For months now, the advanced pace of the UK and US coronavirus vaccination campaigns have provided a sizable boost to economic projections to both local and global growth. It’s important to recognise that valuations of national investment environments and the assets contained within are based not on the present, but rather on expectation. This is why financial media focuses so heavily on the operative question of ‘what’s priced in?’.
It’s hard to say exactly what is priced in because market expectations are a composite of individual expectations, but we can sketch out a few broad points.
- Employment gains are continuing to grow in the UK and US thanks to their relatively high vaccination levels permitting a faster opening of their economies.
- Increased spending is also expected because it follows the logical unwinding of increased savings over the pandemic period. The size of the spending and its impact are a point of debate, but most agree that catch up is just on the horizon.
- The UK and US vaccination campaigns currently see 75% of Americans and 30% of Briton’s inoculated. At the current pace, all UK and US citizens should be vaccinated by July, when the EU should have covered most its vulnerable citizens.
Projections are necessarily a two-sided coin: one expressing a belief and the other qualifying the likelihood of its materialisation. In that spirit, let’s examine a few factors that might impede the realisation of economic recovery.
- The Scottish independence question is likely to weigh on GBP valuations. While it doesn’t directly impact economic recovery, it implies a political premium (like Brexit) for Sterling-denominated assets.
- Unlike the US, the UK has not rolled out cash subsidies to consumers, which is likely to hold back the transformation of savings into spending or repayment of debts. This is true in the EU as well, where the even longer time to reopening will mean greater personal debt loads to repay.
- As Covid infections spike in emerging markets, the potential for mutations of the virus is very real. This impacts the timeline of resumption of international travel and recovery or bust of vulnerable sectors of the economy.
Bottom line: Since the beginning of April, optimism surrounding economic projections has driven USD to become depreciated. Of course, in order to sell Dollar assets one must perceive an attractive alternative. Expected EU stimulus has made the Euro a beneficiary of Dollar declines, but it’s becoming difficult to argue that it should persist. Sterling has traded in a narrow band since March, which means we’ll need fresh positive news to excite additional Pound buying. Wherever one looks the feeling is that the good news is priced and that suggests the likeliest surprise event is to the downside.
The week ahead
UK coronavirus cases and deaths are at their lowest levels since September last year, as current averages stand around 1500 cases per day. Another milestone has been reached in the vaccination campaign; 50 million doses have been recorded as just over a quarter of adults are fully inoculated. This is positive news ahead of the next phase of Boris Johnsons road map, as more areas of hospitality prepare to re-open on the 17th May. The EY Item Club are expecting the Bank of England to hike GDP forecasts for 2021 at Thursday’s meeting, with some expecting the tapering of monetary policy to be considered. The talk of negative rates has taken a back seat in the last couple of months, however as the economy begins to grow, a hike in interest rates could become the next focus of attention for markets.
- The final Services PMI is due out on Thursday reading higher at 60.2 vs 56.3 in April.
- The Bank of England will meet this Thursday to deliver the latest monetary policy update including asset purchase facility and the official interest rate.
- The Construction PMI will be released on Friday which looks set to creep higher to 62.0 from 61.7 in April.
- Monetary Policy Committee member Ben Broadbent will speak on Friday at the National Agency Briefing.
The Eurozone entered into a double dip recession from January to March this year as coronavirus related restrictions stifled economic activity. The current outlook is improving as vaccination rates begin to increase. The initial bottleneck in supply appears to have been resolved, with a jab being administered every half a second in the Netherlands. This has given encouragement to EU leaders, with the resumption of overseas travel looking likely in the summer. Early proposals are suggesting that member states will be able to accept travelers from non-EU countries if they have received a coronavirus vaccine that has been approved by the EU health agency.
- A slew of final Manufacturing and Services PMI’s are due throughout the week for Germany, France and Italy.
- The European Commission will release their EU Economic Forecasts this Wednesday.
- The European Central Bank Economic Bulletin will take place on Thursday.
- President of the ECB Christine Lagarde will speak this Friday.
The US rebounded strongly in the first three months of the year growing 6.4% fueled by increased consumer spending, which hit a 14-month high in April. Joe Biden has hailed the coronavirus vaccination campaign as a major driver of this change, which has allowed the country to begin re-opening sooner than others, with almost 30% of the population fully inoculated. Federal Reserve Chairman Jerome Powell did emphasise that although the recovery is positive, the distribution of this growth has been uneven across demographics and states. The hope is that as more jobs are added over the coming months these gaps will begin to close and maximum employment can be achieved.
- The ISM Manufacturing number came in lower than expected at 60.7 vs 64.7 last month, the ISM Services PMI is due to be released on Wednesday.
- US Unemployment Claims are forecast to decrease slightly to 540K vs 553K last week.
- Non-Farm Payrolls are also due out on Friday and look set to read 975K vs 916K last month. The Unemployment Rate is predicted to fall to 5.7% from 6.0% last month.
- A number of FOMC members are also due to speak throughout the week.
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