The S&P500 crossed the 4000 threshold due to ample fiscal and monetary policy support
The USD edged higher in Q1:2021, due to solid US growth and increasing US Government bond intermediate and long-term interest rates. The DXY trade-weighted index appreciated by 4%, while the EUR/USD declined below the $1.18 threshold for the first time in 5 months.
Interest rate differentials have supported the USD. Indeed, 10-year nominal EUR vs USD interest rate swap spreads, have widened by 57 bps to -177 bps (real: -56 bps to -35 bps), year-to-date.
The beta of increasing US Treasury yields on German Bund yields, is expected to remain restrained, following ECB commitment to prevent an increase of EUR interest rates solely due to global spillover effects.
A highly uncertain near-term euro area economic growth outlook, warrants preserving favorable financing conditions. Indeed, vaccination programs have been considerably slower in euro area (Germany: 5.2%, France: 4.5% and Italy: 5.7% of the population have been fully inoculated) resulting, inter alia, in higher infection rates and renewed containment measures early in Q2:2021.
On the other hand, the prospect of a full reopening of the US economy is coming closer, as significant progress in the rollout of vaccinations is taking place. As of April 4th, 19% of the US population had been fully inoculated and 32% had received at least one dose.
Hard economic data differentials remain in favor of the US, as well. Nonfarm payrolls increased by 916k in March surpassing consensus estimates of 620k. Details were also solid, with the unemployment rate declining by 0.2% to 6% even as the labor force participation rate ticked up to 61.5%.
Regarding soft economic data, the US ISM manufacturing index surged to 64.7 in April -- its highest level since 1983. Nevertheless, euro area PMIs business surveys have improved as well, leaving room for improvement in the euro area outlook in coming weeks, as vaccine supply is set to increase in Q2:2021.
US equities have been able to absorb the upward adjustment in Treasury yields, as it reflected improving expectations vis-à-vis US growth and inflation. Moreover, the Federal Reserve’s “resolute patience” forward guidance, suggests that policy is expected to look past transitory inflation increases in Q2:2021, inter alia, due to base effects (oil and gas prices).
The S&P500 crossed the 4000 threshold for the first time on April 1st, ending Q1:2021 up by 6%, also supported by the White House infrastructure proposal of around $1.7 trillion in capital investment and R&D over ten years ($0.5 trillion in various benefits including Medicaid). Regarding investing styles and sectors, Value (10%) beat Growth (2%) and Small Caps (12%) beat Large Caps (6%), while Energy (29%) and Financial (15%) stocks, overperformed.