The Week in Review
- The key development last week was market’s “sell the fact” reaction to the Fed rate hike.
- With the Fed signalling an earlier than market expected March rate hike in recent weeks, traders seemed to be anticipating a more hawkish Fed statement and possible lift in the number of rate hikes the Fed expects to make this year from 3 to 4. As it turned out, the Fed was not more hawkish and stuck with its (current) plans of only two further rate hikes this year. Bonds yields and the $US dollar dropped, and equities rejoiced.
- Also helping weaken the $US – at least against the Euro – was failure of the hard right to garner strong support in the Dutch elections and further hints from the European Central Bank (from the Austrian CB Governor!) of a possible rate hike later this year. Even the minutes to the Bank of England policy meeting revealed a few more members itching to raise rates, given the UK economy is (so far at least) still holding up and inflation is on the rise due to the slump in the Pound. China’s “data dump” showed the economy’s industrial side still ticking over nicely.
- The weaker $US gave gold and gold stocks a lift, while the drop in bond yields hurt global banks.
- Closer to home, economic data was generally on the soft side – with the unemployment rate lifting to 5.9% in February (from 5.7%), and the NAB index of business conditions more than reversing January’s surprise surge. Despite this, the $A firmed to the top-end of its range due to $US weakness, while the drop in local bonds yields supported listed property. A rebound in iron ore prices also helped resource stocks, while banks – like their global counterparts – dropped back.
- There is little on the global data front this week, with focus therefore likely to be on the raft of Fed officials due to speak – including Janet Yellen on Thursday.
- Locally, the official ABS measure of house prices is due on Tuesday, as is RBA minutes from the February policy meeting.
- While the global stock market rally looks over extended, events that could justify at least a cleansing pullback remain scant – leaving stocks to meander near record highs. Indeed, with US wage growth still relatively benign, the Fed can still afford a cautious attitude with regard to raising rates, which has (so far at least) limited the upside in bond yields and the $US – despite ongoing talk of Trump stimulus.
- Adding to the mix in recent weeks is growing chatter of higher rates in Europe – but while this could limit $US upside to a degree, it only adds to the case for higher global bond yields eventually.
- Locally, last week’s soft data further supports the view the RBA is not about to contemplate higher rates anytime soon. This is supported by the fact local banks have already started to raise investor lending rates on their own, and APRA is also likely drawing up plans to further tighten “macro-prudential” controls. All up, this suggests the $A should struggle to break much higher, and at best appears to remain range bound for the foreseeable future.
Have a great week!