US stocks hit a new high last week, helped by strong earnings and good economic data. The rise was tempered, however, as Fed Chairman Powell signaled some concern that high inflation would last longer. For the week, US stocks were up 1.6%, Eurozone stocks were up 0.4%, and Chinese stocks were up 0.6%, but Japanese stocks were down 0.9%.
The positive US advance saw Australian stocks rise 0.7%, helped by optimism that the lockdown reopened. Bond yields resumed their ascent, with 10-year bond yields in the US, Germany and Australia hitting near their early-year highs. Oil prices have risen, but the prices of metals and iron ore have fallen. The A $ rose and briefly rose above US $ 0.75.
US worried about inflation
Fed Chairman Powell is more concerned about inflation, but the Fed, ECB and RBA are still expected to delay removing stimulus measures against the BoE, BoC and RBNZ. Inflation risks remained the focus of attention last week with higher readings in New Zealand, the UK and Canada adding to expectations of either the removal of monetary stimulus or further tightening of their policies. central banks. This followed some very hawkish comments from Bank of England Governor Bailey. All of this has raised bond yields and expectations of a faster withdrawal of monetary stimulus.
However, the Fed and the ECB are expected to take a little longer to remove the stimulus measures: Fed Chairman Powell has signaled more concerns about keeping inflation higher for longer and confirmed that the cut will likely begin the month next, but also said now was not the time to raise rates as it is always the most likely that inflation will come down as supply constraints ease; ECB officials remain conciliatory and the departure of Bundesbank President Weidmann could strengthen the conciliatory attitude of the ECB; both experienced a long period of underinflation before the pandemic; and all fear that a premature tightening could lead to a return to low inflation once pandemic inflation distortions subside. We expect the Fed to start cutting back next month, but rate hikes are likely in a year or so and for the ECB they are unlikely until 2023.
Low inflation in Australia
At least until the June quarter in Australia, inflation was lower than in the United States and New Zealand. Inflation expectations have been more contained, while some sectors have seen wage inflation rise, for the most part it seems to remain low and the RBA minutes (although dated) have remained accommodating on rates. That said, the supply constraints leading to higher inflation appear to stay with us for some time to come and Australia’s reopening appears to be proceeding faster than expected, which could advance the next step in the unwinding process. the extraordinary monetary stimulus linked to the pandemic.
After starting tapering, the RBA is probably approaching the end of Yield Curve Control, i.e. the 0.1% target for the April 2024 government bond, but the first hike rate is still unlikely before 2023. In any case, the rise in bond yields should lead to further increases in fixed mortgage rates (which the big banks have just increased from 0.1% to 0.35%). will be another factor that will help slow the rise in house prices next year.
While the risk of a correction in equities remains – with China’s inflation and slowing problems likely to linger for some time – they appear to be climbing the proverbial wall of worry. US stocks have hit new highs and the relative strength of cyclical coins like copper, financials, credit spreads and the US dollar are a positive sign that the world is not about to fall back into recession and bodes well for an uptrend in equities. over the next 6 to 12 months. And the coming period is normally positive for stocks in the Santa Claus rally.
Adele is back
When I first heard Adele’s Rolling In The Deep, I thought she was amazing. And I think Skyfall is the best Bond song of recent years (although Bond songs these days struggle to match John Barry’s music from previous Bond films and of course Live And Let Die… there again, my generation could tell!). After six years, Adele released a new album, whose debut single, Easy on Me, broke single-day streaming records on Spotify. So “do yourself a favor” and check it out. Cassettes should come back as there is one in the video at 1.32 with a nice crackle suggesting it was taped to vinyl!
New coronavirus cases continue to decline in most areas, although the UK and Europe tend to increase.
The key to watch in the UK and Europe will be hospitalizations and deaths. The UK (and Europe) could start to see the dreaded increase in new cases after reopening, the start of cooler weather, a stalled vaccination program to 68% of the UK population, a decreasing efficacy against new infections for people vaccinated earlier this year and a slow start of boosters, and there is a new Delta variant (AY.4.2) although it is not clear whether it poses a greater risk or not .
The key to watch will be whether the vaccines are successful in keeping hospitalizations manageable and deaths low as they have been since mid-year. The United States faces a similar risk. So far all is well though. UK deaths continue to be below 20% of the level suggested by the December / January wave.
- 38% of people in the world are now fully vaccinated.
A risk remains that poor countries are poorly vaccinated, which increases the risk of mutations. Singapore may be the gold standard with 83% fully vaccinated and is speeding up booster shots quickly. After reopening, it continues to see more than 3,000 new cases per day – but it appears to have stabilized thanks to the return of some restrictions and booster shots can help, as is the case in Israel.
Australia continues to vaccinate around 1% of the population per day, with 74% of the entire Australian population now having received at least one dose and 60% with two doses, which is now higher in the United States. ACT, NSW and Victoria continue to lead the charge aided by making vaccination a condition for participating in the initial recovery (and possibly even indefinitely in Victoria). Taking into account current trends and the average difference between 1st and 2sd doses, the following graph and table indicate approximately when key vaccine targets will be achieved.
NSW and ACT have surpassed the target of 80% double-vaxing adults, and Victoria will do so next week. Tasmania has reached the 70% double vax target and more states are expected to do so in mid-November. According to current trends, Australia will have an average of 90% of the adult population fully vaccinated by the end of November. The booster injections are expected to be available from mid-November to avoid the decline in vaccine effectiveness, with Pfizer trials showing that their booster restores efficacy against infection to 95%.
Reflecting the achievement of immunization targets, reopening continues in NSW, ACT and Victoria, and Queensland has released a plan to reopen its interior border with key milestones contingent on achieving the goals of vaccination. On the contrary, the reopening is proceeding faster than expected so far, reflecting the changes made by the new NSW Premier and the faster achievement of vaccine targets.
Vaccination helps reduce serious illness. Coronavirus case data for New South Wales shows that fully vaccinated people account for a low proportion of cases (6%), hospitalizations and deaths unlike their majority share of the population and as in the UK United, the level of death is below 20% of the level predicted based on last year’s coronavirus wave.
The main risk in Australia remains a resurgence of new cases in New South Wales, ACT and Victoria after the reopening – as the UK, Israel and now Singapore have seen – which threatens to overwhelm the hospital system in need. a certain reversal in the reopening to slow down new cases as seen in Singapore. This could especially be a risk in the coming months if the vaccine’s effectiveness for people vaccinated earlier this year begins to wane before the booster shots are fully deployed.
The speed of reopening and the marked narrowing of the dose gap (which may reduce the effectiveness of the vaccine) may have added to this risk. The key to watch out for will be new cases, but especially hospitalizations and deaths – to know if the hospital system is coping. So far, everything has been fine – with hospitalizations and deaths remaining moderate compared to new cases compared to previous waves – but it is only the first days of the reopening process. Reopening internal borders in other Australian states that have not been locked can also be bumpy as they have a lower level of natural immunity and a high number of cases could impact trust as they are less there. regulars.
New Zealand’s shift to a traffic light system to guide the transition to living with covid once 90% of people over 12 are vaccinated makes sense – as it targets a higher level of immunization that better helps reduce the risk of the coronavirus spreading and provides guidance and greater certainty as to the level of restrictions that will be imposed based on the strain on the hospital system from new cases.
Economic activity trackers
Our Australian Economic Activity Tracker has risen sharply over the past week as the reopening accelerates. All components are on the rise, but particularly restaurant reservations, transactions and mobility. It is likely to increase as the reopening continues.
However, given the number of coronaviruses present in the community, which may lead to some caution on the part of consumers and businesses and the risk of a setback, this recovery may still prove to be more gradual in the months to come than it was. the case after last year’s shutdowns, but that’s likely to accelerate next year as we learn to live with the covid.
Our US and European economic activity indicators have changed little, but Europe remains stronger than the United States.