- Economic data for the first quarter of 2021 shows the diverging fortunes of the US and Eurozone economies. The US economy expanded by 6.4% in Q1 on an annualized basis with strong gains coming from personal consumption—up almost 11%—as well as business and residential investment. The US performance reflected the effects of stimulus payments that reached most households in Q1 as well as a successful start to the rollout of Covid-19 vaccines.
- In contrast, the Eurozone economy shrank by 0.6% q/q, pushing the bloc into a second technical recession as Q1 2021 followed a similar sized drop of 0.7% in Q4 2021. Germany’s economy saw the sharpest drop of -1.7% q/q given that lockdown measures were strict but Italy and Spain also had a tough start to the year. The Eurozone bungled the start of its Covid-19 vaccine campaign but is now making progress which should help to set up the economy for a recovery in Q2 this year. Nevertheless, the Eurozone has seemingly eroded much of the momentum that it seemed to set last year when it had some early success in containing the virus relative to the US and was able to agree a major rescue package. The trajectory for growth in the Eurozone is such that it will still remain below pre-Covid levels for some time while the US could eclipse the impact of the virus perhaps as early as this year.
- Inflation estimates for the Eurozone showed an acceleration to 1.6% for April compared with 1.3% in March. Most of that bump, however, was catalyzed by higher energy prices and core inflation actually decelerated to 0.8% y/y from 0.9% a month earlier. As energy prices have picked up in recent weeks and thanks to soft base effects from Q2 2020 we would expect to see inflation prints go higher in the coming months. However, given that the Eurozone economy is still so far below pre-pandemic levels of activity we would expect the ECB to largely look through the rise in prices and maintain its accommodative stance.
- PMI numbers out of China showed a drop in activity for April. The manufacturing PMI slipped to 51.1 from 51.9 in March while the non-manufacturing index pulled back to 54.9 for April, down from more than 56 in March. China’s economy is on track to recover solidly from the Covid-19 pandemic but the dip in activity data would suggest it’s not going to expand at a breakneck pace consistently. Difficult access to chips, part of a global shortage, along with a tight shipping market will be playing on China’s economy for the middle of the year at least. Nevertheless, we still see the official growth target of 6% as relatively modest given the tailwinds behind China’s economy.
- Turkey’s central bank revised its inflation expectations for 2021 closer to market expectations and now projects prices rising by 12.2% y/y at the end of the year compared with a previous forecast of less than 10%. The bank expects that inflation will have peaked at more than 16% in March and that policy rates will stay above inflation. Sahap Kavcioglu, who was appointed as governor of the TCMB in March, held policy rates unchanged at 19% on the one-week repo at his first meeting in the middle of April.
- The UAE’s economy minister said that the non-oil sectors contracted -6.2% in 2020, with the hotel & restaurant sector down -24%. Wholesale & retail trade contracted -13% while financial & insurance activities declined -3% according to the statement from the ministry. Headline GDP declined -6.1%. The full data set has not yet been published but these preliminary estimates are higher than our own estimates of -6.7% for non-oil GDP and -6.9% for headline GDP. The government expects non-oil growth of 3.6% this year, broadly in line with our 3.5% forecast.
Today’s Economic Data and Events
09:00 IN Mfg PMI (April)
11:00 TU Mfg PMi (April)
11:00 TU CPI y/y (April): forecast 17.3%
12:00 EZ Mfg PMI (April): forecast 63.3
17:45 US Mfg PMI (April): forecast 60.7
18:00 US ISM Manufacturing (April): forecast 65
Fixed Income
- An index of US Treasuries slipped last week for the first time in four weeks even as the Fed affirmed its accommodative policy stance midweek at the FOMC. Yields were pushed higher at the back end of the curve with the 7yr adding more than 6bps to 1.3086%, the 10yr up almost 7bps at 1.6259% and the 30yr bond adding 6bps to 2.2967%. Front end action was more limited w/w with 2yr UST yields closing essentially unchanged.
- The strong Q1 GDP performance for the US along with persistent signs of strength in the economy will test markets in coming weeks as yields will likely respond positively to the data while keeping an eye for any chink in the accommodative armor of the Fed. President of the Dallas Fed Robert Kaplan said that thinking about adjusting asset purchases “at the earliest opportunity” was “appropriate.”
- The drop in USTs was mirrored by European peers with a broad European bond index falling for a fifth week in a row. Gilt yields added almost 10bps on the 10yr to settle the week at 0.84% while bunds added nearly 6bps on the 10yr to close at -0.2%.
- Emerging market bonds showed a mixed performance last week with sell-offs in Brazil and Poland where Covid-19 cases have jumped in recent weeks. Within our universe of coverage Indian 10yr government bonds were relatively steady over the week, closing at 6.029% while Turkish 10yrs responded positively to the TCMB’s new inflation expectations with yields down 7bps over the week even as the country has reentered strict lockdown measures. In South Africa yields were back well above 9% after a 10bps rise in the 10yr yield to 9.276%.
- Moody’s revised its outlook on Bahrain’s sovereign rating to negative and affirmed its rating at ‘B2’.
- Central bank action this week will see the RBA (Tuesday), Thailand (Wednesday) and Malaysia, Turkey and the Bank of England meeting on Thursday.
FX
- The dollar recovered some poise last week, rising against most major peers. The DXY index added almost 0.5% in its first gain in the last four weeks, closing at 91.28 thanks to a 0.7% gain on Friday alone. Most of the gains came at the expense of EURUSD which fell 0.64% to 1.202 as Q1 GDP data affirmed the bad start to the year for the Eurozone economy. USDJPY also pushed back up above 109 at the end of the week.
- The Bank of England will be in focus this week although no change in policy stance is expected. GBPUSD fell on Friday, wiping out what would have been a weekly gain with sterling settling at 1.3822, down 0.39%. Performance in the commodity currencies was mixed as higher oil prices and a stronger USD generally helped pull up the loonie while both AUD and NZD closed weaker against the dollar.
- TRY appreciated more than 1% against the dollar last week, closing at 8.2948 on Friday while USDZAR rose by 1.5% to 14.495%. INR also managed to strengthen against the greenback, closing the week at 74.0788 with the USDINR pair down 1.25% even as the Covid-19 crisis in India escalates.
Equities
- Global equity markets sold off at the close of last week, with an acceleration in US PCE perhaps prompting renewed concerns over Fed tightening, even in the week in which the FOMC and Chair Jerome Powell once again pushed back against this.
- Friday’s sell-off was sufficient to put most major indices into the red week-on-week. However, as April concluded the story compared to the end of March was that most enjoyed gains over the period, bolstered by ongoing progress in Covid-19 vaccinations and an increasing normalisation of activity as restrictions are eased.
- In the US, the S&P 500 closed flat w/w, while the NASDAQ (-0.4%) and the Dow Jones (-0.5%) both closed down. All three indices closed the month higher however, with the Dow Jones up 2.2% m/m, the NASDAQ 3.6% and the S&P 500 4.0%.
- European equity markets were also broadly higher m/m with the FTSE 100 a notable gainer up 3.5% as the UK has made good progress on vaccinations and easing restrictions. By contrast, there were notable declines over the month for Japanese and Indian indices as they struggled with surging cases and renewed lockdowns. The Nikkei closed down -3.5% m/m, while the SENSEX lost -2.5% over the same period.
Commodities
- Oil prices recorded gains across all major benchmarks last week and managed to gain on the month as well. Brent added 1.7% to settle at USD 67.25/b, WTI rose 2.3% to close at USD 63.58/b while Murban was up 1.4% at USD 64.84/b. The gains come despite the evident downside to demand localized in India and other emerging markets with the market seemingly looking to strong performance in the US and China over the rest of the year.
- Market structures remain supported with a slight dip in front-month spreads for both Brent and WTI, both in backwardation, while longer-dated spreads like the 1-12 month actually saw wider backwardations at the close.
- In the US, the drilling rig count fell back by 1 rig to 342 last week but is now up 50 rigs on where activity was this time last year.
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