Markets last week

The Q1 earnings season in the US was off to a strong start, with most companies reporting better than expected results in aggregate. As a result, analysts upgraded expected earnings and sales growth for the first half of 2021, and for the year as a whole. Despite this strong performance, equities were quite wobbly last week, with concerns about virus infections in Asia and the Johnson & Johnson vaccine driving various sectors down (energy and consumer discretionary) – areas which had led investment into the reopening of the economy.

President Biden plans to propose almost doubling the capital gains tax rate for those earning US$1m or more, to 39.6% or 43.4% when including a surtax, to help pay for the Affordable Care Act (known as Obamacare). Only about 0.32% of American taxpayers have income of more than US$1m and capital gains or losses. Despite the relatively small impact, the announcement affected the market’s mood and various tax rises are now being expected.

The European Central Bank meeting was mostly a non-event for markets.

Against this backdrop, economic data surged, and surveys hit highs, whether in the US, the UK or Europe. US jobless claims reducing, UK retail sales, manufacturing and services PMIs across the board, all show how the reopening of countries is powering their economies. At the end of the week, however, equities were mostly down. Asia, excluding Japan did better, and Japan the worst. After double-digit rises in many indices this year, some fatigue is being seen, but drops tend to be followed by recoveries as many investors have a longer-term view of market strength. Government bonds and gold were stable, but buoyant copper prices highlighted the current industrial boom.

The week ahead

Tuesday: BRC-Nielsen Shop Price Index

Our thoughts: the BRC Shop Price Index tracks changes in retail outlet prices across the UK and therefore the extent to which retailers contribute to inflation. It shows changes in shop prices for 500 of the most commonly purchased items across five large urban areas. Given the recent increases in inflation and concerns about prices, this gauge will give us a better indication of how retail inflation is faring and hence whether markets should be concerned about prices rising.

Thursday: China manufacturing PMI and non-manufacturing PMI

Our thoughts: once again, China will matter to the rest of the world. There are concerns that we have reached peak growth, and this should get reflected in the PMIs, nowhere better than in China, the country that has been ahead of all others in the COVID-19 virus, both in and out of it. If Chinese PMIs have indeed peaked, how long before the rest of the world catches up? Expectations are for a very mild descent for both manufacturing and non-manufacturing. Any surprises could matter to markets.

Friday: US PCE deflator and core deflator

Our thoughts: PCE (Personal Consumption Expenditures) inflation is more relevant than CPI (Consumer Price Index) inflation for the US Federal Reserve (Fed) as the core PCE is indeed the gauge followed by the Fed to determine their monetary policy. The headline PCE is expected to rise from 1.6% to 2.3% with the core PCE more subdued at 1.8%, up from 1.4% previously. Whether these numbers pan out will have an impact on markets. Another important statistical focus will be personal income and personal spending, published on the same day – the current estimate for personal income is a 20% rise, with personal spending also rising to 4.3%. With exceptional numbers like that, inflation may well be on a significant upward slope for the next few months. 

The numbers for the week

Sources: FTSE, Canaccord Genuity Wealth Management

Central banks/fiscal policy

Biden planning to raise capital gains taxes

The European Central Bank (ECB) left all its rates unchanged and the statement was also virtually unaltered. “Since the incoming information confirmed the joint assessment of financing conditions, and the inflation outlook carried out at the March monetary policy meeting, the Governing Council expects purchases under the PEPP – Pandemic Emergency Purchase Programme over the current quarter to continue to be conducted at a significantly higher pace than during the first months of the year.” The ECB President, Christine Lagarde, spent a lot of time explaining what a ’significantly higher pace‘ meant, but it wasn’t clear to the markets afterwards, except they saw the statement as supportive to market risk. She also said that they had not discussed any stimulus phase-out.

The ECB updated the government debt to a GDP ratio for the eurozone to 98% in 2020, from 83.9% previously.

President Biden is betting that the announcement to double the capital gains tax rate for those earning US$1m more, will be popular enough to win passage in Congress, where he can’t afford to lose a single Democratic vote in the Senate.

United States

Jobless claims are now on a fast downtrend

Employment: initial jobless claims fell to 547K from 586K, way below estimates, and confirmed that the previous week’s drop was not a fluke. Continuing claims were less buoyant, easing from 3708K to 3674K.

Housing: existing home sales fell to 6.01 million in March from 6.24 million. Disappointing, after the expectation that there would be a strong rebound from the February storms. New home sales, however, surged from 846K (which was upgraded from 775K) to 1021K, a 20.7% increase. MBA mortgage applications rose 8.6% during the week ending 16 April, after two and a half months of negative numbers.

Surveys: the Chicago Fed National Activity Index surged from -1.20 to +1.71, above estimates. The Kansas City Fed Manufacturing Activity Index rose from 26 to 31, also better than expectations. The Leading Index rose 1.3% in March vs. the -0.1% previous reading. The Markit PMIs, which tend to be less volatile than the ISM, were much stronger – the manufacturing PMI rose from 59.1 to 60.6, and the services PMI soared from 60.4 to 63.1.

United Kingdom

A deluge of data, mostly stronger, with retail sales leading

Employment: the Labour Force Survey measure of employment was 73K (0.1%), lower in the three months to February than in the previous three months. The three-month average unemployment rate fell to 4.9% in February, from 5.0% in January. The claimant count rate for March was unchanged at 7.3% with the jobless claim change at +10.1K for March.

Inflation: the CPI (consumer price index) increased to 0.7% in March from 0.4% the previous month, with core inflation up 1.1% from 0.9%. Fuel, clothing, and footwear were notable areas of rising prices.

The PPI (producer price index) showed that input pricing pressures are still very high, with the PPI input at 5.9%, up from 3.3%, and the PPI output at 1.9%, up from 0.9%. As in the US, though, labour market slack should ensure that underlying cost pressures remain muted. About one in six of UK workers remain off the job following the pandemic. This gap totals more than 6 million people, including about 4.7 million who are still receiving government furlough pay.

Housing: the house price index rose by 0.5% in February and year-on-year it increased 8.6%, from 8.0% the previous month. Housing has been helped by the cut in the threshold for stamp duty being extended.

Surveys: the CBI trends survey was positive, with the business optimism balance at a record +38 in Q2, from -22 in Q1. The total orders balance fell slightly from -5 to -8, but the price expectations balance rose to +26 in April, from +20 in March. The GfK composite index of consumer confidence edged up to -15 from -16 in March. The Markit/CIPS services PMI increased to 60.1 from 56.3 and the Markit manufacturing PMI rose to 59.1, from 58.9.

Retail sales: retail sales, including petrol, rose by 5.4% in March, with year-on-year growth up to 7.2% from -3.7%. A 10% jump in non-food sales and 11% in fuel sales boosted the overall number.

Public finances: the public sector net borrowing requirement rose to £28bn in March, but the estimate of borrowing between April and February was revised down. The Office for National Statistics estimates that public borrowing in this fiscal year totalled £303.1bn, or 14.5% of GDP, the highest since WW2.

Europe

Improving surveys, for services as well as manufacturing

Construction: output in eurozone construction fell by 2.1% in February, with the year-on-year rate at -5.8%, down from -2.6% the previous month.

Trade balance: the seasonally adjusted current account surplus in the eurozone fell to €25.9bn in February from €30.5bn in January.

Surveys: in France, manufacturing is doing better than services – the headline manufacturing sentiment index jumped to 104 in April, from 99, the aggregate business confidence slipped to 95, from 97, the services confidence index slipped to 91, from 94 and the aggregate confidence gauge fell to 90, from 95.

The eurozone consumer sentiment index rose to -8.1 from -10.8, better than estimated. The Markit eurozone manufacturing PMI rose further from 62.5 to 63.3 and services climbed over the 50 threshold between contraction and expansion from 49.6 to 50.3.

China/India/Japan/Asia

Nothing meaningful

China: no relevant data

Japan: industrial production fell 1.3% in February and the tertiary industry index, i.e. services, rose 0.3%. The Leading Index eased from 99.7 to 98.7, whereas the Coincident Index rose from 89.0 to 89.9.

Oil/Commodities/Emerging Markets

Oil prices corrected as markets worried about COVID-19 surges affecting the reopening of the economy. On the other hand, copper rallied strongly.