- The Fed leaves policy unchanged, while President Biden unveils the detail behind the $1.8trn stimulus package
- Earnings season sees a large number of beats, however inflationary pressures need to be watched closely
- Divergent fortunes with COVID-19 continue, however the reflation trade wins out with commodities strengthening
- Next week the earnings season continues in full flow, whilst the Bank of England delivers its latest policy decision
The Fed leaves policy unchanged, while President Biden unveils the detail behind the $1.8trn stimulus package
The Federal Reserve (Fed) delivered its latest policy decision this week. Whilst there were upgrades to the forecasts for the US economy, the Fed decided to keep both the key interest rate and pace of asset purchases unchanged. Fed Chair Powell did acknowledge that indicators of economic activity and employment have strengthened as a result of the progress made on the vaccination roll out and strong policy support, however made clear that he viewed the economy as a long way from achieving the Fed’s goals emphasising that there are 8.5m fewer jobs in the US economy in comparison with February 2020, before COVID-19 swept through the country. Once again, Powell noted that whilst inflation metrics will be higher in coming months, the Fed intend to view those increases as transitory.
Elsewhere, President Joe Biden delivered a speech before Congress outlining his plans for a number of priorities, including infrastructure spending and education. Ahead of the speech, details of the $1.8trn stimulus package were shared by the White House, which includes $1trn in spending and $800bn in tax cuts. The proposed method of funding this package is through an increase to the top tax rate, which will increase to 39.6%, along with an increase in capital gains tax for households earning over $1m per year. Biden also spoke about Russia and China, and more specifically where he sees American interests being at risk.
Earnings season sees a large number of beats, however inflationary pressures need to be watched closely
It was the ‘peak week’ for US earnings this week with around 50% of market capitalisation reporting. The most notable takeaway from the earnings season so far has been the sheer scale of beats. Headline EPS growth is now running above 40% year on year for Q1. That is a significant increase on pre-season expectations for +20% year on year growth. This expectation had itself been revised up more than any other quarter on record. This week was dominated by the megacaps reporting and these firms continued to reaffirm why the market places such a high multiple on them. Highlights include Amazon revenue topping $100bn for the second quarter in a row, Apple revenue growth of more than +35% across all geographies and Alphabet announcing a $50bn share buyback program. Share price reaction was generally positive for the big tech names, although the gains were relatively unspectacular. Microsoft was the only exception, falling 3% after hours, although it beat expectations, the magnitude was less pronounced than other names. The theme of pricing pressures continued with the industrial bellwether 3M expecting costs of raw materials & labour to be a significant drag this year. On a similar note, several large manufactures mentioned the potential of chip shortages to cause supply issues with Ford, Caterpillar & Apple all citing an impact. The earnings season has been very strong and management commentary very bullish on further demand pickup for the rest of the year. However, we need to watch for any impact from inflation pressures and supply ‘bottlenecks’ given modest share price reaction for beats and valuations which appear stretched in certain sectors.
Divergent fortunes with COVID-19 continue, however the reflation trade wins out with commodities strengthening
The theme of divergent fortunes continued with emerging markets such as Brazil and India continuing to experience a severe wave of COVID-19 cases and associated deaths. Brazil has now experienced over 400k deaths, whilst India is reporting daily record case numbers of nearly 400k. The situation is somewhat different in Europe, where governments are beginning to lift lockdown restrictions amidst much lower case numbers and the successful rollout of vaccination programs. The positive sentiment across the US and Europe has provided support to the reflation trade, with some equity bourses reaching all-time highs and bond yields moving higher over the week. Another asset class to benefit from the improving sentiment is commodities, where metals, agriculture, and energy, amongst others, continue to see strong gains. With our allocation to commodities towards the top end of historic ranges, this has been helpful for performance.
Next week the earnings season continues in full flow, whilst the Bank of England delivers its latest policy decision
There is another large raft of companies reporting next week, and with current earnings releases exceeding expectations, these will be followed closely to see if this trend continues. April PMIs and the US jobs report are the key data releases, especially with consideration to Powell’s comments on the labour market and when it will be an appropriate time to start considering a tapering of asset purchases. From central banks, both the Bank of England and Reserve Bank of Australia will deliver their latest policy decisions, however no change is expected from the current stances.
- The ECB leaves the policy rate unchanged, and reiterates the economy faces near-term challenges
- April flash PMIs show the eurozone remaining resilient in the face of lockdown restrictions
- The strong start to the US earnings season continues, although signs of margin pressure begin to emerge
- A busy week ahead with a Federal Reserve meeting and a large number of US companies reporting
The ECB leaves the policy rate unchanged, and reiterates the economy faces near-term challenges
The European Central Bank (ECB) left its deposit and key financing rates unchanged in their April meeting, at -0.5% and 0% respectively. Accompanying this decision, the bank said it expects purchases under the Pandemic Emergency Purchase Program (PEPP) to continue at a significantly higher pace than during the first few months of the year, whilst remaining data dependent. The bank deemed it premature to start discussing a reduction in purchases at this time. President Lagarde took the opportunity to reiterate the bank’s economic assessment, that the economy faces near-term challenges, but the prospect of a gradual reopening and a solid recovery by the second half of the year remains intact.
April flash PMIs show the Eurozone remaining resilient in the face of lockdown restrictions
The main data highlight this week was the flash PMIs from around the world, which helped to provide an initial indication of how the global economy has fared, against a backdrop of significantly ramped up vaccination programmes. The composite PMI in the Eurozone rose slightly in April to 53.7, from 53.2 in March, above the consensus of 52.9. The divergence between manufacturing and services remains: manufacturing printed at 63.3, while services, still largely constrained by virus restrictions, was significantly lower at 50.3, albeit higher than the March print. Overall, despite new lockdown restrictions being imposed across the region, the economy is showing resilience. The PMI results reaffirm our view that we are in an 'accelerating' growth regime and thus portfolio positioning continues to have a pro-cyclical bias.
The strong start to the US earnings season continues, although signs of margin pressure begin to emerge
The US earnings season continued apace this week with 79 S&P 500 companies reporting. The theme of very strong corporate results continues with the headline EPS growth rate now at 28% year-on-year. This is significantly above the pre-season expectation of +20% year-on-year. There weren't too many takeaways from the results with none of the mega-caps or cyclical bellwethers reporting. However, it is interesting to note that while guidance and management commentary remains very strong around future growth, there are signs of margin pressure emerging, most notably being mentioned by Proctor & Gamble. This is something we will continue to monitor closely. Share price reaction has been largely unremarkable so far, although we expect to gain more from the busy week ahead. The themes noted here have been mirrored in Europe, where results are also coming in far ahead of expectations.
A busy week ahead with the latest Federal Reserve meeting and a large number of US companies reporting
There is plenty for markets to follow next week. At the top of the agenda is Wednesday’s Federal Reserve meeting and the subsequent press conference from Chair Jerome Powell. Against an improving labour market and economic backdrop, Powell may continue shifting to a more optimistic tone, however it is likely far too early for any guidance on a tapering of the current loose policy stance. Elsewhere, the US earnings season turns up the heat with some 180 companies from the S&P 500 due to report. Finally, on the data front, the highlight will likely be the Q1 GDP releases from the US and Europe.
- Strong economic data helps lift equities to new highs, while bond yields take a leg lower
- US earnings season kicks off with banks posting strong results
- Next week sees an increasing number of US companies reporting, provisional PMIs for April and the ECB’s latest policy decision
Strong economic data helps lift equities to new highs, while bond yields take a leg lower
The ‘goldilocks’ environment continued for investors this week as equities sustained their recent strong performance, while government bond yields fell. The former were buoyed by a strong start to the US earnings season (which we cover in more detail below) and positive data releases from both the US and China. Starting with China, Q1 2021 printed in line with expectations at 18.3%, supported by a strong rebound in both industrial output and exports. Industrial production for March, whilst a large increase of 14.1% year-on-year, lagged market expectations of 18%. Retail sales on the other hand outperformed, with a 34.2% increase year-on-year vs market expectations of 28%. The market pays particular focus to economic data from China as it was the first major economy to be affected by the pandemic, and the first to come out the other side (albeit not yet completely). Therefore, putting aside divergences in how different economies have handled the pandemic, it helps to provide an indication of how the global economy is likely to fare.
In the US, the consumer price index for March rose by 2.6% year-on-year and by 0.6% over the month. The annual number marked the highest growth rate since August 2018, while the monthly number was the highest for almost nine years, with both figures ahead of market forecasts. Retail sales and initial jobless claims figures released late in the week were strong. Retail sales rose by 9.8% in March (vs market expectations of 5.8%), the fastest growing month since May 2020, aided by the recently landed stimulus checks. Jobless claims fell to a post-pandemic low of 576k (vs 700k expected).
US earnings season kicks off with banks posting strong results
The S&P 500 earnings season kicked off in earnest this week with major US banks reporting. The results were very strong across the board with record trading and investment banking revenues particularly noteworthy, while the bottom line was boosted by a big reduction in bad loan provisions put aside during the pandemic. The only negative was that loan demand remains tepid, which while bad for the traditional bank lending model, is very constructive from a macroeconomic perspective, as this essentially means both corporates and consumers are flush with cash. Earnings for the whole index are expected to have grown at +20% year-on-year in Q1, with the estimate having increased throughout the quarter.
Next week sees an increasing number of US companies reporting, provisional PMIs for April and the ECB’s latest policy decision
The US earnings season kicks into gear next week with a further 80 companies reporting from the S&P 500. For us, the key focal point will be market reaction to strong earnings growth which should help us gauge how much optimism is already priced in. Other than that, the release of April flash PMIs from around the world will provide further insight into how economies are faring as vaccination programs are significantly ramped up. Finally, the European Central Bank delivers its latest monetary policy decision on Thursday, followed by a press conference from President Lagarde which will be followed closely.
- Risk assets supported by strong data whilst bond yields remain stable
- Global Covid cases remain elevated, however vaccinations are on an upward trend
- The International Monetary Fund (IMF) raises its global economic outlook
- Next week is the start of the US earnings season, as well as industrial production and retail sales data
Risk assets supported by strong data whilst bond yields remain stable
Strong data from the US created a platform for risk assets to perform well over the week. The growth in non-farm payrolls surprised to the upside, coming in at 916k vs a consensus expectation of 660k. Leisure and hospitality, as well as public and private education, saw meaningful increases as lockdown restrictions were rolled back, helping to lift the overall payrolls number to the highest print in seven months. The US ISM services index also helped by rising to 63.7, up 8.4 points from the previous month; this largely exceeded consensus expectations of 59.0.
Despite strong performance from risk assets, bond yields, which have been on a recent upwards trend, remained relatively stable. This was in part thanks to the release of the Federal Open Market Committee’s March meeting minutes, which reconfirmed that monetary policy was unlikely to be tightened given the uncertain economic conditions and muted inflationary pressures. Additionally, some investors expect Joe Biden’s $2.3trn infrastructure plan to be watered down, given Republican party opposition to certain elements.
Global Covid cases remain elevated, however vaccinations are on an upward trend
The global Covid case count remains elevated. According to John Hopkins data, the current weekly increase, in absolute terms, is at a faster pace than seen through February and March. Whilst the US is performing well in the rollout of vaccinations, with President Joe Biden announcing this week a 19th April deadline for all states to make all adults eligible for a jab, relaxed lockdown restrictions are feeding into higher case numbers. States such as Florida, Ohio and Wisconsin are posting daily case numbers at two-month highs. In emerging markets the news flow is even more concerning, with India seeing record cases exceeding 100,000 a day, and Brazil recording a record daily number of over 4000 fatalities.
On a more positive note, vaccination numbers have continued to improve around the world, and even in Europe, where France announced it met its target of vaccinating 10 million residents with a first shot, one week ahead of schedule. The interplay between rising cases, improving vaccination rollouts and how authorities manage the roll back of lockdown restrictions continues to be an area of focus for market participants in determining future economic growth.
The International Monetary Fund (IMF) raises its global economic outlook
This week saw the IMF release their latest World Economic Outlook. Based on the current rollout of COVID-19 vaccines, as well as the huge monetary and fiscal stimulus unleashed (especially in the US), the IMF now forecasts economic growth to rise by 6.0% (previously 5.5%) this year and 4.4% (instead of 4.2%) in 2022. Whilst both developed and emerging economies were upgraded, developing nations saw the bulk of the upward revisions. The IMF expects the UK to be the fastest-growing G7 country in 2022, growing by 5.1%, following an estimated 5.3% expansion in 2021, largely reflecting the relatively fast vaccination rollout in the UK. Inflation forecasts also saw modest upgrades with consumer prices in advanced economies rising by +1.6% in 2021 and +1.7% in 2022.
Next week is the start of the US earnings season, as well as industrial production and retail sales data
Next week there are a number of important highlights for markets. Firstly, we will see the US earnings season kick into gear, with several financials due to report. Focus will likely remain on company guidance looking further ahead into this year. On the data front, retail sales and industrial production numbers will help contextualise how various economies are working through the pandemic and associated lockdown restrictions, while China will be releasing their Q1 GDP number. On central banks, we will once again hear from Fed Chair Powell and see the release of the Fed’s latest Beige Book.