Global equities tried hard to break higher early last week on the back of more hopeful vaccine news and Europe’s long-awaited stimulus package, though ended the week on the back foot due to renewed U.S.-China tensions and higher than expected U.S. weekly jobless claims.
America’s ongoing COVID-19 battle and Congressional wrangling over the next U.S. stimulus bill also kept markets on edge. Somewhat surprisingly, however, America’s long feared Q2 earnings reporting season is so far proving better than expected, with an above average 80% of the 128 companies that have so far reported beating (heavily reduced) estimates. Key indices of U.S. service and manufacturing activity also both pushed higher in July, though by slightly less than expected.
Despite a largely ‘risk off’ week, the $US fell – not helped by some optimism in Europe. In turn, that saw gold prices rise even further. All up, it appears the good news with regard to economic re-opening is now priced into markets, with the flow-on risk of renewed infections and potential stalling in the recovery now starting to trouble markets. Trump’s decision to renew his attacks on China – justified or not – are yet another risk factor.
In terms of the week ahead, U.S.-China tensions will remain in the spotlight as will progress on the next U.S. stimulus bill. The U.S. earnings season rolls on, with another 192 S&P 500 companies reporting, including tech titans Amazon, Alphabet and Apple on Thursday. Also on Thursday is the first estimate of Q2 U.S. GDP, which is expected to show a shocking 35% annualised decline in growth. But perhaps even more important than this ‘old’ economic news will be the direction in weekly jobless claims.
The Fed also meets this week, with growing speculation that it could soon announce a promise to leave official interest rates untouched until such time as inflation hits its 2% target. To my mind that seems a ludicrous move considering core U.S. inflation has only reached this level around 25% of the time in the past 20 odd years! And ironically such a commitment might actually cause longer-term bond yields to rise rather than fall – though it will likely keep gold prices trending higher.
Local stocks ended the week lower despite a strong bounce on the day the Morrison Government (as expected) announced a scaled-back version of its JobKeeper program would be extended for another six months. The Government also released the full horror of the updated budget outlook, with the deficit expected to reach $184 billion, or 9.7% of GDP, this financial year. Net debt will rise to around 36% of GDP by June next year which, while well up on the 19% of GDP in June last year, would still leave it relatively low by global standards.
Retail sales bounced a further 2.4% in June, reflecting both the generous income support measures in place and the re-opening of more shops during the month.
A highlight this week will be the Q2 consumer price index on Wednesday, which unsurprisingly is expected to show a fall in both headline and underlying price measures due to the weakened state of the economy. Core annual inflation is expected to drop from just under 2% to just over 1% – or even further away from the RBA’s elusive 2 to 3% target. In a speech last week, moreover, RBA Governor Lowe hinted at the possibility of cutting the official cash rate from 0.25% to 0.1% if economic conditions remained weak – though he was still against the idea of negative rates. Lowe also expressed some comfort with the $A, suggesting its current level was “broadly in line with its economic fundamentals”.
Have a great week!
double click to see larger image