Week in Review
Volatility is back! It was a wild week on global markets with US stocks whipsawing wildly as investors attempted to find a bottom to the latest market sell-off. As reflecting concerns with inflation, US 10-year bond yields still managed to rise (2bps) last week despite the 5.3% decline in the S&P 500, while the $US also firmed 1.4%. Such is the state of nervousness, US stocks slumped on Thursday due to a lift in global bonds yields – caused by hawkish rhetoric from, of all places, the Bank of England. Unlike most central banks, the BOE has inflation higher than it would like, though this largely reflects the post-Brexit slump in the Pound.
Although somewhat lost amidst the market mayhem, Washington managed to agree on another stop-gap funding bill to keep the Federal Government running until March – but there is growing nervousness about the spiraling Federal budget deficit outlook due to both tax cuts, increased spending on defence, health and infrastructure and a lack of offsetting budget savings. Widening deficits together with Federal Reserve balance sheet reductions seems likely to only add to the upward pressure on US bond yields.
Local markets naturally followed global trends, with stocks and the $A down, though bond yields modestly higher. The key development last week was continued rhetoric from the Reserve Bank suggesting it was in no hurry to lift interest rates due to an expectation that wage and price inflation will remain stubbornly low for some time. That said, the RBA remained reasonably upbeat this regard to the growth and employment outlook. Economic data remained mixed, with a rebound in Q4 retail sales volumes (after a flat Q3), a nice surge in ANZ job ads during January, but a continued weakening trend in housing finance among both investors and owner occupiers.
The Week Ahead
All eyes will naturally focus on Wall Street again next week to see if markets are able to settle down. Given the recent heightened concern with inflation, Wednesday’s US core consumer price report for January will take on added importance: the market is counting on a reasonably benign 0.2% (mom)/1.7% (yoy) outcome, and there’s a risk of more stock gyrations especially if it surprises on the upside. In the same light, US producer prices on Friday will be also watched carefully.
The key highlight locally will be Thursday’s December employment report, with another solid 15k gain in jobs expected after November’s blockbuster 34k gain. Of interest will be whether the unemployment rate manages to tick below 5.5% given the need for a tighter labour market in order to generate higher wage inflation.
All up, with the S&P 500 now down 10% from its Australia day peak, we are now in official “correction” territory. History suggests the depth of corrections – assuming the underlying bull market persists – don’t usually get beyond 15%, so there’s certainly some scope for market weakness before a bottom is reached.
I’ll be giving a more in depth analysis of recent market developments and the investment outlook in this Thursday’s webinar at 12.30 (Sydney time).
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