The theme of the past week is ‘old news’, in the sense that global equities managed to lift in the face of rising Omicron cases and the highest U.S. inflation numbers since 1982. But as the saying goes, markets are forward-looking: equities saw fit to take relief from the fact that global Omicron deaths and hospitalisations still seem contained and, while shockingly high, U.S. CPI inflation was at least no worse than the market had expected. For the record, U.S. headline annual CPI hit 6.8%, with core inflation (i.e. excluding food and energy) up 4.9%.
Continuing with the theme of old news, it now seems almost consensus that the U.S. Federal Reserve will accelerate bond tapering at this week’s critical policy meeting, as well as likely pencil in two rate hikes next year within the ‘dot plot’ of Fed member policy rate expectations. Although U.S. 10-year bond yields did rebound a chunky 14 basis points to 1.49% last week, yields still remain remarkably contained despite the clear lift in Fed tightening expectations in recent weeks. To some extent this reflects lingering Omicron concerns and the fact fixed-income markets (although not most economists) had already priced in several 2022 U.S. rate hikes a few months ago.
Given this backdrop, it’s hard to see what what the Fed could say or do this week that could rile equity markets – with earnings still strong, it’s the risk of higher bond yields (and associated downward pressure on PE valuations) that remains the main threat to equity markets. If bond yields don’t push a lot higher, it’s hard to see equity markets pushing a lot lower any time soon.
In terms of global equity trends, U.S. outperformance remains firmly intact, while Australia and emerging markets relative performance remains under downward pressure. The growth versus value tug of war continues, with no clear winner over recent months – reflecting in turn the largely sideways movement in bond yields.
A bounce back in iron-ore prices – reflecting hopes that China is flicking the switch back to supporting growth (given an interest rate cut last week) – helped the $A bounce back a little last week. The main local news of note was the RBA post-meeting policy statement, which dropped any reference to 2023 or 2024 when referring to when its inflation targets might be met. This had local economists getting excited again about the prospect of RBA rate hikes next year – which, as in the U.S., are already priced into the market.
Note while I’ve have downplayed the risk of RBA rate hikes next year – on the view that the required acceleration in wage growth to 3-3.5% seems unlikely – I’m warming to the view that the RBA could change its mind over waiting for this degree of wage acceleration, especially if upcoming quarterly wage and CPI reports surprise on the upside. Unlike in the U.S., we only get quarterly rather than monthly updates on these numbers – and there are widespread anecdotal reports of wage and price pressures given labour shortages and rising imported inflation.
Local highlights this week include Wednesday’s National Australia Bank business survey, which will likely show business confidence remains high though with simmering concerns around staff shortages and wage and price pressures. Thursday’s labour market report will herald Australia’s bounce back from lockdowns, with a 200k rebound in employment expected and a drop in the unemployment rate from 5.2% to 5.0%.