Markets last week

President Biden said he wants all American adults to be eligible for the vaccine by Monday 19 April, two weeks earlier than his previous goal. The UK began rolling out the Moderna vaccine last week, also two weeks earlier than expected, amid concerns over a shortfall of doses this month and worries about the AstraZeneca product. More than 700 million jabs have now been provided worldwide. In terms of herd immunity, this is not great, as it barely covers 1/10 of the world’s population, but the curve is now very steep and the countries that are having difficulties with inoculations are often those with a good history on COVID-19 (such as China and Japan). The UK has vaccinated more than 60% of adults, the US close to 50% and the EU close to 20%. Emerging markets are significantly behind on the vaccination effort.

The third batch of stimulus payments has already been made to more than 130 million Americans, out of the expected 287 million who should receive it. This should add up to US$400bn, compared to the previous two rounds at US$438bn.

The PPI (producer price index) in the US and China surged above estimates (4.2% and 4.4%, respectively), adding to inflation fears for the months to come when the price comparison will be made with last year’s exceptionally depressed levels.

Over the week, US, European and UK equities led global markets, whilst Asia lagged behind. The Japanese stock market weakness seems to have been caused by worries that the Japanese government is planning stricter steps to curb rising infections, against the backdrop of very few vaccinations so far.

Sterling corrected after its strong run this year, in particular against the euro. Currency traders made large gains this year betting on the UK’s vaccine success and against Europe’s stumbles. It now seems that this trade is going into reverse, with the euro having its best week against sterling since September.

Government bond yields see-sawed during the week, failing to give much direction to the various equity sectors. Nevertheless, technology had a good recovery compared to the cyclical value sectors (energy, financials).

The week ahead

Tuesday: US CPI (consumer price index) for March

Our thoughts: this will be the first of a few inflation numbers in the US that might scare markets. As much as we have been prepared for it, there is always a risk of a negative shock to trigger a market tantrum. The last CPI was 1.7% and the headline is expected to rise to 2.5% in March, with the core CPI (ex food and energy) rising to 1.5% from 1.3%. The headline will obviously be influenced by strong energy prices (it was almost a year ago that a one-off negative price for oil was registered!), but it’s the core reading that will matter, as it is more comparable to the Fed’s targeted core PCE (personal consumption expenditures) gauge. The breakdown by sector and product will be followed closely to try and figure out where inflationary spikes might be coming from.

Thursday: Empire State Manufacturing Survey and Philadelphia Fed Business Outlook Survey

Our thoughts: the Empire State and the Philly Fed are generally paired together for analysis. Last month, the Philly Fed soared to a nosebleed level over 50. This month, it is expected to settle around a still spectacular 40. The Empire State (NY) survey is estimated to keep rising, though. The combination of both regional Fed surveys might give us a picture of how manufacturing is faring in two important areas of the US. Although the reopening of the economy should give a fillip to services over manufacturing, the industrial sector is still expected to pull its weight throughout the transition.

Friday: Eurozone March CPI (consumer price index)

Our thoughts: there should be a marked difference between inflation readings in the eurozone and the US. The European Central Bank’s target of 2% inflation seems to be a pipe dream in the eurozone, but the next few months will show us how far prices can rise in an exceptional situation with supply chain bottlenecks, lockdowns, reopenings and skewed year-ago comparisons. The estimate is currently 1.3%, from 0.9% last month. Will there be any surprise?

The numbers for the week

Sources: FTSE, Canaccord Genuity Wealth Management

Central banks/fiscal policy

Fed minutes emphasise patience again

The minutes from the Federal Open Market Committee (US Federal Reserve or Fed) meeting showed Fed officials united on the need to see more progress on the recovery before scaling back their massive bond-buying programme. The members downplayed inflation risks, maintaining that the recent surge in US Treasury yields is reflective of stronger growth prospects rather than higher ongoing inflation. A number of Fed members stressed the importance of communicating well in advance of the time when progress could be judged substantial enough to warrant a change in the pace of quantitative easing (QE), in order to avoid a repeat of the 2013 ‘taper tantrum’.

Fed Vice Chair Richard Clarida said Fed members will await evidence on whether they’re reaching their goals on price stability and employment before adjusting monetary policy. “On a year-over-year basis, headline inflation is going to likely move above 2% because we’re going to be comparing this year’s prices with last year collapsing prices but we expect in our baseline most of that to be transitory, and for inflation to return later this year to around 2%.” Clarida said.”

United States

Shocking PPI jump foreshadows consumer price inflation

Trade balance: the US trade gap widened from US$67.8bn to US$71.1bn in February, which should be expected given the strong economic recovery.

Housing: MBA mortgage applications fell 5.1% for the week ended 2 April. The series has had a few negative numbers in a row as higher mortgage rates and higher house prices start to clip the huge demand for housing in the US.

Inflation: the PPI (producer price index) final demand, a measure of input inflation, jumped from 2.8% to 4.2% in March, with the PPI ex food and energy and the PPI ex food, energy and trade up to 3.1%. This is likely to feed into manufacturing prices.

Employment: initial jobless claims picked up once again, from 728K to 744K, as opposed to an estimated fall. Continuing claims remained high at 3734K vs. 3750K, vs. expectations of a large fall.

United Kingdom

Construction survey more bullish than services

Autos: new-car registrations in the UK increased for the first time since July, mainly due to an easy year-ago comparison. Sales in March rose about 11% from last year but were roughly 37% below the average for the month over the past decade.

Surveys: the Markit/CIPS UK services PMI fell slightly from 56.8 to 56.3 but the Markit/CIPS construction PMI soared from 53.3 to 61.7, way above estimates.

Housing: the RICS house price balance improved above expectations from 54% to 59%, thanks to the extension of the stamp duty allowance.

Europe

Services edging up

Surveys: the Markit Eurozone Services PMI beat estimates, rising from 48.8 to 49.6, but the new lockdowns in Europe will doubtless take it back down next month.

Industry: French industrial production fell 4.7% in February and German industrial production was down 1.6%.

Inflation: the PPI (producer price index) surged from 0.4% (revised from 0.0%) to 1.5% in February, but this is an out-of-date reading now.

China/India/Japan/Asia

Storming PPI portends exported inflation to the West

China: official foreign exchange reserves fell from US$3.2trn to US$3.17trn, reflecting the recent rise in the US dollar almost to the penny. The Chinese PPI (producer price index) stormed from 1.7% to 4.4% in March, above expectations. The CPI (consumer price index) was also higher at +0.4% vs. -0.2% the previous month.

Japan: surveys are mixed but looking better. The leading index rose from 98.5 to 99.7, the coincident index eased from 90.3 to 89.0, the consumer confidence index jumped from 33.9 to 36.1, the Eco Watchers survey (current) from 41.3 to 49.0 but the Eco Watchers survey (outlook) fell from 51.3 to 49.8. The PPI, as in China, rose sharply from -0.6% to +1.0% in March.

Oil/Commodities/Emerging Markets

Oil and copper rebounded from the post-Suez Canal price drops. Gold seems to have stabilised above US$1,700/oz.