RBA theatrics - BetaShares

RBA theatrics

BY David Bassanese | 2 August 2021
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S&P 500 Index

Global markets*

  • After pushing to new highs, last week appeared one of consolidation for global equities – buffeted by continued solid economic growth and corporate earnings reports on one hand, and concern with the delta spread and China’s regulatory crackdown on the other. Long-term bond yields also continued to trend lower.
  • Apart from Amazon, last week’s U.S. tech earnings reports were as strong as could be hoped, though markets had lifted the previous week in anticipation of these results. While the delta variant is spreading globally, the good news is that death and hospitalisation rates are much lower among the vaccinated – which thankfully is most of the U.S. population – thereby reducing the risk of significant new lockdowns.
  • As for China’s latest regulatory crackdown, I wrote a note last week suggesting this may well prove a good buying opportunity in the Asia ETF. U.S. core consumer price inflation came in a bit lower than expected last week – consistent with the view that supply chain inflation pressures have likely peaked. Q2 GDP growth was also a bit weaker than expected, though this appeared to reflect lingering supply bottlenecks in housing construction.
  • The Fed meeting came and went last week, with Committee members conceding they’ve at least started talking about tapering, though as yet no announcement on when they might begin. (My view is an official announcement won’t come until the November FOMC meeting, though we should expect a number of strong hints to this effect well before that date. I also suspect the actual tapering won’t start until early 2022 and will be very gradual in nature so as to avoid any bond market tantrums.)
  • In terms of key events this week, it will be interesting to see if China acts to further ease investor concerns over regulatory moves, or throws out another policy surprise. In terms of delta, the apparent peaking of the latest surge in the UK is worth watching as it may be a lead indicator of trends in other developed markets such the United States.
  • Data wise, there is a smattering of U.S. manufacturing and non-manufacturing data which should show economic growth remains fairly solid. That should be confirmed by a further 900k jobs gain in the U.S. July payrolls report on Friday.

Australian market

  • The main local news last week was Sydney’s ongoing lockdown saga – with Brisbane joining over the weekend. Yet for financial markets this is water off a duck’s back these days, as economic growth is expected to bounce back solidly in Q4 and delta has likely meant the RBA won’t be tapering its bond purchases in September after all. Core consumer price inflation, meanwhile, remained fairly subdued in Q2 which only strengthens the case for the RBA doing nothing for a while longer.
  • Market wise, the most interesting move last week was the (overdue?) slump in iron-ore prices, reflecting China’s renewed edict to cut back steel production. So far at least Beijing has struggled to reign in the production of its myriad regional producers, resulting in national H1’21 steel production being higher than desired. It seems likely that Beijing won’t be defied for long, suggesting the peak in iron-ore prices has finally arrived. This in turn should help keep the $A relatively well contained.
  • In terms of the week ahead, we can expect a few theatrics at the RBA’s Tuesday policy meeting. For starters, the Bank will likely postpone the planned reduction in weekly bond buying from $5 b to $4b from early September. Less likely, though possible, the RBA might even decide to immediately increase bond buying to $ 6b per week. In terms of the economy, a further  incremental adjustment won’t mean all that much, though it could at least allow the RBA to be seen to be doing something in acknowledgement of the savage Q3 hit to economic growth.
  • This week is also the start of the local earnings reporting season, which is likely to confirm a strong rebound in profits over the financial year. As always, what will matter most for markets is the outlook statements, which should remain fairly encouraging despite the current delta outbreak.

Have a great week!

*Due to technical issues, my usual table and charts were not able to be produced this morning. 

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