In this week’s market update: all eyes are on consumer spending as economies re-open; the banks kick-start the first quarter earnings season; and Chinese shares show it can be better to travel than to arrive.
It was fitting in a way that snow should arrive on the day that the UK’s pubs and restaurants were allowed to re-open but only to customers prepared to sit outside. The cold weather has added insult to injury for a country tentatively emerging from three months of lockdown.
So, the first day of non-essential retail and al fresco hospitality is unlikely to set records. But looking further into the second summer re-opening of the pandemic, attention is focused on the extra £180bn that British savers are understood to have set aside over the past year. That’s equivalent to about 10% of the UK’s GDP.
Just how much of that will be spent in the months ahead is a matter of guesswork because we have never been in this situation. There are lots of unknowns. A lot of those savings have been made by relatively wealthier people who do not have a high propensity to spend unexpected financial windfalls. The lower-income households that do spend extra cash have been disproportionately hard hit by the pandemic.
So talk of a new Roaring Twenties of post-lockdown hedonism may be wide of the mark. But there is definitely plenty of money sitting on the sidelines of the economy. At the peak in the second quarter of last year, the savings rate hit 25%. That’s about three times the usual level. At the end of the year it was still about 16%. If the full £180bn were to be spent over the next four quarters it would add about 6% to consumption in both 2021 and 2022.
It won’t all be spent, of course. Economic theory says that people usually spend about 5-10% of unexpected windfalls but this year the proportion could be much higher because large parts of the economy have been mothballed and there is a lot of pent-up demand. Spending on durables like cars, for example, has been particularly low with showrooms closed.
The counter argument is that there is still so much uncertainty that precautionary saving may continue. People are hesitant about booking holidays, for example, after the experience of last summer when many trips were cancelled and with higher costs of Covid testing having to be factored into the price of a family holiday.
Consumer spending will also be in focus this week in the US, where Thursday brings retail sales data for March. What’s certain is that there will be a pick-up after a dismal February hit by poor weather and a reduction in government aid. Last month, however, the Biden administration’s $1,400 stimulus cheques landed. Economists are forecasting a surge in consumer spending of between 3.5% and 11.5% with the wide range reflecting the same uncertainties as over here.
Consumption accounts for about two thirds of the US’s economic output which is why the government has targeted stimulus so precisely at the people most likely to spend. And the $1.9trn American Rescue Plan which includes that helicopter money is just the start of a bigger spending programme that also includes $2trn on infrastructure and other government spending and an expected $1trn childcare, healthcare and education package.
The Biden administration is explicitly ‘going big’ in an echo of earlier massive government interventions such as Roosevelt’s New Deal in the 1930s and President Johnson’s War on Poverty in the 1960s when America also spent heavily on building out its interstate highway network, took on the Soviet Union in the space race and was dragged into an expensive war in Vietnam.
The spending has some high profile economists like Harvard’s Larry Summers worried that it is going too far too fast. He believes that the spending is out of proportion to the size of the economic hole created by the pandemic and describes the stimulus as ‘substantially excessive’.
The bond market is also showing its concern with bond yields rising on fears that high government spending and a desire by the Federal Reserve to keep interest rates artificially low might lead to rising inflation which in time will force the central bank’s hand and push it into damaging monetary tightening.
The government’s need to issue billions of dollars worth of new bonds to finance its spending also threatens indigestion in the fixed income markets. Just over the next three weeks, for example, the Treasury is looking to offload $370bn of new securities. Fears about whether the buyers will be found for all those bonds has pushed yields back up to their recent highs, with the 10-year Treasury bond yielding 1.67% at the end of last week.
Rising bond yields have contributed to the worst quarterly performance for long-dated Treasury bonds in more than four decades. And that has had a knock-on impact on those parts of the equity market most exposed to rising interest rates.
That said, equity markets remain buoyant, with indices on both sides of the Atlantic extending their gains to hit new all-time highs last week. The S&P 500 index on Wall Street recently moved decisively through 4,000 and has held onto its gains above that level. Meanwhile the Stoxx Europe 600 index ended the week at a new all-time high after recovering all the losses incurred in its big fall last spring during the start of the pandemic. Here, the FTSE 100’s 2.7% gain last week was the UK benchmark’s best performance since early January.
In a sign that it might be better to travel than to arrive, however, Chinese stocks fell 1.5% on Friday as an index of factory gate prices rose by the most in two years. China was first in and first out of the pandemic and attention has shifted to whether the authorities will start to tighten policy as inflationary forces re-emerge and signs of excess show up, notably in the property market.
The scale of China’s recovery will be clear on Friday when the year on year comparison between the slump in output in the first quarter of 2020 and the same period this year is most dramatic. A 19% bounce back is expected from the first period of declining GDP in four decades. By the end of last year China was already growing faster than it was before the pandemic.
Closer to home, the impact of Europe’s third wave of infections and renewed lockdowns will be evident in mixed messages from the region’s biggest economy. German GDP is expected to grow by 3.3% this year, down from the 3.7% forecast in January. But the closely watched ZEW survey of financial experts is expected to show a pick up in sentiment in April as Germany’s export-led economy responds to growth elsewhere in the world, notably in China and the US.
Goldman Sachs said this week that it expects European GDP growth to rise by more than 5% this year and expects the region’s GDP to exceed its pre-pandemic level by the fourth quarter. Reflecting that it forecasts another 10% rise in the Stoxx 600 index, which has already risen by 10% this year and by 32% over the past 12 months.
On the corporate front, the highlight this week is the start of first quarter earnings season in the US. The latest set of results announcements is expected to show the biggest increase in profits since the third quarter of 2018, according to Credit Suisse. The biggest US companies are forecast to increase earnings by 25%.
As usual the banks will be first out of the blocks. The likes of JP Morgan, Citigroup and Goldman Sachs enjoyed a trading boom in the fourth quarter so all eyes will be on whether the unusually good conditions continued into 2021. Apart from the banks it’s thin pickings on the results front, with LVMH and Tesco the main non-financial highlights.