Weekly View - Taper paused
The Federal Reserve reaffirmed its dovish stance last week but acknowledged that economic growth parameters have improved. While the US central bank continues to see a spike in inflation in the coming months, it expects it to be temporary. US economic growth in the first quarter came in at 6.4%, slightly below forecasts. The GDP price index however, was significantly above expectations at 4.1% versus 2.6%. Personal consumption grew at the fastest pace since the 1960s at 10.7% on an annualised basis. A decline in inventories should support growth in the second quarter as well. US personal income (+21.1%) and spending growth (+4.2%) show that consumption is alive and well. Notably, wages in the US saw their biggest rise in 14 years. These data signal a buoyant US economy, which ironically could prove an issue for further equity market gains. We bought protection on the Nasdaq.
Meanwhile, Europe is officially in technical recession, following negative Q1 GDP growth of -0.6%. This is a direct effect of the lockdown measures enforced across the continent to contain the pandemic. In spite of this, markets are focusing more on the increased pace of Europe’s vaccine roll out on the hopes that the continent will reopen for business in time for its crucial summer season. We are neutrally positioned in European equities overall and have upgraded Swiss equities from underweight to neutral. In China, Huarong was downgraded by two ratings agencies. We continue to watch for how its debt will be restructured as an indicator of how the state may support faltering state-backed companies going forward.
As the Q1 earnings season progresses, both US and European companies’ earnings have been particularly impressive. Sales growth is now expected to surpass 10% in both regions. While the big tech players reported exceptional numbers, fears of semiconductor supply shortages that started in the auto industry have spread to pockets of technology. This added further impetus to our decision to buy protection. Companies across various sectors have indicated their willingness to raise prices, which could eventually translate to global price rises. Consensus growth estimates continue to adapt to the strong earnings numbers as a result. We maintain a short-duration stance in bonds, given that interest rates should move higher. In equities, we favour companies with strong pricing power.