Week in review
- Global equities rebounded last week, comforted by further reassuring words from Fed chair Powell, excitement related to US President Biden’s infrastructure package, and a no worse than feared inflation outcome.
- After the previous week’s apparent hawkish tilt at the Fed meeting, Powell fronted Congress and reiterated he still considered the (admittedly higher than expected) spike in U.S. inflation as transitory. Meanwhile, President Biden secured commitment from enough Republican Senators to pass a $US600b infrastructure package – likely this week. And while annual growth in the core U.S. private consumption expenditure deflator (PCE) hit 3.4%, this was in line with market’s already elevated expectation.
- In Australia, preliminary May retail sales were a bit weaker than expected – with Victoria’s lockdown a drag. The other major news of course was the rising COVID case count in Sydney and the eventual announcement of a two week lock down of the metropolitan area (including yours truly!). Perhaps it’s no surprise Australian equities lagged last week.
- June U.S. payrolls on Friday will be the major global data highlight this week, with the market expecting a solid 675k gain in jobs and a decline in the unemployment rate from 5.8% to 5.7%. A bigger than expected outcome – which is possible given the impressive vaccination rollout and looming reduction in supplementary unemployment benefits – could again heighten Fed tapering fears and place upward pressure on bond yields and downward pressure of stocks. Before Friday, however, passage of Biden’s infrastructure package could support equities and potentially the $U.S. dollar, though we also need to watch any upward pressure on bond yields.
- In Australia, while local data is likely to reveal ongoing strength in house prices and home lending, focus will remain on the COVID situation – such as how quickly cases moderate in Sydney and the degree to which the pesky delta variant has spread to other States. A broadening in lockdowns to other States and/or an escalating Sydney case count (suggesting a longer than two-week lockdown) will be increasingly hard for the currently buoyant Australian share market to ignore.
- While Powell reassured markets last week, the risk of higher bond yields – and potentially a pull back in equities – due to ongoing strong U.S. economic data remains. Indeed, it seems increasingly likely that the Fed will announce a tapering of bond purchases within the next few months, such as at the Jackson Hole meeting of global central bankers in late August. So far at least, long-term bond yields remain contained and equities more focused on the V-shaped rebound in economic growth and corporate earnings.
- Australia’s low vaccination rollout makes the economy increasingly vulnerable given the new highly contagious COVID delta-variant sweeping the world. Extended lockdowns could severely knock economic growth in the short-term and see the local share market materially lag its global peers.