The correction in global equities continued last week given the latest Fed meeting offered nothing new and U.S. economic data disappointed somewhat. Bonds yields were steady while the $US eased a bit further.
Although the Fed confirmed it has moved to a new framework which will tolerate inflation at greater than 2% (if it ever happened) for some time – supported by projections of the Fed funds rate not budging for three years – the market knew all this already, making it a case of ‘buy the rumour, sell the fact’. Reflecting this reality, however, other central banks are starting to worry about undue strength in their currencies, with the Bank of England opening the door to potential negative interest rates and ECB officials noting they are ‘monitoring’ the euro. In other words, the global currency war continues, which is likely to keep short rates around the world at rock bottom levels for some time – and seems likely to force the RBA to cut the official cash rate to 0.1% before too much longer.
Meanwhile, U.S. weekly jobless claims fell a little bit less than expected and August retail sales were not as robust as hoped. All up, the picture emerging is that while the U.S. economy continues to recover – and so far at a faster than expected pace – there are growing signs of a tapering in the growth momentum, and with as yet few signs of urgency from policymakers to provide much more stimulus.
While markets are impatient, to my mind some slowing in U.S. growth after the initial re-opening rebound was always to be expected, and markets need to get used to the fact sugar hits of more stimulus announcements will get rarer from here. Indeed, more stimulus is simply not needed, with growing signs that the U.S. along with most other developed economies are learning to live with the virus – without a return to draconian lockdowns – until such time as a vaccine becomes available. As seen in the charts below, the much lower death rates during the current second wave of COVID cases are helping keep economies open so far.
Regardless of my own views, Fed chair Powell testifies before Congress this week and is likely to again argue for more fiscal stimulus, and may reiterate a cautious view on the economic outlook to support his position. In recent times the market has not taken kindly to Powell’s often sobering outlook – which still seems too cautious in my view. Indeed, this week we’ll also get the September U.S. purchasing manager indices (PMIs) for manufacturing and services which are likely to show business conditions still improving quite nicely.
The biggest market issue will be whether the correction in the once-buoyant NASDAQ-100 index continues – with the market taking a further leg down on Friday to break below recent support levels at just over 11,000. The correction is now 12% and as I pointed out last week, a 38.2% Fibonacci retracement of the advance since late March – which would be a healthy correction – would take the market down a further 5% were it to happen.
Local equities weakened in line with global markets for much of last week, not helped by signs that Melbourne’s hard-line lockdown stance is not wavering even as the case count drops.
The August employment report was a mixed bag, with a surprise surge in measured employment and sharp drop in the unemployment rate even through aggregate hours worked across the country hardly moved. It seems possible that a re-tightening in eligibility requirements for unemployment benefits may have caused a spike in idle workers choosing to call themselves employed rather than unemployed when surveyed.
As seen in the chart below, my own estimate of the underlying unemployment rate (based on pre-COVID trends in labour force participation and average hours worked) suggest a levelling out in the unemployment rate to just under 10% over the past two months, from a peak of 15% in May. As in the U.S., local labour market improvement seems to have stalled of late.
Source: BetaShares, ABS.
There’s little in the way of major local data this week, leaving a speech by RBA Deputy Governor Debelle on Tuesday – and specifically whether he hints at more stimulus – as the main point of interest. Today’s newspaper reports, meanwhile, suggest the upcoming Federal Budget on October 6 will contain funding for more State government infrastructure programs – provided they agree to spend the money quickly!
Have a great week!
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