Biden $2.5T plan and job gains outdo European goes.
The markets are entering the second quarter with a bang. Profit-taking and quarter-end balance sheet window dressing swiftly gave way to the implementation of new risky exposures. The pause in the greenback’s rebound signals a further reduction in risk aversion. Light traded volumes before the Easter weekend accentuated the bullish movement. The S&P 500 gained 2.8% in four sessions breaking the 4,000 point threshold. Lee rate cut (T-note under 1.70%) before the weekend reflects the buyback of short positions beneficial to Nasdaq and growth stocks. American credit is erasing its lag in performance vis-à-vis the European markets. However, the compression trend resumes on CDS indices as volatility decreases. High yield remains well oriented.
The risk recovery is fueled by encouraging economic indicators. The global recovery fully justifies an increase in OPEC+ production by 2 million barrels per day between May and July. Saudi Arabia will increase production again by 1mn. American capacities are recovering (>11mn barrels) in response to higher prices (WTI at $ 62). In addition, the ISM manufacturing index is at its highest since 1983. Most sectors report a high level of demand and tensions along the supply chains. The lead times, the price of raw materials, and recruitment difficulties are symptoms of overheating that are not traceable in price indices.
Job creations in March amount to 916k and followed revisions in January and February (+156k). The unemployment rate decreases to 6% and underemployment (U6) decreases to 10.7% (-0.4pp). Hours worked increase significantly in accordance with the message of the surveys.
However, this should hold the attention of monetary and fiscal authorities as Joe Biden announces his first infrastructure spending program. The $ 2.25 trillion plan has four components. The transport ($ 650 billion) includes credits for the urgent reconstruction of economically sensitive bridges and $ 174 billion dedicated to the electrification of the automobile fleet. The inclusion of communities penalized by the lack of past public investment is a priority.
The improvement in quality of life ($ 650 billion) will target water distribution and better connectivity to telecommunications networks. The manufacturing sector will receive $ 580 billion, including $ 180 billion earmarked for research and development. Finally, the last section concerns support for the elderly and disabled for $ 400 billion. Note that by mid-April, a second program on access to health care and education will be unveiled by the US government. The
strike force of the Biden Administration is unprecedented and contrasts with the lack of fiscal action that prevails in Europe.
The health situation requires restrictive lockdown measures as the vaccination effort remains insufficient to anticipate a full-fledged recovery. Manufacturing surveys are nevertheless very well oriented in the euro area. The composite PMI gauge stood at 62.5 in March even if GDP
contraction in the second quarter now seems inevitable in France. What is worse, the European recovery plan has only been ratified in 13 of the 27 member states. The German constitutional court is examining the text and blocking situations that have appeared in Slovakia, Poland, Hungary, and even the Netherlands. In short, the familiar European folklore is preventing action. These delays will cause postponements of the first installments of aid initially planned for the third quarter. It also complicates the EU’s funding schedule.
US rates hit new highs for 2021 at 1.77%. Buybacks of short positions brought the T-note down to around 1.67% at close on Thursday. In addition to position squaring ahead of the Easter break, the end of the exemption of Treasury holdings from the bank SLR on March 31, 2021, will not necessarily have the dreaded consequences, as the Fed has opened consultations on this subject. The improving economic outlook favors curve flattening as markets challenge current US monetary policy. Buying interests emerged as 30-year neared 2.50% a week ago (2.33% now). The rise in mortgage rates is now weighing on refinancing demand, reducing receiving demand on long-dated swaps which contributed to swap spread widening (-15bp at 30 years). In the euro area, the weekly pace of PEPP purchases now over around € 20 billion. The ECB is actively seeking to immunize Bunds from tensions on T-note markets. Sovereign spreads are relatively stable even if we were able to observe some profit-taking on Iberian debts at the end of the quarter. Spain’s Bonos are trading at a 65bp spread. Net sovereign bond issuance will be very negative in April and the acceleration of the PEPP may put further downward pressure on yields.
As regards credit, spreads on US IG have shrunk to their underperformance vis-à-vis European credit. The increase in euro-denominated issuance by US names contributed to this rebalancing of performance. Euro and US markets are trading at equivalent spread levels (90bp). Globally, IG credit quality improves with 1.32 rating upgrades for each downgrade in the first quarter. High yield spreads continue to narrow as CDS indices reflect the reach for yield.
On equities, the decline of the T-note propelled the Nasdaq and the S&P to record levels. European bank performances suffer from ECB QE policies, but the cyclical theme and the rebound in technology despite rich valuations pushed the Euro Stoxx 50 past 3,900 points.