Warren Buffett stated ‘Never bet against America’ in his latest annual letter to shareholders. The markets seem to agree with mister Buffett – American economy has rebounded from the recession and is now on an expansionary trajectory again, with a projected growth of 6.5% in 2021.
U.S. fourth quarter 2020 annualized GDP will be published this week. The consensus expects the economy to have expanded 4.1% on an annualized basis, in line with the estimated data published by the Bureau of Economic Analysis. This follows expansion of 33.4% in Q3 when the economy rebounded from lockdown related slowdown during the first half of the year. U.S. has shown a rather resilient recovery at the back of monetary and fiscal stimulus pumped into the economy. An additional US $ 1.9 trillion of stimulus was approved by the Senate a couple of weeks ago whilst the Federal Reserve Bank has confirmed they would continue ultra-loose monetary policy though near-zero interest rates and asset purchases in the amount of US $ 120 billion per month. In conjunction with a successful vaccination rollout, with around 33% of the population having received at least one dose, the U.S. seems to be positioned to recover the fastest among large developed nations.
In fact, during the first couple of months of 2021 the U.S. has made up for the plunge in last year’s real GDP, and continues on growth trajectory for the remainder of the year. The Fed estimates that the U.S. economy would expand on an annualized basis around 10% (or around 2.37% unannualized) in the first quarter of 2021, whilst 2021 growth overall should be around 6.5%. 2021 projection was updated during the latest Fed meeting last week from 4.2% announced in December 2020. The labor market remains the weak spot with around 9.5 million Americans still under- or unemployed. The official employment rate is overestimating the health of the labor market, considering that the labor market participation rate is still 2 percentage points below pre-pandemic levels of 63.4%.
Growth for the upcoming year is expected to stem from stimulus targeted to individuals – direct relief cheques of US $ 1,400, totaling to US $ 422 billion, have or will be dispatched during the next weeks. U.S. consumer driven economy, with its 70% composition from consumer spending, and 40% of that in turn from retail sales, will be bolstered by the spending spree which started in January 2021, when revised retail sales jumped 7.6%. February print was negative 3% but the consensus expects another boost in March. Naturally not all of the money will be spent – according to the New York Fed survey only around 30% will find its way back into the economy through consumption, while the remainder will be equally used to pay down debt and save.
Another source for growth in 2021 is expected from re-opening of the economy. US $ 400 billion out of the latest stimulus package is aimed at improving vaccination rollout and towards testing efforts. Re-opening should naturally allow companies in the client-facing services industry to earn revenue again, while labor force participation would get a boost once people are safe and able to return to the workforce.
Given the aforementioned, we foresee U.S. dollar recovering 2020 losses, at least partially. EURUSD has been trending lower on the daily chart since early January and is currently near 1.19000, only 56 basis points above from the 200-day moving average level. Weekly chart is still bullish, but we project EURUSD to move towards 1.17000 levels by the second half of the year. DXY experienced some volatility last week but has recovered to 91.92 levels. We still project DXY consolidating near current levels with 91.88 – 91.99 acting as a key resistance and support level for the upcoming quarter. DXY is likely to move towards 94.00 during the second half of the year, given the relative overperformance of the U.S. economy.
S&P500 printed another all-the-high of 3,983.87 points last Wednesday but closed the week down -0.77%. Russell 2000 slid -2.77% while Nasdaq 100 closed down -0.54%. DXY was up 0.25%, while oil lost 6.33% and gold gained 1.05%. U.S. 10-year yield climbed to 1.72% and the yield spread between 2-year and 10-year note hit 1.56%.
Have a great trading week ahead!