Here’s a few things that came across my desk that may be interesting…or not.  They are a random selection of charts, some of which are market/investment relevant while others offer potentially interesting food for thought.

Markets are terrible at timing Fed rate hikes: Since 2008, markets have consistently priced in a more aggressive path of Fed rate hikes than what ultimately happened, underestimating how patient monetary policymakers can be in lifting borrowing costs from zero. In late 2008, for example, traders already saw several hikes in the following couple years, even though it ultimately took Fed officials until 2015 to tighten (see chart below from Bloomberg).

Canada amongst the leading beneficiaries of Joe Biden’s $1.9 trillion stimulus package (see chart below from the Financial Times): Based on Allianz’s estimates, roughly $360 billion of the $1.9 trillion stimulus money would be spent on imported goods, with China the single largest recipient, receiving about $60 billion of that, followed by Mexico and Canada.

Pent-up consumer demand showing up as the reopening of the U.S. economy gathers steam: U.S. small business sales have accelerated sharply in recent weeks (see chart below).

The 4-week moving average of buybacks in the U.S. have accelerated to a record level (see chart below).

Buybacks in the U.S. have been concentrated in the Tech sector (see chart below).

Largest company in the S&P 500 by market cap since 1955 (see chart below).

Share of global greenhouse gas emissions covered by carbon pricing initiatives (see chart below from the Wall Street Journal).

China is the country with most electric vehicle (EV) models in the world (see chart below): The number of available EV models was 227 in China in 2019, significantly higher than all other individual countries.

Meanwhile, China is investing heavily in its EV charging infrastructure (see chart below): The number of EV charging locations per 100 km of roadway is higher in China than in many other countries.

And China will become increasingly competitive and important in the global EV supply chain: Data shows that six out of the world’s top ten EV battery producers are Chinese companies, together accounting for 41% of global battery sales in kwh last year (see chart below). Chinese company CATL has been the largest EV battery producer for the past four years.

Robust inflows into ESG fixed income funds: The rapid expansion of the ESG fund universe has been another important factor boosting demand for ESG-labelled securities. As of end-February 2021, the size of fixed income funds dedicated to ESG investing reached $300 billion—up from $200 billion in 2019. Since the start of the year, over 10 new funds have been launched, bringing the total number of ESG-labelled fixed income funds to nearly 730 (see chart below).

Facebook’s fake account problem: Facebook announced that in the last 3 months of 2020 they removed approximately 1.3 billion fake accounts from their platform (see chart below). “That means that Facebook has now deleted almost 16 billion accounts since 2018, which is equivalent to deleting their entire monthly active user base five times over.

Nike continues to dominate the sneaker world with footwear sales of $23.3 billion in its most recent fiscal year (see chart below from Statista).

 

 

While it will still be a long way back, the recovery is exceeding expectations. We look at where things stand for key regions as they reset growth.

Even though some sectors continue to suffer from the scarring effects of the pandemic, the global economy is faring better than many had feared. Not only has economic activity rebounded enthusiastically on partial re-openings last autumn, but the second wave of the virus has taken less of a toll on activity than the first, as people and businesses have adapted to life in a COVID-19 world.

The chief economist at RBC Global Asset Management, Inc., points out that while economic activity in Q1 may not be as widely above consensus expectations as it was in Q4 2020, it remains positive, signalling the recovery is exceeding projections.

Economic surprises are still more positive than negative after wild swings

Citi Economic Surprise Index – Global

 

The line chart shows the Citi Economic Surprise Index from March 10, 2008 through March 9, 2021. Global economic data were worse than expected in the spring of 2020, with the index of economic surprises bottoming at -79.1. By the summer, economic surprises became positive, meaning economic data started to beat expectations, and has been doing so consistently and is currently at 66.3.

Index readings above zero indicate positive economic surprises outnumber negative surprises; readings below zero indicate negative surprises outnumber positives.

Source - Citigroup, Bloomberg, RBC Global Asset Management; data range: 3/10/08–3/9/21

Let’s look at the particular contours of the recovery for the main regions that we monitor.

U.S.: Overly generous stimulus to fuel inflation?

President Joe Biden’s $1.9 trillion relief package aims at supporting the economy, but some question whether this full amount is needed given the strength of the U.S. economic recovery.

The U.S. economy is bouncing back strongly with labour market data pointing to as many as 379,000 jobs created in February. The ISM Manufacturing Purchasing Managers’ Index strengthened to a robust 60.8 in February while the services component continues to be firmly in expansion territory.

Yet pockets of weakness remain. Forty percent of people out of work are now labelled as “long-term unemployed,” the highest level since 2008. Lascelles points out there are also unresolved credit issues, such as 2.7 million mortgages in forbearance expiring in Q2.

While support is clearly needed, $1.9 trillion of stimulus—close to 10 percent of GDP—looks somewhat overly generous given the country’s already heavy debt load, the healthy economic recovery, and the successful vaccine rollout, according to Lascelles. Biden recently announced the U.S. is “now on track to have enough vaccine supply for every adult in America by the end of May.”

Stimulus of this magnitude risks a spike in inflation in the short term. Inflation expectations have already risen on anticipation of the package, the reopening of the economy, and concerns over supply chain disruptions. Notably, the ISM’s Manufacturing Prices Paid Index increased to 86 in February, a level only surpassed in 2008, pointing to input inflation.

While it’s reasonable to expect inflation to pick up in the short term, Lascelles suggests deflationary forces should keep inflation in check in the medium term. With the current business cycle in a very early phase, economic slack is likely to linger for the next year or two. The aging of the population and the maturing of emerging market economies also suggest to us that inflation pressures will not spiral out of control.

RBC Capital Markets expects U.S. GDP growth at 6.5 percent and inflation of 2.7 percent for 2021, but it sees upside potential to this GDP forecast.

China: Low-balling growth

China’s economy was an outlier in 2020, growing as most others contracted. Consensus expectations call for another robust rebound this year, penciling in a GDP increase of over eight percent. However, the government set a surprisingly low growth target at “above six percent.” Such a low number suggests China aims to ensure quality and sustainable growth, as eight percent growth would be unlikely in 2022.

This target was announced at the recent annual “Two Sessions” confab, the country’s main political gathering. At these meetings China typically announces the concrete short-term steps needed to achieve the country’s long-term goals. Back in November 2020, China released its 14th Five-Year Plan. This laid out its goals of transforming into an advanced economy by 2035, which would require the economy to roughly double in size from 2020 levels, and achieving net-zero CO2 emissions by 2060.

We expect the People’s Bank of China will tighten monetary policy in a gradual and managed manner to ensure the economy does not overheat.

Europe: Slow going

Europe’s vaccine rollout faces challenges. Moreover, its fiscal response has been comparatively more timid with national governments weary of yawning fiscal deficits. The €750 billion EU rescue package will help underpin growth, but the impact may be restrained given funds will be disbursed to national governments through to 2026.

Still, as lockdown measures are eventually lifted, and as the vaccine rollout gathers pace, we expect a quick rebound, helped by the release of household savings, much like we saw after the first lockdown. RBC Capital Markets expects euro area growth will reach 4.1 percent in 2021.

UK: The return of fiscal prudence

After a disastrous handling of the pandemic, the UK’s vaccine rollout has earned praise. The government plans to fully reopen the economy on June 21. Nevertheless, the economy is suffering and an additional support package worth more than 2.5 percent of GDP was recently announced.

Emboldened by reopening prospects, measures that aim to balance the books were also announced, making the UK the first country in the developed world to show such resolve. These include an increase in the corporate tax rate from 19 percent to 25 percent by 2023. For businesses, an additional tax burden is unwelcome, though a more lenient approach to regulation and competition could offset this somewhat. The government’s future attitude towards these issues in a post-Brexit world is a key factor to watch.

For now, the consensus expects the UK will see GDP growth of 4.5 percent in 2021.

Canada: Growth despite second wave

Canada appears to have managed to avoid an economic contraction during the second wave. The economy eked out growth of 0.1 percent in December and initial readings for January suggest a further 0.5 percent gain. Lascelles also points out there seems to have been additional momentum in February. He thinks the Canadian economy may well perform ahead of the Bank of Canada’s estimate of four percent GDP growth for 2021.

Portfolio strategy

Given this generally encouraging economic growth outlook, we reiterate our Overweight stance in global equities and expect them to generate modest returns on a 12-month horizon. We believe equities can withstand the current increase in bond yields, though volatility could spike and the recent rotation into reflation-driven and value stocks is likely to continue.

Elevated debt…. not a concern for now

Over the past year, nearly every government around the world has stepped in with financial support for individuals and businesses that have been impacted by the pandemic. That kind of response is unsurprising, particularly given the exogenous nature of the crisis. But the amount of spending undertaken has been relatively incomparable through history. Moreover, governments may not yet be done.

The U.S. government for example recently approved an aid plan that amounted to nearly $2 trillion, which adds to a sizeable amount of stimulus approved last year. And there are growing expectations of an infrastructure oriented package that could amount to as much as $3 trillion.

Governments everywhere are largely funding these massive expenditures via new debt. According to the International Monetary Fund, the amount of global government debt jumped significantly last year. More specifically, government debt as a percentage of global economic output, rose to 98%, from a relatively high level of 84% the year before.

Typically, being heavily indebted is an unenviable position. For the average person for example, an increasing debt burden presents a financial risk as people have a finite number of working years available to pay off their liabilities. But, governments don’t ever retire. Rather, they have an unlimited period with which they can try to reduce their debt load. The simplest way is through economic growth that could lower a country’s debt-to-GDP ratio. Another approach would be to generate inflation, which effectively reduces the principal amount of outstanding loans. Two additional measures include an increase in taxes and a decrease in spending, both of which can be difficult to implement given political forces. Nevertheless, there are plausible scenarios in which governments can see their debt levels fall over time. With a growth outlook that is set to expand over the next few years, the debt levels may modestly improve over the near term horizon. But, it will take considerable time and a sustainable economic trajectory to see more meaningful progress.

In the meantime, the low interest rate environment has made the debt burdens relatively affordable for most governments. Perhaps surprisingly, the total servicing costs for some countries is set to decline over the next few years despite meaningfully higher debt; a function of countries being able to refinance maturing loans at much lower interest rates. In our view, the biggest risk is not necessarily default, but rather the reduced capacity for heavily indebted countries to act in the future when another recession or crisis inevitably emerges.

 

Is it just me or is it hard to believe Easter is next weekend?

 

Take care and chat soon.