L’inflation which rises temporarily, the recovery which becomes more solid and the health situation which finally seems under control thanks to the increase in vaccinations. These are the ingrediants which suggest a continuation of the progressive return to the autumn normality post-Covid, at least for Western countries, with some slight risks scattered here and there along the path that leads straight to 2022. The picture emerges from an analysis carried out by Moneyfarm.
Shooting proceeds
The economic recovery which is manifesting itself in most developed countries makes the debate about the duration of this period alive transition. Consumers have accumulated savings during the lockdown period and are now supporting demand, putting pressure on prices, especially in those sectors most affected by the lockdown measures (hospitality, leisure and automotive). At the same time, labor shortages persist, as well as government aid for workers. However, these inflationary trends are likely to subside over time and supply curves are likely to shift to meet demand, defusing further price increases. The key themes affecting the financial markets remain substantially unchanged from the end of the first quarter. The recovery progress is still largely driven by the speed and effectiveness of the global vaccine launch, value stocks are still underperforming growth stocks (despite the turnaround that occurred for a few weeks during the quarter) and the main concern for central banks is still inflation.
If he first trimester laid the foundations for apost-covid economy, the second quarter marked a decisive step towards normalization. There is always likely to be turbulence in an unprecedented situation like the one we are in, but with the reopening of economies and the impact of vaccines, the outlook is much brighter than it has been in the past year and a half.
The impact of vaccines
To verify what the actual scope of the vaccination campaign in Europe it may be helpful to look at the situation in the UK, a couple of months ahead of the EU as regards the vaccination plan. The country has fully vaccinated about 70% of the adult population, and nearly nine out of ten adults have had at least one dose. However, in the UK we currently find the highest rate of Covid-19 infections in Europe (with a number of tests much higher than the average in other countries also thanks to the distribution of free do-it-yourself swabs). This discrepancy is explained by the fact that the government has just sanctioned the almost complete revocation of the social distancing mandates. With the majority of the elderly and vulnerable population fully vaccinated, the direct link between number of cases and hospitalizations and deaths appears to have been (at least partially) broken. This results in the complete resumption of normal commercial practices. If the vaccine continues to disrupt the relationship between the number of infected and hospitalized people, we can expect a practically normal autumn in most of the Western world.
The role of central banks
Despite the improvements of the global health situation in the second quarter, the threat of ainflation the stone guest remains higher than expected. Price growth is a feature that is common to most of the countries that have come out of quarantine. It is in moments of radical monetary policy that financial markets tend to dance to the notes of the Fed and the ECB. The main signs that emerged in the second quarter are that interest rates could rise sooner than expected, due to inflation and growth prospects being revised upwards. The last meeting of the Federal Reserve showed a slight change of direction with reference to the forecasts linked to the increase in interest rates. The so-called “Dot Plots” (aggregate forecasts) show two increases in 2023 that were not expected in March. Additionally, President Powell said the Fed is considering initiating discussions on bond purchase tapering.
The Fed argues that the current peak ofinflation is largely driven by short-term factors. These include elements such as fuel costs and production bottlenecks which are expected to be temporary and set to be reabsorbed in the coming months. Indeed, there are already signs of a cooling of inflation in the United States. In our view, any changes to interest rates are unlikely to be particularly aggressive, and if the Fed’s projections are correct, we do not see the equity market particularly exposed to this risk. That said, the gradual removal of quantitative easing in the coming months is certainly a delicate junction for the markets and needs to be followed with particular attention. Tapering will most likely be reported at the Jackson Hole meeting in August and possibly introduced in early 2022. We remain convinced that the Fed will be cautious and measured in scaling down monetary stimulus and will be able to manage the delicate balance between monetary stimulus and control. of inflationary risks.
Growth stocks remain at the top
The month of June was characterized by the outperformance of titoli “growth” respect to “value” in Europe and in United States, confirming a trend observed in the second quarter of 2021. The rotation towards “value” stocks that we saw in the first quarter – in the wake of the US elections and the approval of vaccines in November 2020 – seems to have stopped and, at the same time, long-term yields declined slightly.
Even the actions European they slightly outperformed their counterparts Americans, partly thanks to the acceleration of vaccination campaigns across the Old Continent. Even after a period of strong recovery, the economic situation is still plagued by uncertainty. Consequently, the strong performance of these stocks raised some questions. Equity valuations were already high six months ago and remain high, although they are still relatively cheap compared to other asset classes.
Spotlights on work in the US
In June, the data emerged regarding the job market in America have been ambiguous. Data on “jobless claims” and “non-farm payrolls” indicate that some of the temporary labor shortages are starting to ease. On the other hand, the workforce, up by just 151,000, is still far from the pre-pandemic value (more than three million below). This data suggests caution and it is likely that the Fed will use it to justify the expansionary economic policy. The widespread labor shortage that emerges from surveys and from job opening and cessation rates is partly due to transitory factors, including higher unemployment benefits, declining international migration and the wave of early retirements we have experienced. assisted in the last year.
The pressure that these factors will exert on increase in wages and, finally, oninflation it is a hotly debated topic and we believe it has the potential to influence the speed of action at which the Fed will move. Should the labor market recover faster than expected, the central bank would have one less argument to continue with the hyper-expansionary policy.