Weekly Market Recap
Maximum capacity
10/05/2021
Week in review
- RBA upgrades economic outlook to 4.5% growth in 2021
- Strong growth in Australian housing finance 5.5% m/m
- Australian building approvals surge 17.4% m/m
Week ahead
- Australia business and consumer confidence
- Australia 2021/22 Federal Budget
- U.S. CPI inflation
Thought of the week
Investor risk appetite often responds to changes in economic momentum. This places special emphasis on surveys such as the ISM as a signal of economic strength. Recently the U.S. ISM for manufacturing reached its highest level since the early 1980s. Such lofty peaks don’t last long and there is a growing concern that a rollover in the ISM may coincide with a more cautious investor and lower returns in U.S. equity markets. However, the ISM may be overstating the current strength in the U.S. manufacturing sector given the still low level of capacity utilisation and the disconnect between the two metrics (see chart). Even if the ISM starts to decline there’s a good chance that capacity utilisation continues to rise and corporate profits should rise with it, helping to create a floor to equity prices. Moreover, it was the services sector that bore the brunt of the pandemic and that sector will continue to accelerate with reopening of the U.S. economy.
Lots of spare manufacturing capacity in the U.S.