Week in Review
The main theme across global markets last week was relief that commentary from the US Federal Reserve (via policy minutes on Wednesday and its semi-annual Monetary Report to Congress on Friday) suggested it was still fairly comfortable with the inflation outlook and so still not inclined to raises rates more than the three times currently anticipated by investors. Indeed, part of the sell-off in markets over recent weeks has reflected concerns that a possible pick up in US wage and price inflation could see the Fed lift rates four times or even more! To my mind, this was overly negative, given the lift in inflationary pressures remains very tentative and at this stage more welcomed than feared at the Fed. All up, having lifted earlier in the week – partly in response to sizable new Treasury issuance – US 10-year bond yields eased back on Friday to end the week largely unchanged, while a strong 1.6% rebound in the US S&P 500 on Friday left the market up 0.6% for the week. The $US also firmed a little.
In Australia, commentary from the RBA remained consistent with rates on hold for some time – which was supported by another fairly modest gain in wages during the December quarter. Although the 0.6% quarterly lift in the wage price index was slightly stronger than the 0.5% expected by the market, it still kept annual wage growth at only 2.1% – and even this modest result was partly inflated by the flow through of a one-off lift in minimum award wages. Another local highlight was the final stages of the half-yearly earnings reporting season – which revealed a slightly better than average degree of earnings “beats”, but with overall profits growth still fairly moderate and considerably softer than that evident in other markets such as the US.
With markets still fretting over interest rates, a key focus this week will be Jerome Powell’s first public appearance as the new Fed chair, when he delivers the Fed’s semi-annual testimonies to Congress on Tuesday and Thursday. Based on recent Fed statements, it seems unlikely Powell will surprise with hawkish rhetoric – but markets will be understandably nervous ahead of time. Also of note will the US core private consumption expenditure (PCE) deflator – the Fed’s preferred inflation measure – which is expected to have remained at a fairly benign 1.5% annual rate in January.
Locally, we’ll get an update on the business investment outlook when the official capital expenditure survey is released on Thursday. Given recent improvements in business confidence, chances are it will reveal a further upgrade to the non-mining investment outlook – which will further support the RBA’s confidence that the economy (apart from weak wages and fragile consumer spending) is travelling reasonably well. House prices for January are also released on Friday, which should reveal further steam coming out of the once red-hot Sydney market.
Have Great Week!