Despite a weaker than expected payrolls report, and surging COVID cases, U.S. stocks hit new records last week, buoyed by an apparent breakthrough in fiscal stimulus talks and ongoing excitement about an impending vaccine rollout. Risk-on sentiment was also reflected in a further decline in the $US, and a lift in U.S. 10-year bond yields. The weaker greenback helped give gold a lift after recent weakness – while oil prices also benefited from an agreement by OPEC to scale back January’s planned production increase. Helped by rising energy stocks, the value sectors in general continue to outperform growth/technology – though note both are rising!
Following months of deadlocked negotiations, a bipartisan group of Democrats and Republicans proposed a compromise US$0.9 trillion package last week that leaders on both the Democrat (Pelosi) and Republican (McConnell) side appear open to agreeing to. The bill would restore the $300 per week Federal boost to weekly jobless benefits and a range of wage subsides, while also providing more support for state and local governments, schools, universities and airlines. It would not, however, provide another round of stimulus cheques direct to households as Democrats have long wanted – but the new thinking is that they might as well agree to what’s possible now, with a view to potentially working on another round of stimulus next year once Biden takes control.
Vaccine news also remains encouraging, with the UK becoming the first country to formally approve a vaccine (Pfizer’s) for general distribution.
This positive news largely drowned out the negatives – with daily U.S. COVID cases at record highs of over 200k per day, and almost 3k deaths per day. The risk of hospital overruns led San Francisco to re-impose harsh ‘shelter at home’ restrictions across several well-populated counties last week, and California’s Governor said similar restrictions could be imposed in areas across the state should local hospital capacity appear to be at risk. Meanwhile, U.S. November jobs growth came in at a weaker than expected 245k (market 460k), though weekly jobless claims at least dropped back by 75k to a (still high) 712k. Were it not for vaccine hopes, it seems likely that America’s raging third COVID wave might have caused a bigger setback to stocks than seen to date.
Global market focus this week will return to U.S. stimulus talks, along with progress on the vaccine rollout. The UK plans to start offering the vaccine as early as Tuesday, starting with high-risk groups like the elderly and healthcare workers. U.S. drug authorities could also agree to emergency approval of the vaccine for use on Thursday, which could see the first doses distributed on Friday. In the UK, pressure for a Brexit deal before the December 31 deadline is also intensifying.
Local market optimism continued last week, supported by a stronger than expected 3.3% gain in Q3 GDP – reflecting a surge back in consumer spending after the Q2 slump. We also learnt last week that the housing market is storming back, with house prices, building approvals and home lending all lifting. As for our trade tensions with China, the price of iron-ore (accounting for 50% of Chinese exports) continued to rise – underpinned by solid Chinese demand – which is helping (along with broader $US weakness) to keep the $A aloft.
As hard as it is for the sectors involved, restrictions (to date at least) should not have a major macro-economic impact, with beef, barley and wine accounting for only 3% of Chinese exports which in turn equals around 0.2% of GDP. Coal, though, is a bigger fish, accounting for around 10% of Chinese exports which in turn equals around 0.7% of GDP. Of course, China could continue widening the range of exports affected, and could even impose restrictions on iron-ore – though the latter move would likely cause a further surge in global iron-ore prices to the detriment of Chinese steelmakers.
We should expect more good local economic news this week, with ANZ job ads today, the NAB business survey tomorrow and Westpac’s consumer sentiment survey on Wednesday. I expect all to be fairly upbeat. Of course, at least in terms of official interest rates, none of this matters, as the RBA has pledged to keep interest rates on hold until such time as inflation appears likely to be sustainably above 2%. That could be years away! As I’ve said several times of late, I suspect an untoward rise in house and equity prices is more likely to goad the RBA into action within the next year or so – well ahead of a decent lift in wages or consumer price inflation.
Have a great week!
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