French service sector returns to growth in June: PMI By Reuters



© Reuters. FILE PHOTO: Coronavirus disease (COVID-19) outbreak in Paris

PARIS (Reuters) – French service sector activity returned to growth in June as the country’s coronavirus lockdown was further eased, boosting overall business activity, a survey showed on Friday.

Data compiler IHS Markit said its purchasing managers index (PMI) for services rose to 50.7 from 31.1 in May, better than a preliminary reading of 50.3.

The index thus rose above the 50-point threshold dividing expansions in activity from contractions for the first time since February, before the coronavirus outbreak reached France.

The government imposed one of the strictest lockdowns in Europe in mid-March, forcing most service providers to temporarily shut down their businesses until restrictions began to be lifted on May 11.

Combined with already published data for the manufacturing sector, the overall PMI index covering both sectors rose to 51.7 from 32.1 in May, better than the 51.3 originally reported.

“Although the recovery was predominantly driven by manufacturers, service providers also posted an expansion in activity,” IHS Markit economist Eliot Kerr said.

“That said, sub-sector data showed that services firms that are reliant on face-to-face interactions, such as hotels and restaurants, continued to suffer,” he added.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.



U.S. job growth roars back, but COVID-19 resurgence threatens recovery By Reuters



© Reuters. People wait outside Kentucky Career Center in Frankfort

By Lucia Mutikani

WASHINGTON (Reuters) – The U.S. economy created jobs at a record clip in June as more restaurants and bars reopened, but 31.5 million Americans were collecting unemployment checks in the middle of the month, and a resurgence in COVID-19 cases suggested the labor market could suffer a setback in July.

Record spikes in new coronavirus infections in large parts of the country, including Arizona and the highly-populated states of California, Florida and Texas, have forced several jurisdictions to scale back or pause reopenings, and send some workers back home.

The flare-up in the respiratory illness, which started in late June and hit bars and restaurants hard, was not captured in the Labor Department’s closely watched monthly employment report published on Thursday because the government surveyed businesses in the middle of the month.

“June may be the calm before the storm,” said Chris Rupkey, chief economist at MUFG in New York. “We cannot be sure the labor market recovery will continue at a speed that is sufficient to put the millions and millions of Americans made jobless in this recession back to work.”

Nonfarm payrolls surged by 4.8 million jobs in June, the most since the government started keeping records in 1939. Payrolls rebounded 2.699 million in May after a historic plunge of 20.787 million in April.

Economists polled by Reuters had forecast payrolls would increase by 3 million jobs in June. Still, employment is 14.7 million jobs below its pre-pandemic level. The jobs recouped are for workers who were temporarily unemployed.

President Donald Trump, whose opinion poll numbers have tanked as he struggles to manage the pandemic, economic crisis and protests over racial injustice four months before the Nov. 3 election, hailed the job gains as proof “our economy is roaring back.”

Though the second straight month of strong hiring added to a stream of data, including consumer spending, in suggesting that the recession which started in February was likely over, that is all history as the coronavirus rages.

Federal Reserve Chair Jerome Powell this week said the economic outlook “is extraordinarily uncertain” and would depend on “our success in containing the virus.”

Hiring last month was boosted by the typically low-paying leisure and hospitality industry, which brought back 2.1 million jobs, accounting for about two-fifths of the rise in payrolls.

The return of these workers pushed down average wages 1.2%. Companies are cutting wages and hours. The average workweek dropped to 34.5 hours from 34.7 hours in May.

The measurement of the unemployment rate continued to be biased downward by people misclassifying themselves as being “employed but absent from work” last month. The jobless rate fell to 11.1% from 13.3% in May.

Without the misclassification, it would have been 12.3%. The unemployment rate is 7.6 percentage points above its February level. Unemployment dropped for all gender and demographic groups, though joblessness stayed disproportionately high among Blacks and Hispanics. The number of people who have permanently lost their job increased 588,000 to 2.9 million.

“These workers will likely struggle to regain employment in an economy facing suppressed demand,” said Beth Akers, senior fellow at the Manhattan Institute.

Stocks on Wall Street rallied, with the Nasdaq hitting an all-time high. The dollar () edged up against a basket of currencies. U.S. Treasury prices were trading higher.

For a graphic on Rebounding from the COVID-19 crunch:

https://fingfx.thomsonreuters.com/gfx/mkt/gjnpwwjzdpw/Pasted%20image%201593607949970.png

BROAD GAINS

Jobs also returned in the retail, education and health, manufacturing, construction, professional and business services sectors, transportation and warehousing, wholesale trade and financial activities sectors.

Local governments hired teachers and support staff. But state governments, confronting reduced revenues and stressed budgets caused by the pandemic, laid off more workers. There were further job losses in mining.

Hiring has been boosted by the government’s Paycheck Protection Program, which gives businesses loans that can be partially forgiven if used for wages. Those funds are drying up and many companies, including some not initially impacted by lockdown measures, are struggling with weak demand, forcing them to lay off workers.

That has triggered a second wave of layoffs, keeping weekly new applications for unemployment benefits extraordinarily high.

In a separate report on Thursday, the Labor Department said initial claims for state unemployment benefits fell 55,000 to a seasonally adjusted 1.427 million for the week ended June 27.

The claims report is the most timely data on the economy’s health. Including a program funded by the government, 2.3 million people filed claims last week.

The number of people receiving benefits after an initial week of aid rose 59,000 to 19.290 million in the week ending June 20. There were 31.5 million people receiving unemployment checks in mid-June, up 916,722 from the first week of the month.

With roughly a fifth of the workforce on jobless rolls, economists say the government should extend the extra $600 it pays per week in unemployment compensation when that benefit expires on July 31.

“Failure to take action would severely dent the chances of a rapid recovery,” said James Knightley, chief international economist at ING in New York.



U.S. recovery to take years, outbreaks to slow growth By Reuters



© Reuters. Chicago Federal Reserve Bank President Charles Evans speaks during the Global Interdependence Center Members Delegation Event in Mexico City

By Ann Saphir

(Reuters) – Chicago Federal Reserve Bank President Charles Evans on Wednesday said he expects the U.S. economy to take until late in 2022 to recover to its pre-crisis level of output, with some economic growth permanently lost to the effects of the coronavirus pandemic.

“Even after three years, my projected recovery places us below where the economy would have been had the virus not occurred,” he told a Corridor Business Journal conference in Iowa, via videolink. “The economic impact has been catastrophic for an extraordinarily large number of people and businesses, (and) sadly, the cost has fallen most heavily on some of our most vulnerable populations.”

A surprise jump in payrolls in May likely signals stronger underlying demand than analysts had expected, he said. It also probably shows workers and consumers felt comfortable enough to return to stores sooner than anticipated.

And that return, he added, may have its downside.

“My forecast assumes growth is held back by the response to intermittent localized outbreaks – which might be made worse by the faster-than-expected reopenings,” he said.

The Fed earlier this month signaled it will keep interest rates low for years to support growth, and policymakers forecast the economy to shrink about 6.5% this year and unemployment to end the year at 9%.

DOWNSIDE RISKS

With some 20 million Americans out of a job, a drop in spending and economic activity weighing on inflation, and the most uncertain outlook he’s ever seen in his career, Evans said, risks are “weighted to the downside” for even that grim forecast.

“Other forecasts with more severe effects on economic activity are almost equally as plausible in my view,” Evans said adding that while fiscal and monetary policy support have helped, “more may be necessary.”

In particular need are local and state governments, even the most fiscally responsible of which could not have been expected to be prepared to withstand the drop in sales tax and other revenues that are forcing tens of billions of dollars of budget cuts across the country, he said.

“There is a role for the federal government to provide relief assistance of some magnitude,” he said, noting the “awful lot of employment in state and local government and the associated impact from the things that those employees buy or don’t buy if they are laid off.”

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.



Dollar Weakens Amid Signs of Economic Growth By Investing.com



© Reuters.

By Peter Nurse

Investing.com – The dollar weakened in early European trade Wednesday, with traders seeking riskier currencies, latching more on to the signs of economic growth rather than the increasing number of coronavirus cases.

At 3 AM ET (0710 GMT), the , which tracks the greenback against a basket of six other currencies, was down 0.1% at 96.595, from a high of 97.719 at the start of the week.

rose 0.1% to 1.1322, having been as low as 1.1167 on Monday, while was up 0.1% at 106.60, off the six-week low of 106.06 seen earlier this week.

These moves came after the release of better than expected PMI data Tuesday in Europe, the U.K. and the U.S., which lifted sentiment.

“The uptick in global PMIs was a key driver of EUR/USD jumping nearly a figure to 1.1330,” said analysts at Danske Bank. ”These PMIs continue to suggest the macroeconomic surprises are positive (beginning with U.S. payrolls a while back). In our view, positive surprises will be enough to propel further USD weakness for a while longer, even if positioning data suggest EUR speculators are nearly stretched long. We forecast 1.15 on three month horizon.”

There’s also the Covid-19 virus to consider, with the number of cases mounting worldwide and with several U.S. states seeing record infections.

“The dollar and risk sentiment are likely to remain broadly negatively correlated, barring the U.S. displaying clear and enduring leadership in the global economic recovery, something hard to square with the grim U.S. news on Covid,” Reuters reported Ray Attrill, head of FX strategy at NAB, as saying.

That said, sterling has struggled to post gains against the dollar amid worries that the U.K. government is opening up the economy too quickly. 

On Tuesday Prime Minister Boris Johnson announced that pubs, restaurants, cinemas and hairdressers in England will be able to reopen from 4 July. The four countries that make up the United Kingdom are regulated separately when it comes to health matters.

However, both the government’s chief scientific adviser Sir Patrick Vallance and the chief medical officer for England Professor Chris Whitty stressed Mr Johnson’s plan was not “risk-free”. 

Additionally, a number of influential health leaders have signed an open letter published in the British Medical Journal Wednesday, warning that the U.K. runs a “real risk” of a second wave of coronavirus.

At 3 AM ET, was down 0.1% to 1.2513 and was up 0.2% at 0.9046.

 

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.





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Surge in Stablecoin and DeFi Growth Bring Ethereum Fees to 2-Year High By Cointelegraph



Surge in Stablecoin and DeFi Growth Bring Ethereum Fees to 2-Year High

The median transaction fees on the network are the highest they have been in two years and have risen above fee for the second time in the last three months.

Recently, Coinbase researcher Max Bronstein tweeted the chart below and suggested that the most recent surge seems to be due in largely in part to increased interaction with stablecoins on the Ethereum network.

Continue Reading on Coin Telegraph

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.



India money supply surge signals pandemic-related uncertainty, not growth By Reuters



© Reuters. Illustration photo of an India Rupee note

By Patturaja Murugaboopathy and Swati Bhat

MUMBAI (Reuters) – Heightened uncertainty in India caused by the coronavirus pandemic has led to a surge in currency in circulation as people hoard cash or park money in accessible deposits to safeguard themselves against salary cuts or job losses.

According to RBI data, India’s M3 money supply rose 6.7% in the first five months of this year compared with the same period last year, the highest growth in seven years.

Currency in circulation, which measures money with the public and in banks has also surged.

A rise in money supply usually is seen as a leading indicator of growth in consumption and business investments, but the rise this time is unlikely to bolster either, analysts said.

Graphic: M3 money supply rising – https://fingfx.thomsonreuters.com/gfx/mkt/ygdvzwyjbpw/m3%20money%20supply%20growth1.jpg

“We suspect that the recent increase reflects higher cash withdrawals by depositors to meet needs during the lockdown period, until normalcy returns,” said Radhika Rao, an economist at DBS Bank.

Gross capital formation, or total investments toward fixed capital in the country, fell 7% in the March quarter, a seven-year low, and analysts expect a further deterioration due to the pandemic. Lenders too are unwilling to take risks as slowing discretionary spending slows for manufactured and industrial goods.

Graphic: Gross capital formation – https://fingfx.thomsonreuters.com/gfx/mkt/gjnvwwekkvw/Gross%20capital%20formation.JPG

“Risk-averse individuals are putting money in bank deposits, given the high and rising uncertainty, while on the other hand risk-averse lenders are not lending to those who need it,” said Kunal Kumar Kundu, India economist at Societe Generale (OTC:).

However, growth in currency notes held by public was much higher than the deposits made in banks.

Since the end of March, currency held by the public rose 8.2% compared with a 4.1% increase in term deposits, the data showed. Savings and current account deposits fell 8% due to higher withdrawals.

Graphic: Money supply components – https://fingfx.thomsonreuters.com/gfx/mkt/qmypmgnrnpr/Money%20supply%20comp.jpg

“At the margin, people have curtailed their discretionary spending as they’re not sure of their permanent income,” said Rupa Rege Nitsure, chief economist at L&T Financial Holdings. “There is still heightened uncertainty about the duration of pandemic.”

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.



U.S. home sales hit 9-1/2-year low; price growth cools By Reuters



© Reuters. Homes are seen for sale in the northwest area of Portland

By Lucia Mutikani

WASHINGTON (Reuters) – U.S. home sales dropped to their lowest level in more than 9-1/2 years in May, strengthening expectations for a sharp contraction in housing market activity in the second quarter following disruptions caused by the COVID-19 pandemic.

The report from the National Association of Realtors on Monday also showed the smallest annual home price increase in more than eight years. The slump in existing home sales reflected closings on contracts signed in March and April, when nearly the whole country was under lockdowns to slow the spread of the respiratory illness.

With applications for home loans surging to an 11-year high in recent weeks amid record low mortgage rates, May was probably the nadir for the existing housing market. Data last week showed a sharp rebound in building permits in May. But nearly 20 million people are unemployed and housing supply remains tight.

“Home sales may bounce with pent-up demand following the shutdown of the economy starting in March, but the massive scale of job losses and cautious consumers rebuilding their savings may limit sales,” said Chris Rupkey, chief economist at MUFG in New York. “There is still a long road to recovery for the broader economy.”

Existing home sales fell 9.7% to a seasonally adjusted annual rate of 3.91 million units last month, the lowest level since October 2010. It was the third straight monthly drop. Economists polled by Reuters had forecast existing home sales would fall 3% to a rate of 4.12 million units in May.

Home resales, which make up about 90% of U.S. home sales, decreased 26.6% on a year-on-year basis in May, the largest annual decline since 1982. There were 1.55 million previously owned homes on the market in May, down 18.8% from a year ago.

Stocks on Wall Street were trading higher as investors weighed stimulus-fueled recovery hopes against an increase in U.S. coronavirus infections. The PHLX housing index () was little changed. The dollar () fell against a basket of currencies. U.S. Treasury prices rose.

SHIFT TO SUBURBS

Home sales fell in all four regions last month. The NAR said with many companies allowing greater flexibility for employees to work from home amid the COVID-19 pandemic, demand for housing was skewed towards single-family homes, mostly in the suburbs.

Economists believe the migration to suburbs from city centers could ease some of the housing shortage. A homebuilder survey last week showed strong demand in June for single-family homes in inner and outer suburbs featuring lower density neighborhoods.

Single-family home sales dropped 24.8% in May from a year ago, while multi-family homes plunged 41.4%.

The median existing house price rose 2.3% from a year ago to $284,600 in May. That was the smallest gain since February 2012. Though single-family home prices increased, the median condominium price fell.

“Although demand certainly dropped in March and April due to the crisis, supply dropped even more, and has thus far kept home prices from declining,” said Mike Fratantoni, chief economist at the Mortgage Bankers Association in Washington. “We expect that home price growth will pick up over the summer due to insufficient supply levels.”

Last month’s slump in home sales, together with a modest rise in homebuilding in May, suggested a big drop in residential investment this quarter after it grew at its fastest rate in more than seven years in the first quarter.

Economists are forecasting residential investment will decline at around a 20% annualized rate in the second quarter. That would contribute to gross domestic product sinking at as much as a 37.5% pace during that period, they say.

The economy contracted at a 5% rate in the first quarter, the sharpest since the 2007-2009 Great Recession.

At May’s sales pace, it would take 4.8 months to exhaust the current inventory of pre-owned homes on the market, up from 4.3 months a year ago. A six-to-seven-month supply is viewed as a healthy balance between supply and demand.

Last month, houses for sale typically stayed on the market for 26 days, down from 27 days in April, but matching the duration a year ago. Fifty-eight percent of homes sold in May were on the market for less than a month.

First-time buyers accounted for 34% of sales in May, down from 36% in April but up from 32% a year ago.



Systemic racism slows down economic growth, Dallas Fed chief says


FILE PHOTO: Dallas Federal Reserve Bank President Robert Kaplan speaks at the Commonwealth Club in San Francisco, U.S., October 11, 2019. REUTERS/Ann Saphir

WASHINGTON (Reuters) – Systemic racism and high unemployment levels among black and Hispanic Americans create a drag on the U.S. economy, Dallas Federal Reserve President Robert Kaplan said on Sunday.

“A more inclusive economy where everyone has an opportunity will mean faster workforce growth, faster productivity growth and will grow faster. And so I think we’re right to focus on this and bore in on this,” Kaplan said on CBS’ “Face the Nation.”

Kaplan said he agreed with his counterpart at the Atlanta Federal Reserve Bank, Raphael Bostic – the Fed’s only African-American policymaker – who on Friday issued an impassioned call for an end to racism and laid out ways the U.S. central bank can help.

The comments by the Fed policymakers follow weeks of nationwide protests against police brutality and racism after the May 25 death of George Floyd during an arrest in Minneapolis. The police officer who knelt on Floyd’s neck for almost nine minutes has been fired and charged with murder.

“It’s in the interest of the U.S.,” Kaplan said. “The fastest growing demographic groups in this country are blacks and Hispanics. If they don’t participate equally then we’re going to grow more slowly.”

Kaplan said the Dallas Fed and the Federal Reserve System have been working for years to improve skills training and education for blacks and Hispanics, who have long endured a higher level of unemployment than whites.

Overall unemployment, which spiked dramatically during the economic shutdowns to curb spread of the coronavirus, is on the way down, Kaplan said, adding that he expects to see positive job growth starting this month.

He said fiscal policy, which is set by Congress, will be a critical element of the recovery from the coronavirus slowdown, including continued unemployment benefits, possibly “restructured to create more incentives for people to go back to work,” and benefits to state and local governments.

Reporting by Doina Chiacu; Editing by Daniel Wallis and Bill Berkrot



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Aussie Dollar Breaks Through 70 Cents Ceiling on Growth Wagers By Bloomberg



© Reuters. Aussie Dollar Breaks Through 70 Cents Ceiling on Growth Wagers

(Bloomberg) — Australia’s dollar broke through the key 70 U.S. cents mark on expectations markets have witnessed the worst of the coronavirus’ carnage on the global economy.

The jumped as much 0.9% on Friday to 70.04 U.S. cents, the highest level since early January when the virus outbreak had yet to explode into a pandemic. It has risen 27% after sliding to a near 18-year low in March, and is seen as a favored asset to buy among investors cheering the re-opening of economies from Singapore to Germany.

The Aussie could rise to 75 U.S. cents next year as it benefits from a cocktail of supportive monetary and fiscal policies, improving risk sentiment and the nation’s record trade surplus, Thomas Nash, a strategist at HSBC Bank Australia, wrote in a note. “Buying AUD in the depths of recession has been profitable in the past — this time should be no different.”

The currency also received an inadvertent boost from Reserve Bank of Australia Governor Philip Lowe, who refrained from talking down the currency’s strength at a recent policy meeting.

The rising trend is likely to continue, according to Australia and New Zealand Banking Group Ltd.

“The rally has come from a position of currency undervaluation and is aligned to improvements in both risk appetite and global growth prospects,” ANZ strategists including Daniel Been wrote in a note. “As a result, at this stage, the move is unlikely to warrant attention from the RBA.

 

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.





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U.S. banks attract bargain hunters though hurdles to growth remain By Reuters



© Reuters. FILE PHOTO: A woman passes by a Chase bank in Times Square in New York

By Sinéad Carew

(Reuters) – Investors eyeing a turnaround in the U.S. economy are piling into U.S. bank stocks even as some caution that positive stress test results and an abatement of loan losses will be needed to sustain a rally in the battered sector.

The S&P 500 bank index <.spxbk> has kicked off June with an advance of close to 10% so far, following a two-day rally of 15% last week. Banks are sensitive to consumer and business spending so the stocks were slammed by the coronavirus-related economic slump.

As U.S. Treasury yields rose on Thursday, the bank index was up another 1.8%. This added to the previous session’s 5% gain after U.S. May private payrolls declined less than expected, suggesting that layoffs were abating as businesses reopened and stay-at-home restrictions related to COVID-19 eased.

Banks have also been helped by renewed interest in value stocks over growth investments. Optimistic comments from banks had helped the sector last week, including JPMorgan Chase (N:) Chief Executive Jamie Dimon’s forecast that reserve increases for loan default protection could taper in the third and fourth quarter.

Second-quarter earnings are expected to be bleak and investors are eagerly waiting the completion of annual stress test, due by June 30, as the results determine how much capital banks can return to shareholders.

But some portfolio managers are already betting on 2021 earnings improvements, assuming banks have shouldered most of the economic cycle’s loss-reserve increases by then.

“There’s optimism things will be better a year from now. And because banks have trailed just about everything else in the market they’re being dragged up,” said Rick Meckler, partner at Cherry Lane Investments, in New Vernon, New Jersey.

Even after the current rally, the S&P bank index is one of the biggest industry laggards this year with a 29% decline, compared to the S&P 500’s () more than 3% drop.

There are concerns dividends could be suspended if the Federal Reserve requires more capital reserves after the stress test, said Michael Cronin, investment manager for US equities at Aberdeen Standard Investments.

“Banks seem optimistic they’ll be able to continue to pay dividends and they’re advocating for paying dividends but the question is still out there and it’s still weighing on valuations,” said Cronin.

(Graphic: S&P 500 bank valuations fall well below historical average – https://fingfx.thomsonreuters.com/gfx/mkt/gjnpwyjxzpw/bankvaluationmay2020.PNG)

The banks sector’s forward price-to-book ratio, comparing prices to book value estimates, tumbled starting in February as the coronavirus pandemic scared off investors. In April, it hit a trough of 0.72 – the sector’s lowest valuation since the 2009 financial crisis.

The ratio has since risen to 0.81 but still looks like a bargain to money managers versus the historic average of 1.22.

“A lot of the negativity is reflected in current valuations, which is why there’s a lot of upside compared with other industries” said Ryan Lentell, portfolio manager at Manulife Investment Management.

Cronin at Aberdeen Standard is still watching the direction of credit costs, which will depend on whether there is a second wave of coronavirus cases and more lockdowns.

“Until we get some clarity on the stress tests and credit, it’ll be a lot harder to move materially higher in the near term,” said Cronin.

U.S. fiscal stimulus and Federal Reserve support, including interest rate cuts, appear to have put a “backstop” behind bank balance sheets, according to Fred Cannon, head of research at Keefe, Bruyette & Woods.

Banks have also been boosted by a rotation into value stocks with the S&P 500 Value index () gaining more than 11% since mid-May, compared with an almost 7% gain for the S&P 500 value index ().

But Cannon questions how sustainable the rotation will be. And since bank profits depend partly on higher interest rates, Cannon sees a limit to gains in the sector.

“Interest rates will remain low for a very long time. It’s very difficult to see banks regain their pre-crisis levels until there’s some sign interest rates will increase,” he said.