Continued generally encouraging U.S. economic data, further vaccine hopes and confirmation of an even more dovish Fed policy all conspired to support global equity markets again last week. The S&P 500 rose 3.3%, marking the 5th weekly gain in a row.
U.S. economic data continue to paint a picture of an economy gradually recovering from the COVID shock. The good news is that the latest wave of U.S. COVID cases appears to have peaked, with fewer deaths than earlier this year and less draconian restrictions. That said, weekly jobless claims have stopped declining in recent weeks and remain at an uncomfortably high level. Consumer confidence has also so far failed to rebound all that much, though confidence remains well up on the lows during the GFC and it has not stopped consumers from spending their stimulus cheques.
One lingering market worry is that the enhanced weekly unemployment benefit has been effectively halved in recent weeks from $600 to $300 (as failure of Congress to agree on a new arrangement has given way to stop-gap executive orders from President Trump) – though some tapering in stimulus as the economy gradually recovers, to my mind, is not that unreasonable or overly concerning.
The biggest news last week was the Fed’s confirmation of a new ‘2% average’ inflation target framework, meaning it is promising to tolerate inflation remaining above 2% for a period in the future to make up for the extended period it has been below 2%. Given the Fed’s failure to meet its inflation target for an extended period, talk of tolerating more than 2% inflation is purely academic – but, for markets, the bottom line of last week’s announcement is that it supports the idea the Fed will keep rates ‘lower for longer’ and so help underwrite high equity PE valuations. While longer-term bond yields did push higher last week, I strongly doubt markets are starting to fear higher inflation – rather it seems a case of ‘buy the rumour, sell the fact’ with regard to the Fed’s well-anticipated dovish announcement.
High bond yields are also likely a recognition that the global economy is, slowly but surely, getting better – as we learn to live with the virus somewhat more, and confidence with regard to an eventual vaccines grows. Indeed, it’s looking increasingly likely we may well have seen the low for long-term yields, which might start to undermine gold’s continued ascent and the persistent underperformance of ‘value’ stocks like financials. That said, given dovish central banks and likely continued low inflation, only a modest and non-threatening upward adjustment in bond yields seems likely.
In terms of the week ahead, focus will again be on Thursday’s jobless claims along with what is expected to be another encouraging U.S. payrolls report on Friday. Around 1.4 million jobs are expected to have been created in August (after 1.76 million new jobs in July), with the unemployment rate expected to drop back to single digits (to 9.8% from 10.2%).
Australian equities again struggled to keep up with global peers last week as a less than inspiring earnings season continued to weigh on sentiment. Australia’s tougher approach to dealing with the virus, a firmer $A and our relatively small exposure to the booming technology theme are holding back relative local market performance. While the virus case count in Melbourne is coming down, it remains uncomfortably high, suggesting current restrictions are likely to remain in place for some time. Sporadic virus outbreaks in other states – and general uncertainty as to how and when State Governments will react – also leave the economic outlook highly uncertain.
That said, continued high iron-ore prices are supporting resource stocks, and investors are also backing ‘structural growth stories’ where they can be found, such as among our small but thriving technology/internet related stocks.
In terms of the week ahead, recent RBA commentary suggests it will offer nothing more in tomorrow’s policy meeting, even as Q2 GDP a day later is expected to show the economy shrank by a whopping 6% last quarter – confirming Australia’s first technical recession in 29 years.
Have a great week!
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