This week felt like “back to the future”, as inflation concerns were pushed off centre stage, helped by mixed economic data in the US, so-so pandemic news, and – as we have become accustomed to – soothing words from the Fed. This confluence of factors helped subdue the rotation into value as the go-go names re-discovered their mojo and pushed higher, even though many remain well off their 52-week highs (see “Revisiting the High Flyers” if you want to read more about new tech/WFH companies). The week looked to be mostly smooth sailing until Friday morning, when PPI data – a harbinger of inflation – was released (later than expected due to BLS website issues, press release with details here). PPI, both headline and core, was significantly higher than analysts’ consensus expectations, rattling the market during the first half of the session on Friday. Core PPI came in at 1.0% for March (vs 0.4% expected), and 4.2% for the trailing 12 months, the highest since September 2011. Although this could have easily been an inflection point for equities, concerns seemed to fade by mid-day as US equity markets shook it off and rallied in the afternoon session, finishing off a solid week.
The S&P 500 and FTSE 100 were the global index star performers last week, whilst the Asian and emerging markets indices lost ground. In the US, the Russell 2000 – the “value play” – continues to lose momentum, giving way once again to the tech / higher growth stocks, a logical play I suppose given that risk sentiment has returned with a vengeance. One more indicator of risk is the VIX. Having been stuck on the low 20s range for weeks, the VIX has come in nicely since late, closing Friday below 17. One final thing – it’s hard to believe that we are entering earnings season again, but we are. As usual, the banks will kick things off, with JPMorgan, Wells Fargo, Goldman Sachs, Citibank, Morgan Stanley and Bank of America amongst a slew of US banks and asset managers set to release 1Q2021 earnings beginning mid-week.
Even though US Treasuries weakened following the stronger-than-expected PPI release on Friday, they traded most of the week in a relatively narrow range, settling down to the mid 1.64% area for the 10-year prior to the PPI release. The fact that yields did not blow out following the PPI release of Friday shows that investors have become more measured as far as any single data point suggesting future inflation, since economic data (e.g. jobs report on Thursday) remains mixed albeit with a favourable / positive bias. This modest increase in UST yields on Friday also means that expectations are now largely priced into the equity and corporate credit markets. Overall for the week, yields on government bonds in the US, UK, Eurozone and Japan were lower W-o-W.
The positive attitude in equities and the fact that inflation expectations seem for now to be priced into the US Treasury market have both translated into better spreads and lower yields on US corporate credit, signaling that this rally still has legs in the investment grade and high yield markets, too.
The US dollar weakened slightly and the Yen strengthened, both bucking recent trends. Gold was marginally better, seemingly having found a trading range in the $1,700-$1,750 area. WIT crude continued its slide, also pressuring oil stocks. Even Bitcoin fell slightly on this past week although it seems to have settled into a comfortable range in the high $50,000’s.
The markets just feel very risk-on to me at the moment, and the appetite for risk has clearly become more balanced, not necessarily favouring value over growth, and has crept into a broader array of asset classes.
Other interesting articles / data points to reflect on from this past week
IMF Global GDP Growth Expectations: On the occasion of its annual spring meeting, the IMF revised it global projections up compared to its forecast three months earlier. The IMF is projecting global growth in 2021 and 2022 of 6.0% and 4.4%, respectively, following a decline of 3.3% in 2020. The graph below shows the IMF forecasts for 2021 and 2022, compared to actual historical growth.
The IMF is projecting growth of 6.4% and 8.4% in 2021 in the world’s two largest economies, the U.S. and China. You can see the IMF’s 2021 growth expectations by country in the illustration below.
You can find a transcript of the IMF World Economic Outlook press briefing here.
Growth in the US via Bloomberg: Steve Matthews, reporter for Bloomberg, wrote a piece on Friday that looks at real-time indicators of pending growth in the US. He examined trends around five measures: airline traffic, restaurant reservations, hotel occupancy, cinemas, and job listings, all of which make sense as barometers of consumer spending, a key catalyst underlining robust U.S. economic projected growth. The article is here: “Economy’s Real-Time Indicators Signal Even Stronger US Rebound”. Assuming these trends continue, I would handicap US growth at 1-2% above IMF projections for 2021, and also, a more inflationary path ahead.
Jamie Dimon's Views: JPMorgan Chase released its 2020 Annual Report on Wednesday, prefaced by a 67 page Letter to Shareholders that you can find here. I have skimmed it only, but the scope is amazing as it covers everything from JPMorgan’s extraordinary performance over the years, but also all sorts of issues including social inequality, the pandemic and US response, China, ESG, and so on. Of course, many investors were interested to hear that Mr Dimon expects economic growth to be strong through 2023, as the unprecedented stimulus coming from the Fed and US government has put in motion a growth trajectory that could have never been envisaged pre-pandemic. If you have the time and interest in reading Mr Dimon’s thoughts, you can find them here.
SPACs and the SEC: SPACs (see my article from March 16th here if you want to learn more about SPACs) are drawing more and more scrutiny from the SEC, which clearly wishes to have disclosure for reverse IPO’s via SPACs converge with the (much more) comprehensive and formulaic disclosure required for a traditional IPO. You can read the SEC’s public statement from Thursday here, worth reviewing if you follow this market. SPACs offer many interesting features but it is important that investors understand the motivations of all of the parties involved before investing in SPACs.
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