Weekly Market Recap

Deflating the reflation trade

09/11/2020

Week in review

RBA cuts rates to 0.1%, schedules $100bn in QE
Australia retail sales -1.1% m/m for September
Australia housing finance 5.9% m/m for September

Week ahead

Australia business confidence
Australia consumer confidence
U.S. CPI inflation

Thought of the week

Uncertainty surrounding the U.S. election is likely to linger. Even if one candidate gains the required 270 electoral college votes to win, many of the state level races were close enough that court action and recounts are possible. What is clear, is that the next person to sit in the Oval Office will preside over a divided government as the Republicans hold the Senate and the Democrats the House of Representatives. A divided Congress limits the scope for large policy changes, with most significant actions coming from the President’s pen in the form of executive orders. This means the expected large scale fiscal stimulus is fading fast. The reflation trade is fading with it. This week’s chart shows market expectations for U.S. inflation using 5y5y inflation swaps as well as consumer expectations in the coming years from the New York Fed. Markets have yet to reflect a complete reversal, but higher inflation leading to steepening yield curves was a driving force behind the move in to value stocks. Something that may now take longer.

Inflation expectations will be tested
Consumer inflation expectations and market pricing of inflation

Source: Bloomberg, FactSet, Federal Reserve Bank of New York, J.P. Morgan Asset Management, all returns in local currency unless otherwise stated.
Equity price levels and returns: Levels are prices and returns represent total returns for stated period.
Bond yields and returns: Yields are yield to maturity for government bonds and yield to worst for corporate bonds. All returns represent total returns. AusBond Comp is the AusBond Composite 0+ Yr, AusBond IG is the AusBond Credit 0+ Yr both provided by Bloomberg.
Currencies: All cross rates are against the Australian dollar. An appreciation of the foreign currency against the Australian dollar would be positive and a depreciation of the foreign currency against the Australian dollar would be negative.

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