The narrative that the U.S. economy may be “overheating” received a “cold water” blow on Friday, after a U.S. jobs report indicated that only 266,000 jobs were added in April, compared with an expectation for a gain of nearly one million. Unemployment also ticked up to 6.1% from 6.0% in the prior month, suggesting that the U.S. economy may not be growing as fast as some expected.
Signs of a strong job recovery in the U.S. are something of a double-edged sword for markets. Whilst stronger jobs data suggests an increase in business activity, it also weakens President Biden’s proposed $2 trillion jobs bill.
Unsurprising therefore that the negative report immediately set off a scramble in Washington with President Biden defending his policies, urging Congress to take up his $2 trillion jobs bill. His fate rests with Democratic lawmakers and possibly a few Republicans who can help navigate a narrowly divided U.S. Congress. Part of his proposed method for funding these bills is to increase tax rates for U.S. corporates and wealthy individuals.
U.S. earnings season continued to wind down over the week, with 442 of the S&P 500 companies expected to have reported first-quarter results by the end of the week. Earnings over the quarter have generally surpassed analysts’ estimates by a wide margin, with analysts expecting overall profits for the S&P 500 to have grown by over 49% relative to the year before.
In the UK, the Bank of England revised its 2021 economic growth forecast from 5% to 7.25%. It kept its bond-buying program unchanged at GBP 895 billion but said it planned to slow bond purchases going forward. The UK along with many other European economies are slowly “returning to normal” as large percentages of their populations have been vaccinated.
Most European countries have given at least a quarter of their populations a single dose of vaccine. The UK plans to offer a third jab to all those over 50 years of age in September, with the more aggressive aim of eradicating the threat of COVID-19 by Christmas. The European Commission also announced plans to reopen the European Union’s borders again to holidaymakers from outside the bloc by June.
Meanwhile, the U.S. will support a proposal to suspend intellectual-property protections for Covid-19 vaccines, joining an effort to increase global supply and access to the shots as the gap between rich and poor nations widens. The decision comes as the virus continues to ravage nations from India, Southeast Asia to South America, killing thousands daily.
China’s exports rose more than expected in April and imports climbed, reflecting strong domestic and international demand and surging commodity prices. Exports grew 32.3% in dollar terms in April from a year earlier, while imports soared 43.1%.
The Bloomberg Commodity Spot Index returned to its highest level since 2011 as confidence in the global recovery has boosted demand.
The Dow Jones Industrial Average (+2.67%) and S&P 500 (+1.23%) were stronger this week, whilst the Nasdaq (-1.51%) was negative. European markets including the FTSE 100 Index (+2.29%) and Euro Stoxx 50 (+1.50%) were also positive together with Japan’s Nikkei 225 (+1.89%), whilst China’s Shanghai Composite Index (-0.81%) ended the week in negative territory.
Market Moves of the Week
Locally, the big news of the week was the announcement that the ANC has suspended Secretary-general Ace Magashule, after defying a deadline to step aside voluntarily.
Rating agency Moody's was set to release its latest credit rating review of South Africa on Friday evening. Moody’s has South Africa on a Negative Outlook and issued a warning regarding South Africa’s debt levels in February. Some analysts believe however, that Moody’s has chosen to wait until wage negotiations are completed in SA before it reviews its call. S&P and Fitch already have South Africa three notches into junk, whereas Moody’s currently rates the country two notches below investment grade.
The South African Covid-19 Modelling Consortium has said that SA is likely to experience a weaker “third wave” of coronavirus infections because studies in January and February show that 30% to 40% of the population has already been infected.
The JSE All Share Index ended the week up +2.36%, with all three of the major sectors leading the market higher. The resource (+4.16%) and financial (+3.00%) sectors were relatively stronger, compared to the industrial sector (+0.88%). By Friday close, the rand was trading at R14.05 to the U.S. Dollar, strengthening against all of the major developed currencies this week.
Chart of the Week
The proposed U.S. capital gains tax hike to 39.6% would move the U.S. toward the top end of the international range of capital gains tax. An even more modest expectation of a smaller increase to 28% would move the U.S. into the top half of advanced economies, as shown in the chart of the week.