- PMIs come in above expectation in Europe, fuelling the reflation trade
- A new wave of COVID-19 in Europe caused many countries to tighten lockdown restrictions
- Fed Chair Powell reiterates recent messaging on inflation and central bank policy
- Pandemic to remain in focus with cases rising globally, while resolution for stuck ship in Suez Canal likely to receive attention
PMIs come in above expectations in Europe, fuelling the reflation trade
The release of PMIs provided a sense of how the global economy has performed into March. Generally, prints came in much stronger than markets expected, and showed that inflationary pressures remained strong with numerous price gauges reaching multi-year highs. In Europe, the composite PMI reached 52.5 (vs an expected 49.1). Manufacturing was incredibly strong, continuing a theme we have seen for a while, climbing to an all-time high of 62.4 (vs an expected 57.6). Services, on the other hand, remained in contractionary territory, but still largely exceeded market expectations, reaching 48.8 (vs 46.0). The strong numbers seemed to provide support for the reflation trade, with cyclicals outperforming growth companies. However, underperformance in tech companies may have been driven by news on China, with the UK and the US joining Europe in posing sanctions over alleged human-rights issues.
In the US numbers were more subdued, but the economy remains firmly in expansionary territory. Manufacturing printed at 59.0 (vs 59.5 expected) and services at 60.0 (vs 60.1 expected). Elsewhere in the US, the initial weekly jobless claims reached the lowest level since the pandemic began, falling to 684k, keeping the downward trend that’s been in place since late January. It seems likely this number will fall sharply as the economy reopens fully through the second quarter.
A new wave of COVID-19 in Europe caused many countries to tighten lockdown restrictions
Rising cases of new variants of COVID-19 put major European nations, such as Germany and France, on high alert. Data shows a sustained rise in cases since mid-February with no sign of this abating. Combined with the ongoing sluggish vaccine rollout, this has increased expectations that the economic recovery could be further delayed. European Commission President von der Leyen did little to help matters, announcing that Europe is at the start of the third wave of the pandemic. The worsening backdrop helped to keep risk assets in check, as fears that the reopening of economies could be delayed. In an attempt to limit a further spread, France has extended its lockdown to three additional regions, and the Netherlands extended its nationwide lockdown until 20 April. On a more positive note, the Biden administration revised its goal of 100m shots within the first 100 days to 200m shots, proving the US is much more successful in the vaccination rollout. The divergent fortunes in handling the pandemic continue.
Fed Chair Powell reiterates recent messaging on inflation and central bank policy
Attention turned to Treasury Secretary Yellen and Fed Chair Powell, who appeared before the House of Representatives Financial Services Committee this week. Both took the opportunity to reiterate recent messaging. Powell said that while they believe there will be upward pressure on prices, the effect on inflation will be “neither particularly large nor persistent”, stating that the world has seen strong disinflationary pressures for 25 years, which a one-time surge in spending cannot disrupt. He also said the government had avoided the worst outcomes of the pandemic with the aggressive spending policies and low interest rate environment of the past year, and perhaps most importantly for markets, mentioned that Fed support will only be pulled back when the economy has all but fully recovered. US bond yields gently declined over the week, as market concerns around the inflation backdrop partially dissipated on the back of these comments.
Pandemic to remain in focus with cases rising globally, whilst resolution for stuck ship likely to receive attention
Over the shortened week due to the Good Friday bank holiday, with it being quieter on the central bank and data front, focus will remain on the worsening virus caseloads across the globe. While fresh lockdown restrictions may ease pressure on a further spread, market participants will follow the numbers closely. Outside of that, this week saw a ship get stuck in the Suez Canal, causing disruption to supply routes. Numerous goods have been impacted, with oil prices particularly volatile. It looks like dislodging the container ship is no easy task, with experts suggesting it could take until Wednesday. Lastly, from the data docket, the US jobs report will likely take centre stage, with some market participants expecting unemployment to fall to a post-pandemic low.
- The Federal Reserve rules out a near-term tightening of monetary policy
- US-China relations turn frosty as early talks under the Biden administration strike a harsh tone
- Vaccination programmes remain divergent as Europe halts its AstraZeneca vaccination rollout on fears of possible side effects
- The cyclical recovery remains in focus with the release of PMIs next week
The Federal Reserve rules out a near-term tightening of monetary policy
This week the Federal Reserve (Fed) delivered their latest policy decision, with all eyes on messaging addressing the recent increase in government bond yields, and what this meant for the Fed’s future interest rate hikes. Chair Jerome Powell suggested that while the economy had recovered more quickly than expected this year, there was sufficient slack to prevent any near-term tightening in policy. Crucially, the Fed does not expect core consumer inflation – its preferred inflation measure – to rise significantly above 2.0% over the next few years. As a result, the median expectation among Fed officials on interest rates was largely unchanged; implying no rate rise until 2024. Whilst we expect there to be an increase in inflation prints in the near term, several disinflationary forces still hold. For instance, the importance of job security is likely to be prioritised over a push for salary increases, which are ultimately needed for inflation to be sustained.
Both the Bank of England (BoE) and Bank of Japan (BoJ) met this week. The former decided on no change to policy, with Governor Andrew Bailey confirming the decision was unanimous. He stated that, while inflation may pick up in the short term, the upward move is likely to be temporary. Similar to the Fed, Bailey suggested the BoE would need to see an inflation rate sustainably above 2% before considering a tightening of policy. The BoJ marginally widened its self-imposed range on interest rate movements from 0.2% to 0.25%, and reined back its previous commitment to purchase, on a monthly basis, ¥6trn-worth of exchange-traded funds. However, it kept its targets of zero per cent for the 10-year government bond yield, and -0.1% for short-term interest rates, unchanged. Governor Haruhiko Kuroda stressed that these changes were an effort to ensure its monetary policy remained effective.
US-China relations turn frosty as first talks under the Biden administration strike a harsh tone
The relationship between the US and China has been a focus for markets after reports that this week’s talks struck a harsh tone. The US Secretary of State opened by criticising China for threatening the rules-based order that maintains global stability, and China responded claiming few in the US have confidence in democracy. Despite the change in the US administration, it looks like US-China relations are likely to remain tense over the coming years.
Covid fortunes remain divergent as Europe halts its AstraZeneca vaccination rollout on fears of possible side effects
The story of divergent fortunes continued, as parts of Europe struggle to deal with the pandemic. The French Prime Minister announced that Paris would head into another lockdown, with only schools and essential businesses remaining open for the next four weeks. The vaccine rollout was paused in Europe as several major countries decided to suspend the usage of the AstraZeneca vaccine owing to concerns about potential side-effects, while awaiting further clarification from the European Medicines Agency, which deemed the vaccine to be “safe and effective”. On a more positive front, the US has administered 100 million shots just 58 days into President Biden’s term, well ahead of its 100-day target, as more states commit to opening vaccination eligibility to all adults in the coming weeks.
The cyclical recovery remains in focus with the release of PMIs next week
The cyclical recovery remains the dominant theme in markets. While equities finished the week broadly unchanged, there has been a noticeable pull back in several of the recently strong performing sectors. We remain broadly constructive on our outlook for economic growth. Next week, the release of provisional PMIs should provide a sense of how the global economy has performed into March. In recent releases, we have seen Europe lag the US. While, services continue to lag manufacturing, as expected with the impact of lockdown restrictions on the former. With restrictions beginning to tighten once again in Europe and the US vaccination rollout experiencing success, it is likely that this divergence will continue.
- The American Rescue Plan is signed into law, and market concerns on inflation
- The European Central Bank increases their bond purchasing program in response to the rise in bond yields
- Spotlight remains on central banks as the Fed, Bank of England and Bank of Japan make policy decisions
The American Rescue Plan is signed into law, plus market concerns on inflation
Relative to last week, this week was more constructive for risk assets as US President Joe Biden signed the American Rescue Plan into law. Part of that plan includes direct cheques being issued directly to citizens, which may begin as early as next weekend. When this large stimulus package filters into the economy, during a period when lockdown restrictions may start to ease, one important consideration is to what extent this might affect inflation expectations. With the headline inflation print for the US coming in line with expectations at 0.4% month on month, and 1.7% year on year, our view is to not be overly concerned about inflation. This is supported by the Federal Reserve’s (Fed) recent messaging around viewing bouts of inflation as transitory, rather than immediately looking to react with policy changes. That said, the market may indeed test the Fed’s resolve, and that is something we are acutely aware of. Indeed, US Treasuries sold off towards the end of the week with yields rising to 1.6% in early trading on Friday – this was seemingly spurred by the Rescue Plan, with investor flows showing a sizeable switch from fixed income into equities.
The European Central Bank increases its bond purchasing programme in response to a rise in bond yields
The European Central Bank (ECB) announced that it would significantly increase the current rate of bond purchasing. According to the statement issued by the bank, the disbursement of monies from the Pandemic Emergency Purchasing Programme would be accelerated, with the aim of preventing unwanted spikes in bond yields – they explained the decision was “based on a joint assessment of financing conditions and the inflation outlook”. It is fair to say the overall tone was more dovish than the market had expected. The Reserve Bank of Australia appears to have a similar stance as the governor pushed back against higher rates, stating that the market may be getting ahead of itself by pricing in an interest-rate increase within the next couple of years.
In other news, fourth-quarter GDP data for the eurozone showed a fall of 0.7% over the quarter, which raises the spectre of a double-dip recession, if, as seems likely, first-quarter 2021 GDP falls further. On a more positive note, the Organisation for Economic Co-operation and Development (OECD) revised its outlook for global economic growth for this year, from 4.2% to 5.6%. The positive revision is largely based on the expected lifting of lockdown restrictions afforded by the ongoing COVID-19 vaccine programme. For 2022, the OECD raised its forecast marginally higher, from 3.7% to 4.0%.
Spotlight remains on central banks as the Fed, Bank of England and Bank of Japan make policy decisions
Next week the spotlight remains on central banks, and how they address the recent rise in bond yields. The Fed meet on Wednesday for their latest monetary policy decision, which is followed by a press conference from Chairman Jerome Powell. While it would be reasonable for the committee to update their economic projections in an upwards direction following the passing of the stimulus bill this week, we expect Powell to reiterate the uncertainties around the recovery path, and especially in the labour market. In the UK, the Bank of England deliver their latest policy decision on Thursday – the market does not expect any change to policy, although again attention will be closely focused on the messaging used to address the recent sell off in government bonds. The Bank of Japan also meets towards the end of the week.
- Despite the continuing rise in bond yields, the Federal Reserve’s messaging remains consistent
- Economic data remains supportive with PMIs in the mostly exceeding market expectations
- The US Congress made progress on the stimulus, while the UK budget outlines continuing support to the economy
- Focus turns to the ECB meeting on Thursday, with the rise in bond yields the key topic for President Lagarde
Despite the continuing rise in bond yields, the Federal Reserve’s messaging remains consistent
Yields continued to rise this week as the market anticipates a strong economic bounce. As at the time of writing, 10-year Treasury yields are back to levels last seen in February of last year, and the difference between 2-year and 10-year yields is at the highest level since November 2015.
In recent weeks, we have seen members of the European Central Bank (ECB) suggest that higher yields could derail the economic recovery, however their US counterparts, the Federal Reserve (Fed), have not made steps to alleviate the upwards pressure on government bond yields. Fed Chair Jerome Powell was interviewed on Thursday at the Wall Street Journal’s Job Summit. His messaging remained consistent; acknowledging recent price moves catching his attention was the closest to a hint of further intervention. Powell took the opportunity to reiterate the Fed’s stance, whilst voicing that better economic times were ahead, he emphasised that the Fed was not close to reducing its bond-buying program. As we have become accustomed to in recent weeks, he also stressed the Fed’s intent to remain patient in response to rising inflation expectations, highlighting that they expect to view these increases as transitory.
Economic data remains supportive with PMIs in the mostly exceeding market expectations
Economic data was supportive this week with manufacturing PMIs for February generally exceeding market expectations. The Euro Area print was revised up to 57.9, with both France (56.1) and Germany (60.7) firmly in expansionary territory. The Euro Area services PMI was also revised up to 45.7, but remains in the contractionary zone as varying lockdown restrictions hit the services sector across the continent. It was a mixed picture in the US; the ISM manufacturing index rose to 60.8, the strongest reading for over three years, whereas the services equivalent fell to 55.3, over three points below market expectations. China and Japan also remained in expansionary territory.
The US Congress made progress on the stimulus, while the UK budget outlines continuing support to the economy
There was progress on the forthcoming US stimulus package with House Speaker Nancy Pelosi seeming confident that the successful negotiation will allow sign off to be achieved ahead of the jobless benefits expiring on the 14th March. To progress the bill, President Biden agreed to narrow the eligibility of stimulus cheques, with funds being provided to those earning up to $80k, rather than the previously suggested $100k. In return, the supplementary unemployment cheques are to be increased from $300 to $400 per week. Overall, this should result in a relatively small change to the overall size of the package.
In the UK, Chancellor Sunak laid out the government’s annual budget. Additional fiscal measures included an extension of the current furlough scheme that pays 80% of employee’s wages until September (although this will start to taper from July based on the success of lifting lockdown restrictions), as well as extensions to other support measures including the stamp duty cut and a VAT reduction for hospitality.
Focus turns to the ECB meeting on Thursday, with the rise in bond yields the key topic for President Lagarde
On Thursday, the ECB will meet, and focus will turn to President Lagarde’s press conference, where the main discussion will likely be whether the bank will alter its bond buying program in reaction to the recent move upwards in bond yields. Outside of that, the market will continue to monitor the success of vaccination programmes in various economies, and how restrictions continue to diverge. It’s a relatively quiet week for data, with industrial production numbers out of Europe being the main release.
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Weekly multi-asset update: March