Morning Jog

Eurotrip

Euro

By now, the economic boom in the U.S. is a well-acknowledged reality. The negative demand shock of a year ago, with consumption and business activity stalling, has reversed with a fervor. So much so, that no industry survey is complete without mention of increasing order backlogs, supply chain bottlenecks, rising material costs and hiring challenges.

Equity markets have been a step ahead of the recovery story last year and the reacceleration in corporate earnings this year gave an added push, with the S&P 500 rising 12% year to date.

The strength of the recovery took economists and market pundits by surprise, but as expectations for economic growth continue to reset higher, we are seeing forecasts get ahead of the facts on the ground. The back-to-back employment reports for April and May missed lofty expectations. Inflation readings are coming in hotter and housing activity, whether home sales, housing starts or mortgage applications, is cooling off.

While economists are facing a bit of a reality check in the U.S., they are still playing catch-up in Europe, as the Citi Economic Surprise indices show.

Citi Economic Surprise Indices
[Source: TheDailyShot]

The sluggish optimism in Europe is understandable, as governments extended lockdowns and the region slipped back into a recession in the first quarter. But the increased vaccine availability is now giving a lift to consumer sentiment and economic activity, and forecasts are not yet reflecting the improved momentum.

We see first-hand the impact of vaccines from the U.S. data: shots in arms are a massive consumption boost. It will be no different in Europe as the region’s full vaccination rate goes from a current 20% to 40%, as it is in the U.S. now. Recent Eurozone PMI readings are already pointing to a recovery in the services sector, as travel and restaurant spending picks up. And just like the U.S. consumers, Europeans have plenty to spend thanks to a savings rate that nearly doubled last year.

Markets are starting to pick up on “earlier innings” story and we see Eurozone indices extending a lead over U.S. in May. After a long drought, fund flows into European funds have turned positive.

extending lead
[Source: FactSheet]

The expected consumption boom is set against the background of continuing Central Bank support, with the ECB expected to extend its bond buying program into the summer. The EU’s €750 post-pandemic Recovery Fund will also start to dole out cash to governments in July, further supporting the economic momentum.
All has the makings for a good summer in Europe. It is much needed.

Cheers,
Alex

Alexander Bass CFA, CFP®
Managing Director
Chief Investment Officer
Nucleus Advisors