Weekly Market Recap

Fiscal splurge on the way

11/01/2021

Week in review

Australian building approvals up 2.6% m/m
China Caixin services PMI slips to 56.3
U.S. ISM manufacturing index rose to 60.7

Week ahead

Australia retail sales
Australia housing finance
U.S. CPI inflation

Thought of the week

The Democratic party in the U.S. will soon control the House, Senate and White House, paving the way for greater legislative and regulatory change. Crucially for markets, this increases the probability of a larger fiscal stimulus package once the new administration takes over. Bond markets were quick to reflect this in rising bond yields. As this week’s chart shows the change in U.S. 10-year bond yields is being driven by rising inflation expectations. Based on the size of any stimulus package this, along with the general improvement in the U.S. economy, should continue to push bond yields higher over 2021. Higher inflation is one of the risks to monitor for asset allocators this year. Rising bond yields could bring the relative attractiveness of equities into focus and elicit a ‘less loose’ response from the U.S. Federal Reserve, reviving fears of a 2013 style ‘taper tantrum’ in markets. Our base case is that inflation will move modestly higher this year, but that the Fed will be very patient in shifting policy even with more fiscal stimulus in the works.

Inflation expectation and bond yields
Change in U.S. 10-year treasury yield since Jan 2020, bps

Source: FactSet, U.S. Federal Reserve, 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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