The positivity surrounding the global economic recovery this morning has overshadowed reports of excesses in asset prices that spell trouble on the horizon. The best news is predominantly proceeding from nations who have made progress on coronavirus inoculations, but the effect is hitting most major economies to some degree. In fact, most economists have been forced to revise their economic forecasts higher as a result of better-than-expected GDP, employment and inflation data in the UK and US. Not surprisingly, calls for the Fed to signal policy tightening have become more vociferous—as we predicted several weeks ago—in response to the blend of fiscal largesse and rapidly improving conditions.

Despite all the good news, the bad news is that asset prices continue to track higher, away from valuation fundamentals. Overnight, signs of overleverage cropped up in newspaper headlines. Credit Suisse and Nomura have revealed they took on a sizable exposure to a Hong Kong Hedge fund, Archegos, who was unable to meet margin calls, resulting in a liquidation of $20billion of Chinese and US stock positions. A week and a half ago, a Financial Times article highlighted fragility in the EU government bond market. The bid-to-cover ratio indicated a substantial increase in demand for bonds despite lack-lustre economic fundamentals, juxtaposed against an under-sized inoculation effort. One Rabobank strategist suggested the action reflected ‘frankly ridiculous numbers’.

Bottom line: The ultimate question is whether the positive growth narrative supports asset price increases and demand in the right places, or whether the exposure is not supported by fundamentals. Given how economists have been surprised by this last series of economic metrics lends some credence to an optimistic outlook, on say EU debt. Certainly, the US stimulus effort must raise questions in the minds of some EU policy makers and their ability to replicate that feat. Sure, the EU might move forward with their own plan and create a real basis for the EU bond move, but that is all supposition at the moment. In the very real present, we have a market that is almost like a sand castle that can be washed away by the next modest wave.

 

The week ahead

GBP

Over the weekend, the UK hit yet another milestone in its vaccination campaign as 30 million people have now received their first dose. The worries that vaccine supplies will tighten in April are lessening as the UK recently secured 17 million doses of the Moderna vaccine which is scheduled to be rolled out in April. The UK has taken its first tentative step out of lockdown today as the ‘Stay at home’ order is dropped in favour of ‘Hands, Face, Space and Fresh Air’ as the government starts easing restrictions. Positive economic data is fueling optimism as sectors that faced closures in the current lockdown such as retail and hospitality, have fared better than last April thanks to online sales and being more adaptable to the current conditions.  

• The final GDP q/q figure is due out on Wednesday forecast at 1% for Q4 of 2020, compared to 16% in Q3.
• Nationwide’s House Price Index m/m looks set to read 0.4% this month vs 0.7% in February.
• The final Manufacturing PMI looks little changed at 57.9 and is to be released this Thursday.
• UK banks will be closed on Friday through to Monday for the Easter Holidays meaning lower foreign exchange trading volume is to be expected.

EUR

The coronavirus conditions in Europe have failed to improve as German health authorities have warned there is potential for hospitals to be overwhelmed and case numbers reaching 100,000 a day. However, the EU have received a boost in their vaccination campaign. Two vaccine production facilities in Germany and the Netherlands were approved over the weekend, potentially boosting the blocs production to two billion doses this year. Although this news is positive, the EU is still far behind its counterparts and is likely to lag in its economic recovery later this year. Just last week, Spain downgraded its growth forecast to 6.0% from the 6.8% forecast made in December, pointing to the delay in EU recovery funds as the main driver.  

• German Preliminary CPI m/m is forecast at 0.5% for March vs 0.7% in February.
• German Unemployment Change appears to be improving as the number of unemployed people looks set to fall by 1K in March vs a 9K increase February.
• France Preliminary CPI m/m is also out this week and is forecast to rise in March to 0.7% from 0.0% in February.
• Italy’s Manufacturing PMI is to be released on Thursday forecast at 59.5 vs 56.9 previously.

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USD

Last week, President Joe Biden increased his vaccination goal and pledged to administer 200 million doses in his first 100 days as President. This news came as the US fully vaccinated almost 50 million people and is close to a vaccination rate of 40 per 100, coming close to that of the UK which has 47.5 doses per 100 people. This increased vaccination rate can only mean a faster re-opening of the economy, pair this with the monetary and fiscal stimulus already in the marketplace and inflationary fears seem justified. Many US companies are already experiencing increased shipping costs, coupled with the increase in commodity prices over the last year, the early signs of inflation are beginning to look real.

• The CB Consumer Confidence is scheduled for release on Tuesday and looks set to read 96.0 vs 91.3 previously.
• The ISM Manufacturing PMI looks set for a marginal climb to 61.0 vs 60.8 previously.
• Non-Farm Payrolls are due out this Friday forecast at 633K for March vs 379K in February.
• The Unemployment Rate also looks set to fall marginally to 6.0% in March vs 6.2% in February.

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