US in recession and SP500 in positive ytd return

Market movers today

Today, Norges Bank publishes the results of its Q2 regional network survey. As usual, interest will centre on the aggregated output index for the next six months (see next page).

Markets will start to zoom in on the Fed meeting tomorrow. Yesterday the Fed already announced an expansion of its Main Street lending programme allowing more firms to benefit from it. US NFIB small business optimism for May will also draw our attention.

Selected market news

The major US equity indices rose 1.2-1.7% yesterday, with notably the S&P500 rising 1.2% resulting in it now being higher than at the start of the year. Yesterday's performance was broad based with industrials and the energy sector leading the rally. The positive risk sentiment carried over to the overnight session where major Asian equities are also up.

At the same time, European indices were trading on a weaker footing, which illustrates that, while we have seen positive risk sentiment in markets in recent weeks, economic fundaments are still to follow suit.

The NBER's Business Cycle Committee announced yesterday that it now officially thinks the US expansion ended in February 2020 and that the US economy fell into recession in March. While the recession is extremely deep, the committee recognises that it is a very unusual recession, as it is driven by the virus fear and the strict lockdown imposed. For that reason the committee states that the recession may turn out to be a very short one. In our view, there are multiple signs that the US economy has already bottomed out and the recovery has begun despite the mixed COVID-19 signals, with the number of infections still rising in states like Florida, Texas and California (although more testing obscures the picture somewhat). The jobs report for May released on Friday showing an increase in employment of 2.5 million is of course an important signal in that regard. This morning, we published our US Macro Monitor: Jobs report for May supports our view that the healing has begun, 9 June, which includes some of the most important charts on highfrequency economic indicators and politics.

In ECB president Lagarde's quarterly testimony to the European Parliament, she repeated many of the similar messages from Thursday's meeting. That said, we took note of in particular the comment on the ECB supporting the process of the German constitutional court ruling but at the same she emphasised that this decision was not addressed to the ECB, leaving this a domestic German issue. Unless solved, the Bundesbank should not be able to participate in the PSPP programme from 5 August.

We revised our EUR/USD profile to 1.15 in 1M and 3M and see 1.11 In 6M and 12M. The key to further short-term optimism is a continuation of the rally in value assets - which we think is likely. The key to 12M upside risk remains a Fed-driven reflation trend in H2. More in FX Strategy - EURphoria to continue: watch the canaries, 8 June.

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