This week we’ll look at the contrast between Europe and the US in terms of the vaccines and the economy, and Europe does not come out well. That’s Europe ex UK, because we’re in a quite a different position – different in good ways and bad.
Let’s begin with earnings and the economy in the US. And the news here is good. We get the first estimate of GDP growth for the fourth quarter on Thursday and it should show healthy growth – close to 5% annualised. The closely watched Purchasing Managers’ Indices (PMIs) for January came out last week and they were very strong. Both manufacturing and services were up and beat the consensus, with the composite at a very healthy 58.
A strong economy usually means strong earnings
As the reporting season for S&P 500 companies gets underway, it seems that this quarter will be no exception. Almost every single company reporting in the last week or two has beaten estimates with especially strong beats from financials like JPM, Citi and Goldman Sachs.
And there’s every chance that the strong US economy will continue, even with a few bumps in the road. Joe Biden’s Administration together with the Democrat Congress are planning to pass a $1.9 trillion budget. As I discussed last week, that’s a huge number. Together with the near $1 trillion package already passed by the outgoing Congress, that would amount to 15% of GDP. Because the Democrats plan to pass it through reconciliation, there’s a good chance that most of it is passed.
With US consumers having saved much of last year’s fiscal handouts, this all adds up to massive spending power. Whether they are able and willing to spend it depends on the virus though, but again the news is good. The US has now vaccinated over 17 million, with 3 million having had two doses of the Pfizer vaccine. That’s an impressive achievement. New cases of the virus have been falling in the US and that, together with the vaccine roll-out, suggests that pressure on hospitals will start to recede in the next few weeks. The decision to ease the lockdown is largely a matter for individual states but there is a clear prospect that US consumers will be able to go on a spending boom from the spring onwards.
A very different story in continental Europe
They will also get figures for GDP growth for the fourth quarter this week and whereas the US shows vigorous growth, Europe’s major economies look set to see contraction. Those PMIs that went up strongly in the US went down in January in Europe, the composite fell to 47.5, way below the US. And we don’t expect that to change soon. There’s no big fiscal expansion in Europe. And the vaccine roll-out is going very slowly; by the end of last week, Germany had managed to vaccinate less than 2% of its population, Italy only a little more, France significantly less. By contract, the US number was 6%. Three times as big with no sign that the gap is closing. There is some good news that the numbers of new cases are falling, as are hospital admissions. The big fear is that the UK variant might spread, triggering a new wave.
A shift in strategy from the UK
The UK is seeing a remarkably successful vaccine roll-out, even better than the US and way better than Europe. But we’ve suffered very badly from the new variant. So we have many more cases per capita than Europe and pressure on our hospitals is much worse.
It does seem that the vaccines are equally effective against the UK variant but there are real fears over the South African and Brazilian variants. We will get more information from Porton Down and elsewhere over the next week, but it has led to a shift in UK government strategy. There is a real risk that foreign travel in and out of the UK will be heavily restricted, even as the lockdown is eased. Pfizer, Moderna, Johnson & Johnson and AstraZeneca are all working on tweaks to their vaccines to make them more effective against the new variants. That’ll take 3 to 5 months for the first two, 5 to 7 months for the second two. Let’s hope they can work in parallel: efficacy for the existing vaccines may be reduced by the new variants but almost certainly not eliminated.
Where does all this leave markets?
I still believe that the news flow is positive for risk assets, despite all the talk of bubbles and the risk from virus variants. It will stay that way until and unless the impending US spending boom triggers real fears of inflation. So for now, I remain bullish, but I’m more nervous now than just a few weeks ago. There’s as lot priced in and markets are higher, record highs in the US.