It was a curious week in global markets whereby the ongoing downtrend in long-term bond yields, which was initially celebrated by equity markets, has morphed into a potential ‘canary in the coal mine’ growth scare. U.S. stocks sold off almost 1% on Thursday, with U.S. 10-year bond yields touching 1.25%, before rebounding on Friday. The net result was the S&P 500 inched ahead 0.4% last week, while 10-year yields dropped a further 0.06%, ending the week at 1.36%. There’s talk the global spread of the delta COVID variant is one new growth concern, even though high vaccination rates suggest Europe and the U.S. at least seem to be managing the rising case count reasonably well.
Indeed, anyone who watched Wimbledon on the weekend would have seen packed stadiums and no face masks – even though 30,000 Britons are still getting COVID each day and almost 20 are dying. Yet the UK is moving on because 66% of the population have now been fully vaccinated.
To my mind, the main factor holding back equity markets is that much of the recent good news is now priced and the oxygen is getting thinner at these near-record highs. Maybe all we need is a period of rest and consolidation before pushing on to new heights. As for US 10-year bond yields, by my estimates, they are basically where they should be in an environment where the Fed is still not expected to lift rates for two years and inflation should settle back to a 2% annualised pace.
The main global highlight last week was the U.S. Fed minutes, which suggested mixed views on when tapering should commence. The tone of the comments suggests Powell might still not be ready to announce a tapering timetable at the Jackson Hole conference later next month, which if right should keep bond yields well-behaved and equity markets well-supported.
In Australia, commentary from the RBA highlighted the high hurdle required for a rate hike – namely 3% wage growth, which in turn the RBA suggests might likely first require the unemployment rate to drop to below 4.5%. The RBA still feels it might take until 2024 before this happens, though is open-minded to it potentially happening earlier.
By my estimates, Australia’s ability to keep COVID contained has likely saved around 34,000 lives over the past year, though our hardline stance and slow vaccination rollout has now left us somewhat more vulnerable to the highly contagious delta strain than some of our global peers.
Global highlights this week include the U.S. consumer price index and the start of the U.S. Q2 earnings reporting season. The monthly gain in the core CPI (excluding food and energy) is expected to slow to a (still high) 0.4% from 0.7%, which would see annual CPI inflation edge up to 4% from 3.8%. But markets may well take this as confirmation that U.S. inflation concerns are reaching a peak.
The Q2 earnings season promises to be very strong, with 64% growth in earnings expected on the June quarter 2020 levels. But again, like the recent high U.S. inflation readings, this seems well priced by the market already.
In Australia, the June labour market report is expected to show continued solid employment performance, with a 20k increase in jobs and the unemployment rate holding steady at 5.1%. Of course, this result pre-dates Sydney’s recent lockdown, which should weigh on the July numbers.
Local stocks were down 0.5% last week, with Sydney’s worsening COVID situation hurting sentiment modestly. That said, markets have learnt to ‘look through’ lockdowns, especially if they don’t affect the whole country and are only expected to last a few weeks. Indeed, we know once let out of their homes, consumers roar back into the shops and spend with gusto!