Markets last week |
Equities regained some poise despite continuing worries over inflation, with most major indices moving higher. Calming words from central bankers, the end to an excellent earnings season and bond yields moving lower (in what looks like a short-term technical move) all combined to underpin sentiment as investors looked forward to a long weekend with the US having a public holiday on 31 May for Memorial Day and much of Europe closed for the late May holiday. The debate over the future direction of inflation remains at the core of market thinking. The publication of President Biden’s US$6trn budget, which incorporates his two headline grabbing mega-stimulus measures (one passed, one still under debate), but would also shovel further large spending commitments on a greener energy infrastructure, childcare and welfare spending, helped turn the focus to growth and whether we are going to see too much of it, rather than worries about new COVID-19 variants. Even though the budget will almost certainly not be enacted in its current form, it’s still reminded markets of the enormous levels of government debt in the US, which are now forecast to exceed the peak levels seen at the end of World War II. Regionally, the Far East and specifically China regained some ground on better performing markets such as Europe, the UK and the US, in part driven by evidence of powerful growth, but also driven by local sentiment around the 100th anniversary of the founding of the Communist Party of China, an event imbued with much significance by party propagandists and much heralded by President Xi. Sectorally, the leaders over the last week were consumer discretionary, industrial and real estate, all reopening plays, whilst the laggards were utilities and consumer staples, both more defensive in nature. The one exception to this pattern was energy, which was also weak despite a recovering oil price. The major company news in the sector was the astonishing success of a small activist hedge fund in getting two of its nominees elected to the board of Exxon, with the support of a number of large US public pension funds. As yet there seems little sign of the much-anticipated market correction after the strong start to 2021 equity market performance, with small pull-backs quickly reversed this week. However, the summer is often a time when upwards momentum hits the doldrums and by a number of measures indices remain extended. It would be no surprise to see at least a consolidating phase from current levels. |
The week ahead |
Tuesday: Markit Industrial and Services surveys, US ISM Our thoughts: a number of surveys have shown a slight slowing in the rapid pace of recovery, which is understandable given the historic scale of the post-pandemic upswing in confidence. The Markit series of surveys, due out predominantly on Tuesday morning is likely to follow this recent trend. With the employment picture in focus later in the week, and consumers awash with cash, it will be interesting to see if the services series show any signs of a sharper pick up than their industrial equivalents. Anecdotal evidence of labour constraints in the hospitality space may be an early indication of much better conditions, especially in the European surveys, where the accelerating vaccine roll-out is helping phased returns from lockdowns. Meanwhile, the US Institute of Supply Management (ISM) industrial survey, which has been at very high levels of late, is expected to remain very close to last month’s 60.7 reading. Much attention will be on the prices paid component of this survey, given pervasive worries about incipient inflation. Wednesday: the Fed releases the June Beige Book Our thoughts: the Fed’s Beige Book is a survey conducted by the US central bank’s individual branches that examines regional economic conditions on the ground across the US. It is closely watched due to its immediacy and the fact that it derives bottom-up insights into how the US economy is faring. Any signs that the combination of government stimulus and ultra-low interest rates is beginning to implant inflationary expectations will be closely watched, and the document will be a good indicator of the size of the economic recovery that is unfolding right now in America. Friday: US Non-Farm Payrolls Our thoughts: this is a key release, coming as it does with data on unemployment, hours worked and pay. A headline payrolls improvement of 650,000 jobs is expected after last month’s disappointing rise of only 266,000, but it is the pay number that will draw the most attention. Any signs that anecdotal evidence of upward pressure on salaries may help push bond yields higher and accentuate the rotation into more cyclical equity names that we’ve seen for much of 2021. Unemployment is expected to decline to around 5.9% from 6.1%, although workforce participation rates, as people move back to actively seeking employment, may temporarily distort what is clearly a sharply improving trend. |
Markets for the week |
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Central banks/fiscal policy |
Central bankers around the world speaking with one voice There were no specific news releases from the major central banks over the last week, although a number of senior policy makers in the US, Japan and Europe went on record to underscore that they are in no hurry to turn off the liquidity taps. Bank of Japan governor Kuroda pointed to the difficulties that his country has encountered for decades in prompting higher inflation, despite massive government stimulus, while a chorus of US policy makers indicated that it was too early to consider reducing monetary accommodation, although as ever, the Fed is driven by data. |
United States |
Surveys no longer rising uniformly but jobless claims remain on a downward trend Housing: although the housing market remains hot, with the FHFA House Price survey showing gains of 1.4% in the month and the average US home now worth 13.2% more than a year ago, there is evidence that the rises we have seen in bond yields and, therefore mortgage interest rates is now having a dampening effect. New homes sales came in at 863,000 compared with expectations of 950,000 and the previous month’s data was revised sharply lower. Pending home sales data was also much weaker than expected at -4.4% compared with expectations of a small increase.
Surveys: the Conference Board survey showed a decline to 117.2 from 121.7, but remains at an elevated level as the reopening of the US economy feeds into consumer sentiment. Employment: weekly jobless claims data showed a strong continuation of the recent downward trend, with the 117.2 number the lowest since the pandemic started in March 2020. The more keenly watched Non-Farm Payrolls report, due on Friday, will add further colour to the speed of America’s return to work after the earlier second wave of COVID-19 and what appears to be a highly successful vaccine roll-out. |
United Kingdom |
OECD upgrades UK growth forecasts further The OECD raised its forecasts for UK economic growth to 7.2% from the previous 5.1% – reflecting a successful vaccination programme and higher consumer spending. Although this puts the UK at the top of the G7 in terms of growth in 2021, it should be remembered that the UK’s 9.8% decline in GDP in 2020 was the worst amongst the major economies. Government debt: UK government debt numbers were less bad than expected. Some had anticipated that the borrowing requirement would come out as high as £35bn, but in the event the public sector net borrowing requirement came in at ’only‘ £31bn. This may reflect more companies repaying some of the emergency support they received during the pandemic and also a quicker than forecast economic recovery.
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Europe |
Some signs of a return to life after the double dip recession Surveys: the German IFO survey printed at 98.2 versus 96.8 last month, with the expectations element moving to 102.9 from 99.2. The GfK survey of consumer confidence also eked out a gain, although only marginally improving to -7.0 from -8.6 the previous month. Expectations had been higher. Meanwhile, in France, business confidence rose strongly to 108 from the expected 98, and although lagging slightly, still managed to rise to 97 from 95 last month. These data confirmed that it is manufacturing that is leading Europe’s recovery, with the consumer lagging. However, with lockdown relaxations spreading across the continent and signs of an accelerating vaccine roll-out, we expect the consumer to catch up quickly over the summer. Inflation: in a sign of the inflationary pressures building in the pipeline, German import prices rose by 10.3% year-on-year, confirming that bottleneck issues in specific sectors like chips and logistics problems are placing upward pressure on factory gate prices. |
China/India/Japan/Asia |
China: showing the strength of the Chinese economic recovery, industrial profits rose 57% in April from a year ago, and were up more than 100% over the first four months of the year, driven by better market demand, faster production and sales, and rallying commodity prices. China, of course, was first in and first out of the pandemic. Japan: a further sharp rise in Japanese machinery orders, now up 121% from a year ago, underpinned strong evidence of an investment splurge from companies boosting capital spending as they position themselves for a post-COVID-19 world. Nonetheless, although the headline percentage rise is eye-catching, we shouldn’t forget that it comes from a low base and that the actual level of these orders remains some way below the previous peak. |
Oil/Commodities/Emerging Markets |
Oil recovers its poise and gold climbs back over US$1,900/oz After the previous week’s falls in the face of a seeming rapprochement between Iran and the western powers, the oil market moved sharply higher again, climbing by almost 5% as investors focused more on the burgeoning economic recovery from COVID-19 and its likely impact on supply and demand. Other industrial commodities like copper and iron ore also performed well, driven in particular by Chinese demand. Despite its safe-haven status and the market being in risk-on mode, gold climbed back above the US$1,900/oz level, more in a nod to its perceived inflation protection properties. |
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