing more on the dovish signals around the timing of the interest rate liftoff, than the slightly more hawkish signals around the timing of tapering. Going forward, we expect tapering will provide a modest headwind to equities and will have a bigger impact on low-quality stocks.
Nasdaq 15,000: Just another stock-market number or something else?
The Nasdaq Composite COMP, +0.52% took 136 days from its last milestone at 14,000 to close at 15,019.80, marking the longest stretch before knocking out a thousand-point landmark since the 335 sessions between 8,000 and 9,000 back in 2018-19, according to Dow Jones Market Data.
The move from 8,000 to 9,000 was a 12.5% rise for the Nasdaq Composite, compared with the 7.1% rise to 15,000, this time around. That said, this milestone, also the 29th record closing high for the Nasdaq Composite in 2021, comes with the added benefit of records for the broader market index, too.
The S&P 500 index SPX, +0.15% is marking its 50th all-time closing high of the year at 4,486.23. It took the Nasdaq Composite 50 years to achieve 15,000 while it took the Dow 117 years when it hit 15,000 in 2013. The top performers for the Nasdaq Composite in its climb to 15,000 include Support.com Inc. SPRT, +4.48%, up 466%, Prothena Corp. PLC PRTA, +3.19%. , rising by about 317%, and Eurodry Ltd. EDRY, +0.54%, advancing 250%. BioNTech’s U.S.’s listed stock also tops the list, up by about 214%.
Here are the top performers since the 14,000-point milestone:
COMPANY NAME % CHNG SINCE CURRENT MKT CAP (MIL)
14K MILESTONE
Support.com, Inc. 466.53 332.30
Prothena Corp. Plc 317.13 2,890.02
Eurodry Ltd. 249.51 74.71
Performant Financial Corporation 240.84 289.84
Vertex Energy, Inc. 234.19 476.57
Technoglass, Inc 222.94 1,100.81
Urban One Inc Class D 214.51 328.01
BioNTech SE Sponsored ADR 213.85 89, 457.23
CPI Card Group, Inc. 195.61 272.43
State Auto Financial Corporation 187.66 2205.87
Note: Only Includes companies that were trading before Feb. 10, 2021.
Nordstrom Earnings beat Expectations
Shares of Nordstrom dropped 7.4% to $35.01 in extended trading Tuesday. The stock had rallied 21% in 2021 and 143% from a year ago.
Even at $35, Nordstrom stock is still well above its $32.61 close from Wednesday, Aug. 18.
Shares had rallied in recent days following upbeat results from Macy’s (M) and Kohl’s (KSS). Such gains may have set the bar for Nordstrom so high that even better-than-expected top and bottom-line figures, and a higher outlook was a disappointment. Nordstrom (ticker: JWN) reported fiscal second-quarter earnings of 49 cents a share, ahead of consensus estimates at 27 cents a share, according to FactSet. Sales of $3.57 billion were up 101% from last year and above consensus estimates at $3.34 billion. Still, sales were down 6% from the same period in 2019, before the pandemic withered traffic counts in department stores.
“Our second-quarter results demonstrate the strength of our two brands, the power of our ‘closer to you’ strategy, and the success of our iconic Anniversary Sale,” CEO Erik. Nordstrom said in the earnings release, “We capitalized on improving customer demand with focused execution, healthy inventory sell-through and continued expense management to deliver strong quarterly results.” The company said freight and labor cost pressures led to selling, general, and administrative expenses as a percentage of net sales that were 1.7 percentage points higher than in 2019. It expects revenue growth, including retail sales and credit card revenues, of more than 35%, up from a prior expectation for more than 25% growth.
Major bourses in Asia traded mixed on Wednesday, amid policy divergence between the PBoC and the Federal Reserve.
On top of that, Dr. Anthony Fauci said that the pandemic in the US won't be under control until spring 2022 while CNN and Xinhua reported that China could become the world's first country to control a Delta outbreak with its stringent approach. The Shanghai Composite led the gains (0.5%), trading at a near 2-week high, after China's central bank today boosted short-term funding to ease worries over tightening liquidity amid a slowdown in economic recovery.
Shares in Australia rose for the third straight session (0.2%), as Treasurer Josh Frydenberg urged states in Australia to stick to a 4-stage national reopening plan; and those in South Korea also gained 0.2%, advancing for the third session in a row. The Nikkei 225 was almost flat, meantime, as Japan is set to expand a state of emergency to eight more prefectures, taking the total to 21.
The Nikkei 225 increased 98 points or 0.4% to 27,830 in early trade on Wednesday, rising for the third session in a row and tracking a buoyant sentiment on Wall Street overnight, amid optimism about economic recovery in the US following a full approval of the two-dose Pfizer/BioNTech vaccine for COVID-19 that would boost vaccination rates.
Risk appetite was also lifted by reports that new home sales in the US rebounded in July, rising for the first time in 4 months.
Traders were also upbeat after Bank of Japan board member Toyoaki Nakamura said today that the Japanese economy was headed for a recovery driven by robust global demand. Meantime, a Reuters Poll showed that Japanese shares are expected to reach a near 30-year high by the end of this year, amid a strong corporate outlook and the rollout of COVID-19 vaccines. Shionogi & Co jumped 6.3% while Mitsubishi Motors soared 3.7%.
References:
Trading Economics. (n.d.).South Africa Unemployment Rate. [Website]. Retrieved from South Africa Unemployment Rate | 2000-2021 Data | 2022-2023 Forecast | Calendar (tradingeconomics.com
Naidoo, Prinesha. (2021, August 24). South Africa Unemployment Rate Rises to Highest in the World. [Website]. Retrieved from South Africa Unemployment Rate Rises to Highest in the World.
Trading Economics. (n.d.). Australia Construction Output. [Website]. Retrieved from Australia Construction Output | 1986-2021 Data | 2022-2023 Forecast | Calendar (tradingeconomics.com)
Business Wire. (2021, August 23). Trends and Opportunities in the Australian Construction Market (by State and Territory) to 2025. [Website]. Retrieved from Trends and Opportunities in the Australian Construction Market (by State and Territory) to 2025
Bartash, Jeffry. (2021, August 23). Delta varian deals blow to U.S. economy in August, but businesses remain upbeat. [Website]. Retrieved from Delta variant deals blow to U.S. economy in August, but businesses remain upbeat - MarketWatch
Trading Economics. (n.d.). Malaysia Leading Economic Index. [Website]. Retrieved from Malaysia Leading Economic Index | 1991-2021 Data | 2022-2023 Forecast | Calendar (tradingeconomics.com)
Department of Statistics Malaysia. (2021, August 25). Malaysian Economic Indicators: Leading, Coincident & Lagging Indexes June 2021. [Website]. Retrieved from Malaysian Economic Indicators: Leading, Coincident & Lagging Indexes June 2021
DeCambre, Mark. (2021, August 24). Nasdaq 15,000: Just another stock-market number or something else?. [Website]. Retrieved from Nasdaq 15,000: Just another stock-market number or something else? - MarketWatch
Trading Economics. (n.d.). Japan Stock Market Index (JP225). [Website]. Retrieved from Japan Stock Market Index (JP225) | 1965-2021 Data | 2022-2023 Forecast | Quote | Chart (tradingeconomics.com)
Trading Economics. (n.d.). Hong Kong Stock Market Index (HK50). [Website]. Retrieved from Hong Kong Stock Market Index (HK50) | 1964-2021 Data | 2022-2023 Forecast | Quote (tradingeconomics.com)
Smith, Connor. (2021, August 24.). Nordstrom Earnings Beat Expectations. Why the Stock is Sliding. [Website]. Retrieved from Nordstrom Earnings Beat Expectations. Why the Stock Is Sliding. - MarketWatch
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