Markets last week

Once again, strong economic data peppered the globe: US sentiment surveys and house prices, UK retail sales and house prices, economic confidence in the eurozone, Japanese retail sales, industrial production and housing starts and, to top them all, Chinese industrial profits up 93% year-on-year.

The US Federal Reserve did not waver from its steady-as-she-goes message on its inflation policy, despite very strong US economic growth (6.4% in Q1) and an improved virus situation. President Biden proposed a second jumbo spending and tax bill, this time focused on family rather than infrastructure. Markets were rather unmoved, as the chances of any legislation being approved as is by Congress, are probably slim. Although markets are concerned about potential tax increases, they wait for a clearer path for a Congressional vote.

Improved economic numbers globally helped keep risk appetite high, although fatigue has probably set in. Strong earnings numbers were not rewarded by investors in a sign that some markets are feeling a little stretched or have anticipated most of the good news.

US margins have already recovered to pre-COVID-19 levels, whereas European and UK margins are still behind. Based on the 60% of US companies reporting for Q1 to date, earnings growth has increased to 46.3%, the highest growth rate since Q1 of 2010. Likewise, the percentage of companies beating estimates and the magnitude by which they are surpassing expectations, are all the highest on record.

In the markets, the UK Bank Holiday was shared by Japan and China, but the US and European markets were open. At the end of the extended week, UK equities did best and Asian shares worst. Government bond yields rose sharply, in particular UK gilts. The surge in US treasury yields was stemmed yesterday after a somewhat disappointing manufacturing PMI from ISM (Institute of Supply Management). Copper and oil once again surged. The US dollar rebounded against developed currencies.

The week ahead

Wednesday-Thursday: Services PMIs globally

Our thoughts: this week we will see services PMIs in the US and the eurozone (Wednesday), in the UK, Japan and China Caixin (Thursday). The COVID-19 recovery has been based on a massive manufacturing surge globally, starting with China and moving on to the rest of the world. Although some further upside on manufacturing would be justified by the current bottlenecks and supply chain issues, ultimately the baton of the economy has to be passed on to services. There, the discrepancy is high between those countries that have bounced back sharply (US, China) and those still lagging (Europe, Japan, even UK). Lockdowns and vaccines probably make a greater impact on services than on industry and construction, so logic would indicate a better recovery in the US and UK compared to Europe and Japan. The services PMIs may well have an outsize effect on markets this week.

Thursday: Bank of England Monetary Policy Committee (MPC) meeting

Our thoughts: as is the case for the US Federal Reserve, nobody expects a change in interest rates or the level of asset purchases (quantitative easing) from the Bank of England. On the other hand, the language used will be parsed carefully for any clues as to a potential future change in monetary policy. The UK has often been slightly ahead of the US in economic cycle, so it would not be impossible to see monetary policy in the UK move slightly ahead of that in the US if domestic conditions warrant it.

Friday: US employment data

Our thoughts: the US Federal Reserve (Fed) has an objective of full employment for the US, including people not registered for unemployment or not looking but available (i.e. the underemployment gauge rather than pure unemployment). Given how fast the economy is bouncing back, the question is obviously how quickly new jobs will be created and in which sectors. The market is likely to extrapolate the next few non-farm payroll readings and determine at which point the Fed will be satisfied that we have reached full employment. Probably a premature exercise, but some strategists will carry it out and start positioning for that outcome. The next few months of employment data will be crucial in that respect.

The numbers for the week 

Sources: FTSE, Canaccord Genuity Wealth Management

Central banks/fiscal policy

Fed confirms views on growth and inflation and Biden tries to sell his new proposal

Biden delivered a speech to Congress to unveil his American Families Plan, a US$1.8trn package of tax credits and domestic priorities including childcare, paid family leave, and tuition-free community college that would be funded in part by the largest tax increases on wealthy Americans in decades. He also touted his previously proposed US$2trn American Jobs Plan (infrastructure bill) as a blue-collar blueprint to rebuild America. He would restore the top personal income tax rate to 39.6% for people earning more than US$400,000 a year, tax capital gains at the same rate for people earning above US$1m and end a capital gains tax break on inheritances as well as the carried interest tax break for fund managers.

Both proposals have to go through Congress where very tight partisan arithmetic awaits them, hence markets are unlikely to price any of these proposals in, until they are on their way to being approved by Congress.

No change in rates or the pace of quantitative easing from the US Federal Reserve (Fed). Fed Chair Powell said that activity and employment have strengthened, thanks to “progress on vaccinations and strong policy support”. Powell said that it’s not time to consider tapering asset purchases yet. There is still some time before an economic assessment would qualify as “substantial further progress”. The US remains a long way from full employment: wage readings are not concerning at the moment and expanded unemployment benefits are set to run out in September. The upward pressures on prices are believed to be one-time due to base effects and bottlenecks.

The Bank of Japan meeting threw off an interesting outcome in its inflation forecasts. They show this year’s CPI (Consumer Price Index) at 0.1%, next year at 0.8% and the following at 1.0%, with GDP going the other way, up 4% this year, 2.4% next year and 1.3% the following.

United States

Surveys soaring, except for ISM. Inflation not quite scary yet

Industry: US durable goods were hit by aerospace issues, but the trend looks positive, with core capital orders rising at an annualised 12%. Total durable goods orders rose 0.5%, below estimates, but orders ex-transport were 1.6%, in line with expectations.

Housing: home prices soared. The Case-Shiller index of property values for the US climbed 12% in February from a year earlier, the biggest jump since 2006, up from 11.2% in January, with the narrower home price survey for 20 US cities up 11.9%. The average for a 30-year mortgage dropped to 2.97% recently, moving closer to the record low 2.65% set in January. Pending home sales rose 1.9% in March, well below estimates, however, due to softer mortgage demand.

Surveys: the Conference Board consumer confidence index rose to 121.1 from 109.7, well above estimates, the second monthly jump, bringing confidence closer to pre-pandemic levels. The rise is due to a 28.5-point increase in the present situation index, but the expectations were up a small 1.5 points. Presumably, this has to do with the receipt of the latest round of stimulus payments. The MNI Chicago PMI jumped to a 38-year high from 66.3 to 72.1. The University of Michigan rose from 86.5 to 88.3 driven by expectations rather than the current conditions. Lastly, the ISM (Institute of Supply Management) manufacturing PMI fell from 64.7 to 60.7, almost in line with the Markit manufacturing PMI at 60.5. The drop came mostly from the new orders, at 64.3 down from 68.0 and employment at 55.1 down from 59.6.

United Kingdom

Strong retail sales and housing prices

Retail sales: the CBI distributive trades survey showed the sales balance jumping to +20 in April, from -45 in March, above estimates, although the comparison may be skewed since non-essential shops in England reopened on 12 April and were shut in April last year.

Housing: the Nationwide measure of house prices rose by 2.1% in April, the highest number in 17 years. Year-on-year, it increased to 7.1%, from 5.7% in March.

Europe

Improved confidence numbers and soaring German retail sales

Surveys: the GfK consumer sentiment index in Germany fell to -8.8 in May, from a revised -6.1 in April. The INSEE (The National Institute of Statistics and Economic Studies) consumer confidence in France was unchanged in April at 94. The economic confidence index in the eurozone soared to 110.3 in April, from 100.9 in March, mostly driven by a jump in industrial confidence, at 10.7 after 2.1 in March, while the services sentiment gauge leapt to +2.1, from a revised -9.6 last month. The eurozone manufacturing PMI eased from 63.3 to 62.9, still very high.

Retail sales: German retail sales bounced 7.7% in March bringing the year-on-year growth to 11.0%.

Employment: unemployment in the eurozone fell to 8.1% in March, from 8.2% the previous month, better than estimates.

Money supply and inflation: headline M3 money supply growth in the eurozone slowed to 10.1% year-on-year, down from 12.2% the previous month. The trend in narrow money is still up, however. The eurozone CPI (consumer price index) rose from 1.3% to 1.6% in April, with the core CPI (excluding energy, food, alcohol and tobacco) actually easing from 0.9% to 0.8%.

GDP growth: economic output in the Q1 was down 0.6% in the eurozone, a double-dip recession, with drops of 1.7% in Germany, 0.4% in Italy and 0.5% in Spain. France, which put off tougher restrictions, posted 0.4% growth.

China/India/Japan/Asia

Spectacular Chinese industrial profits and overall good numbers in Japan

China: industrial profits rose an amazing 92.3% year-on-year in March. It’s a number that’s hard to comprehend, in particular as the previous quarter’s reading was only up 20%, but it shows that Chinese manufacturers have fully exploited the global manufacturing recovery and supply chains have not been altered significantly.

The official manufacturing PMI fell from 51.9 to 51.1 whereas the unofficial Caixin manufacturing PMI rose from 50.6 to 51.9, the strongest reading in four months. The official services PMI fell more, from 56.3 to 54.9.

Japan: retail sales were strong, rising 5.2% in March year-on-year vs. a -1.5% drop the previous month. Industrial production rose 2% in March against estimates of a decline. Housing starts beat expectations of a large fall, rising 1.5% in March. The jobless rate fell from 2.9% to 2.6%. The Jibun manufacturing PMI rose from 53.3 to 53.6. The consumer confidence index fell from 36.1 to 34.7.

Oil/Commodities/Emerging Markets

Copper rose to the highest level in a decade, briefly topping US$10,000 per metric tonne on demand growth. In addition to the current manufacturing boom, it is significant that electric cars use four times as much copper as combustion engine cars. In addition, Chilean copper mine workers have just called a strike.

Oil prices have also recovered strongly.