A pause for thought

11 May 2021

In this week’s Market Pulse, Chief Investment Officer Bernard Swords reflects on the market reaction to disappointing non-farm Payrolls data and the implications for equity and bond markets in the months ahead. 

  • The big miss in the non-farm payrolls does give some food for thought. One cannot read too much into one figure, but it does affect timelines. We were expecting a peak in economic momentum by June. Asia has already rolled over, the US would be starting to in May / June which would leave only Europe showing stronger momentum. Consequently, we would see the growth in global activity begin to fade from June. It could also allow the Fed to start talking about tapering. This all looks like it is going to be pushed out by a month at least.
  • For equity markets this is probably a reasonable outcome. The possibility of the Fed talking about tapering has been weighing on sentiment. This weak jobs figure combined with the large downward revision to the previous month means this could be put off for up to three months. For US bonds it is probably a modest positive as well, at least on a relative basis. One of the factors driving up the spread on US fixed income assets anyway was a much earlier moves from the Fed versus other Central Banks. That time gap is looking shorter now making US fixed that little bit more attractive on a relative basis, so it is worth revisiting the switch from euro area fixed income into US fixed income.
  • In equity markets we have been looking at reducing early recovery exposure and transition towards more mid-cycle exposure. We are likely to be doing more of that this quarter, but it does not look as urgent as it did last week. 
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