There’s plenty going at the moment.
At a headline level, the S&P/ASX 300 shed 1.13% last week, while the S&P 500 was up 1.35%.
Domestic inflation data prompted a large divergence between US and Australian bond yields. US earnings season maintained a good trajectory, though supply chain issues are making themselves felt.
Commodity prices took a hit on some policy announcements in China.
The market is doing what it does best — testing the resolve and conviction of key constituents. The RBA’s response to recent moves will be important to watch in this context.
There are indications Delta waves may be peaking in recent hot spots such as Romania and Singapore. This is consistent with the experience of other countries.
The issue of vaccine availability in the world’s poorest countries is one to watch.
While almost 60% of the world’s population have had two vaccine does, parts of Africa, Eastern Europe and emerging Asia are running well below that figure.
News that Merck has agreed to license drug makers globally to produce its oral antiviral medicine Molnupiravir without royalties could be a material benefit to countries that are vaccine constrained.
There were a couple of quarterly data points out of the US last week.
US GDP grew 2% sequentially in the third quarter (seasonally adjusted), down from 6.7% growth in the previous quarter. As a result, annualised growth for 2021 is now running at 4.98% (down from 5.82%).
The more important point to watch in terms of questions over monetary policy was the Employment Cost Index, which measures total compensation to workers including salaries, wages and benefits.
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This grew at its fastest pace in more than 30 years, rising 1.3% quarter-on-quarter. It is up 3.7% from a year earlier.
This headline increase was driven by a 1.5% spike in wage growth over the quarter, versus 0.9% growth in Q2.
The question is: does this start to slow in the current quarter as labour supply rebounds? If it doesn’t, the market is likely to lose faith in the “transitory” inflation narrative and the Fed will come under pressure to start hiking rates sooner.
European Central Bank president Christine Lagarde acknowledged that inflation will be higher for even longer than first thought. But she maintained the increase will be temporary, so a policy response would be premature.
She identified higher energy prices, a global mismatch between recovering demand and supply and one-off effects of a German sales tax as three factors temporarily driving inflation.
There are reports that Chinese banks are starting to ease credit controls in response to government concerns about the potential effect of a slowing property sector on the broader economy.
Banks in some areas have accelerated issuing home loans and lowered mortgage rates. The credit environment for property developers is also improving.
Australian 10-year government bond yields rose 29bps last week to 2.09% — versus an 8bp fall in the US equivalent.
Three factors drove the recent rise in yields:
The market is aggressively pricing in both the end of yield curve control and rate hikes prior to the RBA’s previous target of 2024.
The RBA meeting on Melbourne Cup Day will be keenly watched in this regard.
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US earnings season continues to play out well — 63% of companies have so far beat earnings estimates.
That said, the market is not rushing to upgrade outlooks. Revisions to fourth-quarter and FY22 earnings and margins have been very modest.
Supply chain issues are evident. Apple said supply chain issues cost it US$6 billion in sales for the quarter, with a bigger impact coming in the current quarter.
Iron ore fell 10.9% and copper lost 2% as Beijing stepped in to control the price of coal.
China’s National Development and Reform Commission set a target price and price ceiling for domestic coal at the pit-head until May 2022.
It is also looking for downstream sale prices to be controlled, but will let local governments set their prices.
The focus is alleviating pressure on coal prices for power production. The thermal coal price has almost halved from its highs, but is still up more than 100% since the start of year.
Australian equities had a flat start last week, but sold off on bond market volatility in the last two days.
Drawing on more than 25 years of experience investing in top-performing Australian companies and a background in accounting, Jim manages our Long/Short Fund and co-manages our Imputation Fund. He is a Chartered Accountant with membership of the Australian Institute of Chartered Accountants.
Pendal Focus Australian Share Fund is managed by Crispin Murray. The fund has beaten its benchmark in 12 years of its 16-year history (after fees), across a range of market conditions. Find out more about Pendal Focus Australian Share Fund here.
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