Wind of change
28/02/2022
The release of the closely watched PMI business surveys last week were a bright spot in what has been a dark market mood. The lift in services activity in February suggests that the lingering impact of Omicron is very much fading away in developed markets. This validates the view of a robust economy and rationale of central banks to move on with raising interest rates. What these surveys may not yet capture is the fallout from the situation in Ukraine. Economists are trying to assess the impact of higher oil prices on the outlook for the economy. A surge in oil prices would represent a significant adverse supply shock, dampening the growth outlook and pushing headline rates of inflation higher. To some extent it’s the pace of change which matters rather than the final level. Between 2011 and 2014 the price of oil hovered around $100 for an extended period of time without causing too much economic fallout. This is because markets and the economy can adjust to slower moving factors without too much disruption. Sentiment indicators will need to be closely watched to see whether oil or omicron wins out.
Developed market PMI output indices
Source: Markit, J.P. Morgan Asset Management. Data reflect most recently available as of 02/02/22.
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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99 problems, earnings ain’t one : Rising equity valuations means investors should focus on market were earnings quality is highest and companies can defend profit margins.
Gold on the ceiling: The rally in the gold price has defied the increase in real rates, but a rising USD may take some of the lustre off the strong performance.
More people, less problems: A boost to the U.S. labour supply creating a softer and wider landing for the U.S. economy.
A hike, a hold and a hesitation: A big week for central banks in Japan, the U.S. and Australia with three very different outcomes.
Taxing times: Political uncertainty may create near term market uncertainty, but the economic cycle matters more for long-term returns.
Buffering: The squeeze on Australian household finances should start to ease, while a rise in the savings rate creates more of buffer to shocks
Hold my sake : Japanese equities break through a record higher, are market expectations dislocated from economic reality?
Smoke and mirrors : The Australian unemployment rate is the highest in two years driven by seasonality rather than real weakness.
Simply the best, for now : A quality bias in equities means leaning into U.S. large caps and diversifying exposure beyond the magnificent seven.
Singing the same ol’ tune : Falling inflation in Australia will not change the RBA’s tune this week, but lower rates in the long over hope to bond investors.
Never going to give you up : Central banks are adamant that rates will not move until inflation is lower, a message likely to be reinforced by the U.S. Fed this week.
Pushing Back : Expectations barely budging despite Fed speakers’ pushbacks
Slowly but surely : Is the fight against inflation over?
New year, old risks: Could supply chains and risings goods prices upset the inflation optimism?
Who let the doves out: Markets have rapidly priced looser monetary policy in 2024, but have they gone too far?
All the small things: The widening valuation gap between large and small cap stocks is gaining investor attention, but they are not without risk
Hold on for one more day: Weaker monthly inflation figure in Australia reinforces an RBA on hold.
Part-time lover: Softer demand for labour and rising supply should lead to a steady rise in the unemployment rate.
Part-time lover: Softer demand for labour and rising supply should lead to a steady rise in the unemployment rate.
Bad news is good news until it isn’t : The decline in bond yields could unwind the Fed’s reliance on tighter financial conditions unwinding positive sentiment in markets
YCC yeah you know me : The Bank of Japan continues to go its own way taking steps to move away from ultra-loose policies and yield curve control
Our house : Higher interest rates in the U.S. are staring to have an impact, just look at the housing market.
A November hike : The low unemployment rate and inflation being too slow to fall is setting the RBA for a November rate hike
Work smarter not harder : Higher yields have tightening financial conditions doing the Fed’s job for them, but will it last.
Under pressure : Market focus will soon rotation from macro to micro as the U.S. earnings season gets underway.
Under pressure : Market focus will soon rotation from macro to micro as the U.S. earnings season gets underway.
Higher for even longer? : Markets were hoping for rate cuts in 2024, but central banks are signalling higher for longer.
Throwing a lifeline : China’s government faces the tough job of balancing between preventing a moral hazard and defusing systematic risks when it comes to the local government debt problem.
Working hard, or hardly working: Australia’s economy is chugging along, but productivity needs to rise to improve the growth outlook.
JOLT out of the blue: A less imbalanced U.S. labour market diminishes the risk of further Fed rate hikes
Sliding into a September pause: Sliding economic data outlast week suggest central banks will pause on rate hikes come September
The Aussie dollar decline: There is more than on force weighing on the Aussie dollar, but they won’t all last
The inflation trend is your friend: U.S. inflation continues to trend down, but a resilient economy may slow the downward trend
What matters more, lending or financial conditions? : Lending conditions continue to tighten at a time financial conditions have loosened. This may explain some of the resilience in the U.S. economy.
China is getting ready to spend : China is finally taking action to stabilise a fragile economy, but will it matter?
The price is not yet right : Softer inflation reports globally suggest disinflation pressures are building. Will Australia follow suit this week?
Car trouble : U.S. ‘super-core’ inflation isn’t being pushed higher by wages, but car prices.
Better than all the rest : The concentration of the rally in U.S. equities creates both risk and opportunity.
Recession was the case that they gave me : Better economic data from the U.S. doesn’t fade the recession risk, rather pushes it into the future
Debt servicing squeeze : Households are both payers and earners of interest, unfortunately the balance is tilted towards payments and squeezing consumption
Fed enters the triple jump : After the May hop, the June skip, the Fed is poised for a jump in rates in the coming meetings.
I quit : The U.S. labour market is looser, but only if you look at the right numbers
I quit : The U.S. labour market is looser, but only if you look at the right numbers
Bending not breaking (yet) : Economic data paints a picture of a resilient economy, but how far can it bend?
Tide’s is turning on employment : The surprise jump in the unemployment rate maybe a signal of things to come
SLOOS you lose : Evidence of further tightening in lending conditions part of a losing formula for the U.S. economy
Are they done? : That may have been the last hike from the U.S. Fed and RBA.
Shifting sands of Australian inflation : Australian inflation has peaked but the path downward will still be gradual
What does the 1Q23 economic data mean for China? : This week’s CHART and THOUGHT look at China’s 1Q23 economic data and implications on China’s upcoming earnings.
No loosening in the labour market : Australia’s labour market is very tight, but leading indicators suggest softening ahead.
What’s my rate again?: Markets are debating whether the Fed will push the policy rate over 5%, but the actually policy rate may already be over 6%.
Lending standards and the Fed: Credit is oxygen to the economy, restrict it and growth will suffocate
Sticky shelter costs: Slow moving property market means U.S. will not hit inflation target this year
Blowing through the buffer: The savings rate has fallen to pre-pandemic levels increasing the pressure on household spending habits.
Blowing through the buffer: The savings rate has fallen to pre-pandemic levels increasing the pressure on household spending habits.
Good news is bad news : A resilient economy comes at a cost, higher rates
Not bothered : Australian business conditions ticked higher in January, but will it last?
Take me higher : Rates are going higher but just how much is still up for debate.
Looking for the bright side : Equities have a romantic view of the outlook but may not love corporate earnings.
Hard vs soft landing : The rally in equities suggests the market is discounting the chance of a U.S. recession. Is this time really different?
Sticky vs flexible inflation : Falling inflation is helping markets to rally, but the sticky parts of the inflation basket are yet to move
Margin call : How far will companies go to protect margins?
Higher ground : Waiting on the U.S. Fed to signal where they think rates will go in 2023.
Second hand news : The monthly inflation series suggests inflation is peaking, but this won’t change the outlook for the RBA this week.
Recession is coming: The recession is coming, but not everywhere and not all at once.
Takin’ care of business : Inflation may be starting to roll-over but unemployment rates really yet to rise, central banks have more to do
My own two hands : The size of U.S. rate hikes may be about to get smaller, but the ending policy rate may be higher.
My own two hands : The size of U.S. rate hikes may be about to get smaller, but the ending policy rate may be higher.
Under pressure : Domestic inflation pressures rose sharply in the third quarter, but it’s a case of slower not lower for the RBA.
Hey now, you’re an all-star : Restrained supply may be one reason credit spreads are not wider, but this won’t last.
Ready for the fall : Earnings expectations are yet to catch up to the market, this may change in the current U.S. earnings season
sLOWEly does it : Pivot and pivot again, a smaller than expected RBA rate hike last week raised markets hopes for the peak in hawkish central banks.
Times like these : The aggressive repricing of rates is tightening financial conditions much faster than prior rate hike cycles
Fasten your seatbelt for a bumpy ride: Looking at the Fed’s recent rate hike and the current economic outlook.
I’ve got the power : Fiscal support is picking up in Europe as governments try to keep the lights on
Nothing comes close : How close is close enough for central banks when it comes to getting inflation back to target
The heat is on : A big week for central banks as the market grapples with higher for longer when it comes to interest rates
That don’t impress me much : The U.S. may avoid recession, but don’t expect a lot of growth from the world’s largest economy.
Castles made of sand : Chinese stocks have been left out of the bear market rally, when will sentiment turn for the better?
Castles made of sand : Chinese stocks have been left out of the bear market rally, when will sentiment turn for the better?
Are you gonna go my way : Up or down? Business surveys are providing conflicting messages on the health of the U.S. economy.
Is this it? : Growth is taking over from inflation has driving force for yields. Is this it for higher yields or just a pause?
Some don’t like it hot : Inflation continues to run ahead of forecasts, keeping pressure on central banks to deliver outsized rate hikes.
Are we there yet?: U.S. inflation is rising, but bond yields are falling. Do recession risks mean that we’ve passed the peak in yields?
What to expect when you’re expecting : Market based measures of inflation expectations are softening, but may not be enough for rate setters
When the spending stops : Consumers not confident, but still spending
Not yet the house of pain: Housing activity in the U.S. is slowing but lack of inventory will support prices and household wealth.
Rumour has it : The leaked guidance by the U.S. Federal Reserve pushed up rate expectations, and suggests a more aggressive pace of rate hikes to come.
A show of wealth : A cooling housing market and rising rates may lead to many Australian feeling less wealthy.
Stuttering not stopping : Economic data out last week points to a slide in activity in developed economies rather than a stall.
Don’t step on the crack : Markets are pricing for a recession which may not come, but some cracks are starting to appear in the riskier parts of the credit market.
Rocky mountain high : U.S. inflation is still running hot, rocking markets last week, but we may be passing the peak in both inflation and central bank hawkishness.
Higher ground : Central banks are acting to catch up to the inflation outlook and willing to front load rate hikes, but this may not lead to a soft landing for the economy.
The heat is on : The strong inflation reading for Australia should be enough to spur the RBA into action this week, but only slowly.
Off target : Inflation pressures are building more slowly across Asia, and some central banks are responding, but the normalisation path will be relatively gradual.
Tired of waiting for you : The RBA has signaled that higher rates are coming, but the market remains far ahead of what may be delivered.
Dealing with distortion : Rising yields hide the very negative real yields underneath as the distortion in bond markets grows
Fighting back with fiscal : Europe’s probability of recession is predicated by governments willingness to spend.
False start for recession : Flattening yield curves and falling sentiment gaps maybe signaling a false start to a recession.
Uneven impact of rising commodity prices: Rising commodity prices are a headwind for some, and a tailwind for others.
The impact of Russian default on global banking system should have limited effects on the global financial system.
Under pressure: Core rates of inflation continue to rise in many developed markets, will central banks come out fighting with big rate hikes?
The de-rating of equities in the face of tighter monetary policy is weighing on markets, but valuations should find a footing once this recalibration process is complete.
Not as bad as you think.
Turn it around: This week’s thought and chart look at the improving sentiment in the manufacturing sector and why the momentum in the economy shouldn’t be underestimated.
Diversification does not guarantee positive returns or eliminate risk of loss.
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