Eurozone manufacturing accelerates as economic recovery gains steam

On the latest edition of Market Week in Review, Chief Investment Strategist Erik Ristuben and Research Analyst Laura Bardewyck discussed recent economic data releases from the U.S. and Europe. They also unpacked U.S. Federal Reserve (the Fed) Chairman Jerome Powell's recent comments on the economic recovery and discussed how competition for resources in Greenland is playing a role in China-U.S. tensions.

March PMI survey shows boom in eurozone manufacturing

Recently released data from March suggests that the economic recovery is gaining momentum across Europe, Ristuben said, noting that IHS Markit's manufacturing PMI (purchasing managers' index) for the eurozone reached a level of 62.5 last month. A number above 50 indicates expansionary conditions, and a number below 50 indicates contractionary conditions. "March's reading of 62.5 means that the eurozone manufacturing sector grew at its fastest pace in nearly 24 years last month," he remarked.

The PMI for the eurozone services sector, meanwhile, climbed to a level of 49.6 in March, teetering on the edge of expansion, Ristuben said. "The European services sector, while improving, is lagging behind the manufacturing sector, which doesn't come as much of a surprise, given the difficulties Europe has experienced in its vaccine rollout and broader economic reopening," he stated. However, the region's vaccine campaign has picked up steam in recent weeks, Ristuben said, especially in countries like Germany, where nearly 700,000 doses were recently administered in a single day.

The economic recovery is also well underway in the U.S., he added, with IHS Markit's services sector PMI for March rising to 60.4 - the highest number in six years. "The expansion in services activity shows that the U.S. has fared better than much of Europe in its vaccination and reopening efforts - but the overall message here is that the economy is improving in both areas," Ristuben remarked. While he expects some volatility within economies and markets in the months ahead, the latest numbers are a confirmation that things are getting better, he said.

U.S. Federal Reserve zeroes in on maximum employment

Turning to the latest news from the Fed, Ristuben said that Chair Jerome Powell's comments during an 8 April speech served as a strong signal to markets that the central bank is not concerned about inflation pressures over the next year, and that it will continue to focus on job creation. "Powell stated that he wants to see a string of months with job gains similar to the nearly 1 million nonfarm payrolls the U.S. added in March," Ristuben explained, "and that would obviously equate to a tremendous amount of jobs created." In Ristuben's opinion, Powell was essentially conveying to markets that the Fed is committed to achieving full employment - and that inflation numbers won't force the central bank to raise rates anytime soon.

Markets appeared to take solace in the Fed chair's remarks, Ristuben said, as evidenced by the muted reaction in government bond yields on 9 April, after a new report showed that the U.S. producer price index rose more than expected last month. "In the context of what's happened this year - i.e., with the sharp increases in long-term interest rates - news like this typically would have fuelled additional inflation concerns and led to a jump in Treasury yields, but that wasn't the case," Ristuben noted. He also attributed part of the lack of movement in yields to the fact that markets have more reasonable inflation expectations now than they did at the start of 2021.

Greenland election results show China-U.S. tensions remain elevated

Broadening his gaze to geopolitical issues, Ristuben said that the results of a recent election in Greenland help highlight the battle among economic superpowers for influence and access to the country's supply of rare-earth minerals.

"Greenland has some of the world's largest reserves of rare-earth minerals, and with warming temperatures allowing for easier access, China has been backing a massive mining project in Greenland, with an eye on continuing its dominance in the production of rare earths," Ristuben said, adding that China currently mines approximately 70% of rare earths worldwide. The project is now in jeopardy after Greenland's left-wing Inuit Ataqatigiit party, which opposes the mining project on environmental grounds, came in first in the 6 April parliamentary elections, he explained.

"The mining project really gives a sense of the increasing competition among nations - particularly between the U.S. and China - for Greenland's resources," he said. This, in turn, shows that despite the change in presidential administrations, U.S. policy toward China is unlikely to be much different moving forward, Ristuben remarked. "Ultimately, the developments in Greenland are a reminder that tensions between the U.S. and China still exist, and are likely to last for a long time, remaining one of the major geopolitical risks for markets," he concluded.

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