Global equities pushed onwards last week as solid U.S. earnings and economic reports outweighed concerns with regard to eventual Fed tapering and the pesky delta variant. Although U.S. July manufacturing indices were a touch weaker than expected, they were nonetheless still very strong – with service sector indices even stronger! Payrolls on Friday were also very solid, with 943k new jobs and a drop in the unemployment rate from 5.7% to 5.4%. At 4%, annual growth in average hourly earnings was also uncomfortably firm, though the market is treating wage pressure at present as related to lingering supply issues, with labour force participation still yet to return to pre-COVID levels.
Fed Vice-Chair Clarida essentially confirmed the Fed would announce a tapering in bond purchases by year-end but still seems unlikely at this stage to raise rates before 2023. U.S. 10-year bond yields did bounce higher last week, and as delta fears ease we may well have seen the bottoming of the trend decline in bond yields over recent months – which in turn could favour a return to ‘value over growth’ themes, though the more important story is that the overall equity market seems well positioned to keep grinding higher.
Two global factors to watch this week will be the U.S. CPI and Fed-speak. Annual growth in the U.S. core CPI is expected to ease to 4.3% from 4.5%, which would support talk that supply-related inflation pressures have peaked. A menagerie of Fed speakers will also be out and about sharing their disparate views on when the Fed should taper.
Local economic data continues to take a back seat to lockdown news, which sadly is going from bad to worse in New South Wales. A new lockdown in Victoria is more bad news, even though the sharemarket continues to look through this serious short-run disruption to growth. Indeed, even the RBA refused to back away from plans to taper bond purchases in September at last week’s policy meeting, though I suspect this could be the rabbit pulled from the hat at next month’s meeting. Square’s surprise decision to buy Afterpay (the local tech stock many love to hate) saw the local technology sector surge 13% last week – but there was also strength across many other sectors, with only materials retreating due to weaker iron-ore prices.
Both business and consumer sentiment should suffer lockdown-related hits in the NAB and Westpac surveys due to be released on Tuesday and Wednesday respectively. We are also entering the local earnings season which should confirm an impressive rebound in corporate profits last financial year, which in turn could see dividend levels nicely raised in the months ahead. One concern, however, is this year’s overall Australian earnings growth appears relatively subdued compared to the global outlook, not helped by an anticipated slump in resource sector earnings due to an expected weakening in iron-ore prices.
What might boost the local earnings outlook, however, is a weaker $A. Indeed, with Australia now lagging in the global COVID recovery and iron-ore prices finally coming back down to earth, one potential vulnerability in the next few months is the $A. Indeed, my year-end target of US73c has already been achieved, and as the Fed inches closer to tapering and China reigns in runaway steel production I suspect the $A could tumble further. I now see the $A likely breaking US70c in the next few months, with a new H2’21 target of US68c.
Have a great week!
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