Your weekly economic update from the team at FXD Capital
Despite the prevailing narrative that USD is on a path towards continuing weakness – due to global economic recovery and Federal Reserve money printing – the Greenback is on its best run since 2018. Over the first quarter of 2021, the dollar index (USD vs six major currencies) rose 3.6%, contrasting its 6.8% decline in 2020.
Perversely, the dollar’s resurgence may be attributed to the recent inflation spike, which pushed up Treasury yields. For some investors in less inflationary economies, rising yields have piqued interest and lead to renewed demand for US debt and, thus, USD. Some of this sentiment has added to recent reverberations in the stock market, with export-driven companies feeling the force of a stronger dollar and higher rates impacting valuation.
By the end of 2020, predictions seemed uniform for a weaker dollar going forward; the recent reversal against this may highlight the peril of blind consensus. The dollar will be fascinating to watch going forward due to the strong forces pulling it in either direction: The US economy is likely to perform considerably well this year, but it is also the economy most likely to feel the effects of inflation.
In his annual letter to shareholders, JPMorgan chief Jamie Dimon acknowledged and lamented the growing threat to banks from fintech competitors. He opined that extensive competition from new entrants is “here to stay” and that “banks are playing an increasingly smaller role in the financial system”. The calls against fintech from incumbent banks are that new players skirt regulatory scrutiny, but as acknowledged by Dimon, they have less bureaucratic baggage to contend with and fresher ideas.
The threat to banks from fintech is not purely down to regulatory games; the growing trend of specialisation is harming the cache of one-stop-shops. JPMorgan Chase is an all-in-one bank, borne from an era where customers would have life-long relationships across a full suite of services. As users of banking services have become more aware of competing services and less encumbered by switching costs, they increasingly turn to specialists and shopping around among multiple providers. While the size of the prize for a specialist is smaller than an all-in-one financial services provider, the peril for the large groups is how to succeed as a jack of all trades, master of none in a specialist-focused world?
Fintechs don’t actively skirt rules; they play by the book but exploit nuance that allows them to thrive. Banks are no angels in this regard either, but by being specialists in certain areas, fintechs have fewer internal conflicts of interest, which allow them to capitalise better on the opportunities present. For example, a fintech lending customer deposits from its balance sheet would face the same scrutiny as any other high street bank. Hence, most choosing to lend have eschewed this option favouring warehouse facilities, working capital lines or facilitating lending as a marketplace between intermediaries.
Due to the Easter break, it was relatively quiet on the data and macro front this week. European news especially has had a Groundhog Day-type feel to it in recent weeks, with vaccine and lockdown-related stories dominating the narrative.
Data continues to release positive news for the UK economy. A recent monthly survey by KPMG and Recruitment & Employment Confederation survey saw the strongest rebound in permanent hiring for six years and the first upturn since December last year. Six years was also the magic number for UK construction activity, with the IHS/Cips UK construction purchasing managers’ index rising to 61.7 in March, from 53.3 in February.
Eurodollar futures point towards a Federal Reserve interest rate increase by the end of 2022, with three further rises occurring by early 2024. The moves continue to divide economists, with some analyst notes calling the timetable too aggressive, with the consensus in that camp being for no increases until 2024.
US markets appear very tentative at the moment: 2021 has already seen some significant events like the Archegos family office collapse, value-to-growth shift and machinations in the treasury market. While yields have fallen back in recent weeks and attention has moved back to growth stocks, it seems like sentiment is on pause as we await the summer and how the recovery manifests over a more extended period.
Italy issued a 50-year bond for the first time in five years and received robust demand from investors. The final print yielded 2.2%, attracting a healthy €64 billion in orders for the €5 billion on offer and priced at 4bps over fair value. It’s interesting to see a long-dated issue at such a time due to the trepidation about interest rates. Is Italy prudent to fill its coffers before rates rise further, or are investors savvy and buying the recent dip?
All the best for the week ahead.
Our weekly column is written by Alex Graham, Economic Advisor to FXD Capital. Originally a bank treasurer, Alex’s weekly roundup intends to provide a conversational, top-down view of what is going on in world macroeconomics and how it impacts business on the ground level.
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