US equity benchmarks remain near all-time highs due to positive economic activity data and better-than-expected corporate earnings
The equity reflation trade lost momentum in April, following significant gains for procyclical sectors (Energy, Banks) and asset classes as small caps (Russell 2K) since November 2020 US Elections. Region-wise, equity indices (Eurostoxx) with small exposure to growth stocks underperformed as well, on a relative basis.
Q1:2021 earnings continue on a strong footing, beating consensus expectations, on both sides of the Atlantic. The overall market remains at all-time (S&P500) or post Covid-19 (Eurostoxx) highs, broadly unperturbed by President Biden’s plan to increase corporate and capital gains taxes.
The consolidation of long-term US Government bond interest rates in the area of 1.6% has contributed to equity market factor reversals. The market-implied timing of the first interest rate increase by the Federal Reserve (early-2023) has been sticky since March 2021, following significant repricing since November 2020 US Elections. Moreover, market-implied expectations for US inflation and inflation term premia have been relatively stable lately.
US Treasury bond yields need a new catalyst to edge higher from current levels. The Federal Reserve meeting on Wednesday (29/4) is expected to be broadly uneventful. Nevertheless, further firming on momentum in employment and enhanced communication by Fed speakers regarding the timing of tapering of large-scale asset purchases could allow long-term bond interest rates to move higher.
The speed of the reopening process, in relation to the pandemic’s evolution, is also a key factor behind the resumption of the reflation trade. Note that, as of April 26th, 42% of the US population had received at least one vaccine dose, with 29% being fully inoculated.
Having said that, the official advance estimate of US real GDP from the Bureau of Economic Analysis, is due on April 29th, with analysts’ consensus expecting growth of +6% (NBG: +7%) on a quarterly annualized rate (sa) in Q1:2021. Growth is expected to accelerate further in Q2:2021 (NBG: +8%).
Vaccination in big euro area countries, following an anemic start, has accelerated lately, pointing to a benign outlook for the path of the pandemic and the respective lockdown measures, this summer/fall. PMIs for April confirmed that the euro recovery continues and the services sector is gradually catching up to manufacturing as economies reopen.
Moreover, the decision by the German Federal Constitutional Court to dismiss a request to block the NextGenerationEU mechanism, will allow the European Commission to raise up to €806 billion until 2026 in order to support the European economic recovery, with the first NGEU issuance probably by June 2021.
The European Central Bank meeting (22/4) turned into a non-event for global markets, as generally expected. President Lagarde reiterated that purchases under the PEPP over Q2:2021 will be conducted at a significantly higher pace (circa €20 billion per week) than during the first months of 2021 (€13 billion per week). We expect the ECB to use the full envelope of PEPP of €1850 billion (current purchases: €999 billion as of 23 April) in order to support the fragile recovery.