Overview

The economic recovery across most of the world seemed to be gaining more and more traction during April.

The US and UK, in particular, are powering ahead after the COVID-induced contraction of last year. 

Eye-catchingly the UK manufacturing sector is estimated to be improving at the fastest rate since 1994.

In addition, although the Eurozone entered a double-dip recession in the first quarter of this year (according to preliminary estimates), the region looked to be finally on an upward path.

However, inflationary pressure across most of the world continues to build and many manufacturers and importers complained of supply shortages.

The month was also notable for President Biden unveiling a truly colossal infrastructure spending plan worth in the region of $2 trillion.   

Although compromises are likely before the proposal becomes law, it still represents a huge boost for the US (and world) economy.

Most stock markets continued to make solid gains during April.

Over the last 6 months the FTSE 100 returned 25.44%, whilst the Euro Stoxx 50 returned 32.64% and the US S&P 500 returned 26.99% (total return).

The Japanese Nikkei 225 returned 23.68%.

The broad emerging markets index returned 21.7% in US$ terms.

The US 10 year yield fell slightly during the month but is still significantly higher than one year ago.

US Economic News

The initial estimate of growth in the US economy during the first quarter of the year was better than many had expected.

This suggests that the recovery was strengthening even before the latest surveys painted a positive picture.

In fact the April surveys point to the fastest improvement in the US economy since at least 2009 and most companies continue to be positive regarding the future.   

This is in no small part to the success of the vaccine rollout in the country, which is one of the fastest in the world.

As in previous months, however, there was clear evidence of supply chain disruptions and bottlenecks, particularly for manufacturing companies.

This partly explains the sustained rise in job numbers as companies attempt to clear the backlog of demand.

Elsewhere, and arguably the most important development of the month, was President Biden’s unveiling of a huge stimulus package designed to revitalise the nation’s infrastructure.

It is unlikely that the proposal will pass as it is (due to Republican opposition). However, the scale of the proposed investment would give a significant boost to the US economy and, by extension, the world economy.

UK Economic News

The UK vaccine rollout continued at a solid rate during April leading to over 60% of the adult population having had at least one dose.

This meant that the government could continue with its “roadmap” and allow more businesses to at least partially open.

As restrictions have loosened the economy has been recovering at a fast rate.

In fact the latest industry surveys suggest that the economy as a whole is improving at the fastest rate since 2013 and the manufacturing sector is improving at the fastest rate for decades.

Employers are taking on workers at the sharpest rate since 2017 in response to the sharp upturn.

As in the case of the US (and indeed much of the world) there was clear evidence of shortages and delays for some producers.

Prices charged by manufacturers continued to rise at one of the fastest rates over the last 10 years.   

Some expect that the Bank of England will begin to slow down its asset purchase program (QE) in response to the better than expected economic performance.

Eurozone Economic News

The initial estimate of Eurozone growth in the first quarter of the year was -0.6%, meaning that the region has fallen back into recession.

However, this recession is likely to be short-lived as developments during April suggest that the services sector has finally returned to growth.

This is somewhat surprising considering new COVID restrictions in Germany and France.

Whilst the services sector is on shaky ground for the moment, however, the manufacturing sector continues to surge ahead.

The latest surveys point to the fastest rate of improvement in manufacturing conditions since at least 1997.

As in the case of the US and UK economies, faster rates of growth did not come without increasing inflationary pressure.

Factory costs rose at the sharpest rate for a decade as many companies complained of shortages.   

The prospect of the vaccine rollout finally gaining momentum across the region meant businesses reported being more optimistic about the future.

Wider Economic News

The Chinese economy continued to improve at a solid rate during April after a brief soft patch and employment showed signs of picking up.

However, signs of inflationary pressures were showing in China as well as manufacturing prices rose at the quickest rate since 2017.

Elsewhere, the Japanese manufacturing sector improved at the fastest rate for three years during April and employment rose for the first time in several months.

Companies were broadly positive about the future but the reintroduction of restrictions has introduced some uncertainty.

Finally, India is in the grips of a severe wave of Covid after a new, more transmissible variant of the disease started to spread.

However, even with new restrictions in place, the manufacturing sector still managed to expand as a result of the strength of underlying demand. 

Financial Markets and Corporate News

After rising rapidly since the start of the year, the US 10 year bond yield fell slightly during April.

Nevertheless market interest rates remained significantly higher than they were a year ago.

Despite higher interest rates, however, most stock markets have continued to grind higher.

Over the last 6 months the FTSE 100 returned 25.44%, whilst the Euro Stoxx 50 returned 32.64% and the US S&P 500 returned 26.99% (total return).

The Japanese Nikkei 225 returned 23.68%.

The broad emerging markets index returned 21.7% in US$ terms.

The Investment Association (IA) UK Gilts sector returned -6.41% over 6 months, whilst the IA Sterling Corporate Bond sector returned 0.52% and the IA Sterling High Yield sector returned 7.87%.

Source: FE Analytics

 Summary of Key News:

• The world economic recovery is gaining momentum.
• President Biden outlined a huge infrastructure investment plan.
• The UK economy is accelerating at a solid rate.
• The Eurozone has fallen into recession but improved during April.
• Inflationary pressures are rising across most of the world.
• Both the Chinese and Japanese economies improved during the month.    

Financial Markets:

• Over 6 months the FTSE 100 returned 25.44%, the Euro Stoxx 50 returned 32.64%, and the S&P 500 returned 26.99% (total return).
• The Japanese Nikkei 225 gained around 23.68% (total return).
• The broad emerging markets index rose by approximately 21.70% (in US$ terms).
• The   IA  UK  Gilts    sector    returned -6.41% over 6 months, whilst the IA Sterling Corporate Bond sector returned 0.52%, and the IA Sterling High Yield sector returned 7.87%.

Outlook

The rise in bond yields paused for breath during April. However, the move since November last year has been dramatic and with the outlook for most economies improving rapidly it may be a matter of time before yields start edging higher again.

There is likely to be a point at which higher government bond yields cause equity investors to question whether stock market valuations can be supported.

At the same time some Central Bank policymakers have already voiced their concern for how quickly yields rose. 

Two key questions for the coming months are therefore how high can bond yields rise before equities suffer, and will Central Banks step in before this happens?

More broadly, as the economic recovery becomes entrenched, there are two general scenarios going forward.

The first is that a sharp rebound is followed by growth faster than the pre-pandemic trend, forcing interest rates and inflation higher.

Alternatively, after a sharp rebound, growth could return to the sluggish pre-pandemic trend and we will return to a world of low interest rates and low inflation.

The challenge for investors, therefore, is in navigating these two opposing possibilities. The swift rise in bond yields is the first sign that a period of volatility may be replacing the serene rise in stock markets we have witnessed since late Spring last year.