Weekly market recap
Global equities staged a nice comeback last week, reflecting short-term oversold conditions, signs U.S. inflation is past its worst, and – most importantly – desperate market hopes that the Fed could pause its aggressive rate hike plans after two 50 point hikes in June and July.
As I’ve noted in recent weeks, moreover, bond yields continued to edge lower last week – this time even with the rebound in equity risk sentiment. Meanwhile, Oil prices are not following the disinflation script and pushed higher for the fifth week in a row. The $US weakened and the $A rebounded, with growth stocks marginally beating value.
Such is the depth of recent market pessimism that equities rebounded last week even while the Fed acknowledged in the minutes to its recent meeting that it would likely hike rates by a further 0.5% at both the June and July meetings (i.e. to 1.75 – 2.0%). The minutes also indicated its was prepared to push rates to a restrictive level (i.e. more than 2 to 2.5%) if needed. But what got markets excited was the comment that after July the Fed could then be “well positioned later this year to assess the effects of policy firming”. Fed member Bostic set the ball rolling last Monday, suggesting the Fed could pause its rate hikes in September after back-to-back large increases from May to July.
Of course, all this depends on the course of U.S. inflation. If inflation moderates quickly, even a rate hike in July could come under question and the risk of a Fed-induced recession any time soon would recede. If not, mayhem lies ahead. In this regard, Friday’s core consumption deflator was at best mildly encouraging, with core prices rising 0.3% – or broadly in line with the increases over the previous two months. Note this is still an annualised rate of 4%. As seen in the chart below, the trend in monthly core inflation did peak in mid-2021, though the decline has been fairly gradual to date, and far from smooth. While some goods-generated inflation has moderated – such as for used cars – service sector inflation has lifted, reflecting pent-up demand as the economy re-opens from COVID.
In Australia, market reaction to the new Labor Government was fairly calm, while economic data highlighted that while flood and lingering Omicron restrictions disrupted construction in the March quarter, retail spending remained very firm in April.
What to watch: the week ahead
May U.S. payrolls will be the data highlight this week, with a solid 320k gain in jobs and decline in the unemployment rate from 3.6% to 3.5% expected. Annual growth in average hourly earnings will be the major risk, though the market expects growth will slow from 5.5% to a (still uncomfortably high) 5.2%.
Also more important than usual will be comments from an array of Fed speakers. In particular, markets will be looking for further confirmation of the potential for a pause in rate hikes by September. Whether the Fed is happy the market has latched onto this so quickly (causing equities to rally and financial conditions to ease) remains to be seen.
In Australia, Q1 GDP will be the highlight on Wednesday. Reflecting weakness in last week’s construction and business investment data, a fairly weak (and potentially even negative) outcome is now possible, though I suspect markets and the RBA will quickly ‘look through’ the result to the extent the weakness reflected disruptions caused by Omicron and Queensland/NSW flooding. Fuelled by cashed-up consumers and low unemployment, the outlook for the economy over the remainder of the year remains fairly bright.