Weekly Market Recap
How high is too high?
01/03/2021
Week in review
- Australia wage index rose 1.4% y/y
- Australia capital expenditure 4Q20 rose 3% q/q
- U.S. initial jobless claims rose 720,000
Week ahead
- RBA policy rate meeting
- Australia real GDP 4Q 2020
- U.S. labour market report
Thought of the week
How high is too high? The only question that seems to matter for asset allocation at present is whether the rally in bond yields will upset the longer term positive view on equity markets, reviving memories of 2013’s taper tantrum. A lot has changed since 2013. Quantitative easing is a mainstay of monetary policy, cash rates are not going anywhere for some time and governments are still spending. But importantly nominal yields are rising on the basis of improving economic growth and inflation outcomes. This is positive for equities, particularly cyclical sectors. The chart below shows that in 2013, it was real yields that were rising and lifting the nominal yield. Breakeven yields, or inflation expectations didn’t really move. Today it’s almost the reverse, inflation expectations are lifting nominal yields and real yields haven’t risen nearly as much. A further rise in bond yields caused by rising real yields would have greater consequences for equities than what we are seeing today.
What’s driving yields higher
10 year U.S. yields