Reflation, reopenings and a packed data docket
Summary: US futures trade directionless oscillating between gains and losses, while rebounding Chinese stocks lead the charge in Asia, breaking from their recent underperformance. An air of quiet positivity lingers as we await further catalysts.
Global equities are kicking off the month of April and new quarter in the green. Following on from what was a solid Q1 performance, the S&P 500 continues to hit fresh all-time highs, with last week being the 3rd straight weekly gain for the broad index and the index already putting in 6 all-time closing highs 13 days into April. This as financial conditions remain accommodative, front month VIX continues to collapse and the dollar resumes its decline. All told, reflation remains in play, the good news continues to roll in for growth and companies continue to participate in the economic recovery.
Yesterday’s US CPI read provided fuel for the debate over the trajectory of inflation in the coming months, of particular interest for the path of longer duration bond yields and path currently outlined by the Fed deeming inflationary pressures transitory.
Inflation data did surprise to the upside, but the surprise was benign print relative to what had been feared, so sufficiently priced in US Treasuries. There is no guarantee that this pattern will continue over the coming months, one month does not a trend make. We are only just entering the period where we will see higher inflation prints as the “base effect cliff” comes firmly into play. As supply constraints, pent up demand and fiscally juiced up consumers collide with the base effects cliff it is logical to expect higher inflation is coming and that long-end yields will trade higher in the coming months.
Recent PMI, small business surveys and PPI data all point to inflationary pressures with supply bottlenecks and increasing input costs flowing through to pricing intentions. In addition, commodity prices continue to push higher showing strong read through to PPI prints.
The risks going forward for assets are squarely focussed on the winding back of extremely loose monetary or fiscal policy (looking at you, NZX 50/SH COMP), inflation, taper tantrums and regulations/taxes – None of which are in plain sight yet. This will change as we head into 2H21, but with a big rate of change acceleration in both growth and inflation data keeping long-dated US yields likely headed higher – it seems premature to ditch reflation trades.
Up next is 1Q earnings with US banks kicking off the season. The banks have been a key beneficiary of the reflation trade. Benefitting from a reaccelerating economy, higher yields, vaccine rollout and a robust fiscal pulse. Post a period of underperformance for these cyclical reflation trade beneficiaries’ earnings could be an important catalyst for renewed confidence in reopening and cyclicality trades.
In general, with the spotlight on inflation, investors will be on the lookout for incoming margin pressures or any hit to earnings from higher input costs. But the broader thematic will be all about whether the COVID winners can beat their tough comps and whether earnings will be a continued catalyst for reopening/reflation trades.
US retail sales will also be in the spotlight as investors parse the impact of the vaccine rollout, an ongoing recovery in the labour market and March stimulus cheques on consumption. UK retail sales also coming in strong earlier this week vs. the 2020 COVID cliff but also the 2019 comparison as the vaccine rollout continues to outperform, providing a catalyst for the value heavy FTSE 100 index as anticipations of a booming NH Summer spending rebound in conjunction with the reopening are firmed.
Tomorrow locally jobs data should confirm a continued recovery in the labour market, but we may start to see the pace of gains moderate with JKP winding up. Leading indicators have bounced from strength to strength, the employment sub index in the AI Group PMI hit a record high of 66.0. AND the ABS Job Vacancies Survey also hit a record high of 288.7k. with employment growth outpacing the uptick in participation keeping downward pressure on headline unemployment.
In general, the data continue to outline an accelerating rebound in the domestic recovery. The NAB business conditions survey is sitting at record highs, whilst consumer sentiment has ramped to an 11-year high. A continued pick up in hiring and investment providing plenty of momentum for the ongoing recovery even as fiscal support measures wind off and continuing to support the ongoing recovery in labour market. This pickup in growth, alongside recovery in business conditions and confidence as activity normalises is one of the pillars of support for ongoing earnings recoveries and sustained gains for reflation trades. Confirming reflationary positioning and leverage to economic sensitivity e.g., cyclicals, commodities, materials, industrials, financials, energy, small caps, international stocks (ex-US) etc.