Markets last week
The US$1.9trn COVID-19 relief bill was finally signed by President Biden. The package is: US$160bn for vaccine and testing programmes, US$360bn in state aid, US$25bn to help restaurants, US$170bn to reopen schools and of course US$1,400 cheques for eligible Americans (about 85% of the population). A study from the Tax Policy Centre found incomes of the lowest fifth of earners will jump 20%, the highest among income groups. The question is how much will they spend and how much will be saved?
The number of people who have received two vaccine doses in the US now outnumbers the total number of recorded COVID-19 cases. This is leading many states to reopen activities at a faster pace. The reopening adds to the fiscal stimulus and the large consumer savings and is likely to create significant upside in economic growth data this quarter and possibly this year. Consensus expectations call for a 4.5% GDP growth this quarter and 5.5% for the year as a whole (with the OECD even forecasting 6.5%), but these estimates are rising constantly. Japanese machine tools orders soared, confirming that global manufacturing is still on a tear.
The US CPI (consumer price index) was well behaved with the largest increases expected in the next few months due to the comparison with last year. The PPI (producer price index), however, showed some pipeline price pressures, as did the Chinese PPI, with China now exporting inflation rather than deflation to the rest of the world. Accelerating inflation in the coming months is becoming the base case. The Fed expects the 2021 run-up in inflation to be transitory. With its flexible inflation target and 5-year plan, the Fed still plans to keep interest rates low until 2023. Markets may test that, but the Fed is unlikely to waver from this view so soon after announcing it.
Day-to-day as well as intra-day equity market volatility was huge last week, in particular in the US. The uncertainty created by rising bond yields is not going away. During the week, the seesaw between growth sectors (tech and healthcare) and value sectors (energy, materials and financials) was constant and resulted in day-to-day reversals in trends whilst the top market indices remained relatively unchanged. On Friday, both Treasury and Gilt yields jumped, with the spread between the US 2-years and 10-years rising to a high of 1.48%.
For the week, European equities starred, in part thanks for a dovish European Central Bank meeting, whereas Hong Kong and China were still lagging due to a government clampdown on fintech and M&A deals.
The week ahead
Tuesday: ZEW survey for eurozone and Germany
Our thoughts: the ZEW survey measures expectations for economic growth in the eurozone as well as expectations and the current situation for Germany. The eurozone expectations are close to an all-time high which clashes with the actual economic reality, but, in light of the recent dovish turn by the European Central Bank and the US fiscal stimulus, could the eurozone benefit from an export-induced growth spurt?
Wednesday: meeting of the US Federal Reserve (Fed)
Our thoughts: the Fed is not expected to change its interest rates or programme of quantitative easing (government and mortgage bond market purchases). What will be scrutinised very closely, though, is the language employed by Fed Chair Jay Powell in describing the state of the US economy, rising bond yields, expected inflation spikes during this year and future asset purchases. Although no change in policy direction is expected, small nuances in the wording may be mined for deeper meaning, such as when the Fed might be expected to start tapering its asset purchases and how patient they are likely to be if inflation surges in the next few months.
Thursday: meeting of the Bank of England (BoE)
Our thoughts: the BoE meeting will be scrutinised like the Fed meeting above. Although asset purchases are not expected to be tapered by the BoE, as opposed to the Fed, for all other topics, markets will follow the language equally carefully. The post-Brexit cross-Channel trading difficulties may be putting some price pressures on some sectors of the UK economy whilst curtailing some exports. How is the BoE going to react to these conflicting trends? The lockdown has been very painful for UK growth, but the Chancellor has opened the money spigots very wide. How will the BoE take these opposite factors into consideration in its rates and asset purchases policy?
The numbers for the week
|Equity indices (price only)|
|In local currency||In sterling|
|Index||Last week||YTD||Last week||YTD|
|Hong Kong equities||-1.20%||5.50%||-1.90%||3.30%|
|Emerging market equities||0.70%||4.40%||0.00%||2.40%|
|Government bond yields (yield change in basis points)|
|Current level||Last week||YTD|
|10-year US Treasury||1.62%||6||71|
|10-year German Bund||-0.31%||0||26|
|Current level||Last week||YTD|
|Commodities (in USD)|
|Current level||Last week||YTD|
|Brent oil (bbl)||69.22||-0.20%||33.60%|
|WTI oil (bbl)||65.61||-0.70%||35.20%|
|Copper (metric tonne)||9085||2.10%||17.00%|
Sources: FTSE, Canaccord Genuity Wealth Management
Central banks/fiscal policy
Biden’s tax package approved and ECB sounding more dovish
Fiscal Policy: the US$1.9trn COVID-19 relief bill was finally signed by President Biden. The package is: US$160bn for vaccine and testing programmes, US$360bn in state aid, US$25bn to help restaurants, US$170bn to reopen schools and of course US$1,400 cheques for eligible Americans (about 85% of the population). A study from the Tax Policy Centre found incomes of the lowest fifth of earners will jump 20%, the highest among income groups. The question is how much will they spend and how much will be saved?
Central Banks: at the European Central Bank (ECB) meeting on Thursday, the ECB left its rates unchanged but made a statement which had some impact on markets. “Based on a joint assessment of financing conditions and the inflation outlook, the Governing Council expects purchases under the PEPP (Pandemic Emergency Purchase Programme) over the next quarter to be conducted at a significantly higher pace than during the first months of this year.”
It confirms the ECB’s reaction function and reinforces the guidance that monetary policy will remain accommodative. This helped Italian BTPs (government bonds) and the euro, but movements in other European bond yields were more subdued. European equities did better than UK equities following the ECB meeting.
Inflation pressures rising and employment market healing
Inflation: the February CPI (consumer price index) rose. The headline rose 0.4%, in line with consensus. The core rose 0.1%, below the consensus, 0.2%. That means 1.7% headline CPI and 1.3% core CPI.
Rents are rebounding strongly which is affecting the core CPI whereas a 6.4% jump in gasoline prices boosted the headline reading. Rent had the highest increase since January last year and, at 40% of the core CPI, it has a large impact. The Fed’s target, however, is the core PCE (Personal Consumption Expenditures) with only 18% rent in it, so the effect of a strong rent bounce-back is more limited for monetary policy. Economists are forecasting that the CPI will rise to 2.9% in early summer and fall back later in the year to 2.2%.
The PPI (producer price index) jumped 0.5%, with the core PPI up 0.2%, both as expected. The headline was boosted by higher energy prices, with gasoline up 13.1%. Within the data, core goods inflation rose sharply, to 2.5% in January from just 0.2% in May. Core services inflation is also 2.5% and rising. These upward trends are likely to feed into both the CPI and the PCE in the next few months.
The 1-year inflation expectation embedded within the University of Michigan index fell from 3.3% to 3.1%, although the 5-10 year inflation level remained at 2.7%.
Employment: US jobless claims seem to be in a strong downward trend now. Initial claims dipped to 712K from 754K, below the consensus, 725K. This was the lowest reading since November. Almost more important than jobless claims are job openings. The JOLTS job openings series rose by almost 200,000 to a pre-COVID-19 level of 6.9 million, a sign of healing in the employment market.
Household net worth: one statistic that would normally go unnoticed is the household change in net worth which soared from US$3.9trn in Q3 to US$6.9trn in Q4 to an all-time high for household net worth, confirming that most of the stimulus cheques so far have been saved rather than spent. The average number was US$2trn pre-COVID-19. The numbers are huge compared to the size of the US economy (US$21trn).
Surveys: the NFIB small business optimism index edged up a little from 95.0 to 95.8, below estimates.
The bellwether University of Michigan sentiment index rose to 83.0 from 76.8, above the 78.5 estimate, with both current conditions and expectations rising. The index is still way below pre-COVID-19 levels above 100 but now stands at the highest level in a year.
Data still depressed by lockdown but inflation expectations steady
Sales: the BRC Retail Sales Monitor for February bounced back despite the continued closure of non-essential shops. Year-over-year growth in total sales rose to 1.0% in February, from -1.3% in January.
Housing: the February RICS survey showed that the net balance of surveyors reporting that house prices have risen over the last three months increased to +52% in February from +49% in January, above the consensus, +45%. This is old news, however, as three quarters of responses were received before the Budget.
Growth: GDP fell by 2.9% month-to-month in January, less than the -4.7% estimate. Three-month-on-three-month growth declined to -1.7%, from 4.1% in December, but above the -2.6% estimate. Construction was the only bright spot in January, up 0.9%, whilst manufacturing production was down 2.3% and services down 3.5%. Meanwhile, the trade balance improved to -£1.6B in January, from -£5.2B in December, better than consensus.
Inflation: the Bank of England/TNS inflation expectation for the next 12 months remained at 2.7%.
Improvements in data
Survey: in the eurozone, the Sentix investor sentiment index rose to +5.0 in March from -0.2 in February, above the 1.4 estimate.
Industry: industrial production, ex-construction, in the eurozone rose by 0.8% month-to-month in January, above the consensus for a 0.5% increase. The year-on-year rate rose to +0.1%, above the -1.9% estimate. In Germany, it fell by 2.5% in January, well below consensus. In France, however, it jumped by 3.3% in January, against a 0.5% estimate.
China now exporting inflation and Japanese machine tools orders surging
China: the PPI (producer price index) jumped from 0.3% to 1.7%. This is the number that matters for global inflation as it reflects the end of China exporting manufacturing deflation to the rest of the world. In addition to the PPI, the Chinese currency, the Renminbi, has risen by almost 8% against the US dollar in the last 12 months, adding to US imported inflation. Chinese companies and consumers, however, are not bothered by the PPI, as the CPI (consumer price index) in China was still a negative -0.2%.
Japan: surveys improved. The Leading Index rose from 97.7 to 99.1, the Coincident Index from 88.2 to 91.7, the Eco Watchers survey (current) from 31.2 to 41.3 and the Eco Watchers survey (outlook) from 39.9 to 51.3. In January, though, labour cash earnings fell 0.8% year-on-year and household spending fell 6.1%. The most important datapoint from Japan, however, was machine tool orders growth, which soared from 9.7% in January to 36.7% in February.
After dropping to US$66 earlier in the week, Brent crude oil tried to recapture the US$70 handle but finished the week lower. Copper and gold were well supported.