Note: Data as at the end of a holiday shortened week, Thursday 1 April.
Global equities pushed on to new record highs last week as bond yields remained relatively well contained despite ongoing strong U.S. economic news. After harsh winter weather held back sections of the economy in February, early March U.S. economic data has been blisteringly strong. The U.S. ISM manufacturing index hit a 37-year high of 64.7 last month, while the March payrolls report blew away expectations, with 916k new jobs created and the unemployment rate dropping to 6.0%. U.S. President Biden also unveiled a US$2.2 trillion infrastructure package, though with this spending staggered over several years and planned to be financed by corporate tax increases. Overnight, the U.S. ISM service sector index was also very strong.
Despite all this strength, U.S. 10-year bond yields only tested recent highs, rising 5 basis points to 1.72%. The $US also remained firm as higher U.S. yields and its relatively strong economy enticed investors. Europe especially is still struggling with COVID outbreaks and lockdowns, its vaccine rollout has been slow, and the European Central Bank has indicated a greater preparedness to boost bond buying to containing rising bond yields if need be.
Perhaps of most interest this week will be the reception in Congress of Biden’s infrastructure package – while it should be passed by the Democrat-controlled House, it may face more resistance in the Senate, especially because of the planned tax increases. Powell and Yellen both also speak publicly again this week, but are only likely to reiterate their existing dovish sentiment when given the opportunity. Similarly, minutes from recent Fed and ECB meetings are unlikely to reveal much new.
The course of bond yields will also be critical – will U.S. bond yields push higher or have they already gone as far as they can while the Fed remains very dovish? I suspect the latter, which would be rocket fuel to equities as we approach the start of a (likely strong) Q1 U.S. earnings reporting season next week. Of course, even if bond yields rose further, it may well be that the underlying strength in the U.S. economy and corporate earnings might still be enough to keep equities aloft.
Global equity trends
Despite $US strength, emerging markets outperformed last week – partly reversing a multi-week downtrend in relative performance. European equities are also holding up as value-seeking investors appear to want to ‘look through’ the region’s current troubles. For the first time in a while, growth also solidly beat value last week – while Australia’s relative performance remained lacklustre.
Even as global equities grind higher, and despite equally impressive local economic growth indicators, the Australian market has tended to grind sideways of late. So far in 2021, our market is up 3.7%, compared to 7.0% for the S&P 500 Index. The sharper move higher in local bond yields has likely not helped, as has our somewhat more moderate earnings outlook. As I indicated last week, however, I suspect pressure for an upside breakout is building.
Local economic news remained upbeat, with home building approvals surging back in February (after a January slump due to the expiration of homebuilder grants) and house prices surging even further in March. According to Core-Logic, national house prices rose 2.8% in March, with a blistering 3.7% gain in Sydney. Although retail spending dropped in February, this reflected mini lockdowns in Victoria and Western Australia, and the underlying trend likely remains very solid.
There are few local market highlights this week, with the RBA’s post-meeting statement today likely to reiterate the pledge not to touch interest rates for a long time.