U.S. stocks edged ever higher last week, despite a lack of progress on extending fiscal stimulus and the Fed’s reluctance to consider further monetary measures despite its ongoing concerns for the economy. The Fed’s failure to hint at new stimulus also helped stem the slide in the $US last week, and associated rise in the $A – though bond yields generally edged back after the previous week’s surge.
The Fed’s minutes, however, did express concern that the pace of labour market improvement could be slowing, which was in evidence again last week with weekly jobless claims ticking back over the one million mark. But other data was generally solid – with strength in housing indicators and stronger than expected rebounds in the manufacturing and non-manufacturing PMI indices for August. Major retailers such as Walmart also rounded out a surprisingly resilient Q2 earnings reporting season.
Maybe the Fed is too worried? Wall Street seems to think so. Indeed, the fact Wall Street is holding up so well has probably lessened the sense of urgency in Washington to strike a deal. Note also the U.S. daily COVID case count – though still reasonably high – at least appears to be falling again, and the death rate (so far at least) has remained notably lower than during the first outbreak in March and April. To an extent, America may be learning to live with the virus, with the risk of renewed lockdowns due to second or third waves receding somewhat. News on the vaccine front also remains encouraging. Of course, there’s also the risk of complacency – a hasty tapering of fiscal stimulus and easing in social distancing restrictions could threaten the recovery just as Washington gets set to close down ahead of a heated U.S. Presidential election.
But, especially with the Fed waiting in the wings, a collapse in equity prices back through the late March lows is looking increasingly unlikely – at worst we may be due for a 10 to 15% correction at some stage, either due to a slowing in the U.S. economic rebound and/or election uncertainty. As for the U.S. equity market’s poor breadth, I’m also starting to view this as a healthy sign – while some tech stocks may have attracted ‘safe-haven froth’ in the short-term, the rest of the market is at least not getting too carried away as yet, which in turn reflects the reality that the COVID shock had had a very unequal impact on sectors within the market. As and when the recovery gains surer traction, a rotation towards the weaker parts of the market could eventually happen without necessarily seeing a collapse in tech stocks or the overall market.
In terms of the week ahead, markets will again be wondering if Fed chair Powell hints at more stimulus at his annual Jackson Hole talk on Thursday – but I suspect he won’t. Meanwhile, the market is anticipating weekly jobless claims this Thursday will tick back below the one million mark, and continued healthy though more moderate growth in Friday’s July consumer spending report, building on the very strong rebounds evident over May and June.
The local stockmarket continued to grind sideways last week, extending the narrow range it has been trapped in since early June. The earnings reporting season is largely living ‘down’ to expectations, with a swag of companies reporting severely-dented profits and a cut in dividends. The $A also had its first negative week since mid-June, which in turn reflected last week’s pause in $US weakness.
Despite high unemployment, however, we learnt last week the mountain of policy support directed at households kept retail sales ticking along nicely in July. Mixed news came on the virus front, however, with tentative signs of a peaking in Melbourne’s case count but signs of a new outbreak over the weekend in Brisbane, while Sydney is still nervously trying to keep its numbers low and manageable without resorting to new draconian lockdowns. Rightly or wrongly, most Australian states appear less prepared than parts of the United States to learn to live with the virus.
Datawise, this week is likely to be less cheery than last week – with a broad-based slump in Q2 construction activity and private business investment likely to be reported on Wednesday and Thursday respectively – which will be key drivers underpinning the widely-anticipated slump in Q2 GDP to be reported next Wednesday, September 2. Thursday’s investment report is also likely to contain a further major downgrade to this financial year’s business investment outlook – though again this is now anticipated by most forecasters, and underpins the weak outlook for the economy over the next few quarters.
Have a great week!
double click to see larger view