Leaders and Laggards

STRONG DATA FROM US AND UK WHILE EUROZONE LAGS Markets have been mixed this week, with mostly positive economic releases, especially in the US, broadly confirming expectations, while the Federal Reserve reiterated that it is in no hurry to tighten monetary policy. The US economy expanded by 6.4% on an annualised basis in Q1, propelled by a 10.7% rise in personal consumption. Growth could be even stronger in Q2. In contrast, Eurozone Q1 growth fell by 0.6%, signalling a return to recession as Covid-19 containment measures were extended. Still, latest survey indicators point to rising business and consumer confidence, with vaccinations in Europe finally being ramped up, paving the way for a gradual reopening of the economy and a return to growth in Q2. France, for example, is expected to start easing restrictions from Monday. In contrast, there remains concerns about rising infections rates in other parts of world, especially in India and other emerging economies. Overall, while US equity markets reached new highs, that was by no means universal with Asian markets, for example, lower on the week. The US dollar was little changed, with sterling staying below $1.40. The 10-year Treasury yield moved back up to around 1.65%, although that is still below last month’s highs, and 10-year gilt yields also increased to 0.84%. Commodity currencies outperformed, as Brent crude oil rose to $68 a barrel and copper touched $10,000 a metric tonne for the first time in a decade. UK FOCUS: BOE AND ELECTIONS The coming week’s UK focus is likely to be two-fold. The Bank of England (BoE) policy decision on Thursday takes centre stage for sterling markets, but there will also be attention on Scottish and Welsh parliament and English local elections. At the time of writing, there seems to be more or less evens market odds on whether the SNP, who favour another independence referendum, will win a majority in the 129-seat Scottish parliament. Elections in England include a Hartlepool by-election, a formerly solid Labour seat which the Conservatives hope to win. Social distancing in the counting of votes means that it is not clear when the election results will be declared, and some may not be known until the weekend. BOE UPDATE PREVIEW: GROWTH BOOST The Bank of England is expected to present a more optimistic assessment of the domestic economic outlook when it delivers its latest policy announcement on Thursday. No changes in monetary policy are expected, with both Bank Rate and the target level for asset purchases maintained at 0.10% and £895bn respectively. However, the meeting is one of the occasions when the BoE will publish an update to its economic forecasts in the quarterly Monetary Policy Report. Since its last forecast in February, developments have been unequivocally positive. Vaccinations have continued apace, leading to a further easing in lockdown restrictions, while buoyancy across a number of fast indicators and business/consumer surveys have increased confidence about the economic recovery. Monthly GDP out-turns for January and February also suggest that the economy in Q1 contracted by less than half the 4.2% drop assumed by the BoE in February. Together with a boost from the measures announced in the March Budget, including an extension to the furlough scheme, that should allow the BoE to upgrade its expectations for near-term economic activity and lower its assumed peak for the unemployment rate. We expect the BoE to upgrade its growth forecast for this year from 5% assumed back in February and to now say that the level of economic activity will return to its pre-crisis level by the end of this year, a quarter earlier than previously assumed. However, as some of the upgrade to its 2021 growth forecast is likely to reflect ‘front loading’ of economic activity associated with a quicker removal of restrictions that previously assumed, the BoE is likely to be cautious over the extent to which these near-term upside surprises are carried over into the medium-term forecasts. With the recovery in its infancy, the Committee will probably confirm the current £4.4bn weekly pace of asset purchases for the immediate future. The pace means the current tranche of £150bn will be completed by early November. At the March meeting, the BoE signalled that asset purchases would continue until the end of 2021, pointing to the need to slow their pace, but most likely later in the year.

ANOTHER STELLAR RISE IN US JOBS Internationally, the central banks of both Australia (Tue) and Norway (Thu) are expected to leave their settings unchanged, with the respective cash rate and deposit rate at 0.1% and 0.0%. Australia’s Q1 inflation surprised on the downside and rates are not expected to rise anytime soon. Norges Bank, however, could start to raise rates in the second half of the year. In the Eurozone, final PMIs (Mon/Wed), German/Eurozone retail sales (Mon/Thu) and German industrial production (Fri) are among releases. The main market focus will be the US labour market report (Fri). We forecast non-farm payrolls to rise by 925k in April, similar to the 916k gain in March. Supporting expectations for another solid month of jobs growth is the drop in weekly initial jobless claims figures to the lowest level (553k for the week of 24 April) since the start of the pandemic. The official jobs data will be preceded by the ADP report (Wed) and the ISM manufacturing and services surveys (Mon/Wed). We predict further rises in the ISMs to 65.5 (for both manufacturing and services), underlining the positive growth momentum. Despite that, the Fed is in no hurry to taper its bond purchases. One important reason for this is that, even with another out-sized rise in payrolls, employment would still be more than 7 million below pre-pandemic levels. It means that the unemployment rate, which we see falling to 5.7% in April, may be underestimating the ‘true’ amount of slack in the labour market since the participation rate remains well below levels prior to the health crisis.

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