RECENT trends persisted last week, although news flow was relatively quiet.
US and Australian 10-year government bond yields rose 15bps for the week, prompting further rotation from long-duration growth plays.
Commodity prices continued their climb. Brent crude oil rose 3.9% and copper 2.1%. There was some relief for iron ore, which gained 9.7% after recent plunges.
Gas and electricity prices continue to surge in the US, the EU and Asia. They are at record levels in the UK and EU, while volumes in storage are materially below historical averages. Moscow stepped in late last week, saying it was prepared to take steps to calm energy markets.
US payrolls data on Friday asked more questions than it answered in terms of the pace of tapering and rate rises.
The S&P/ASX 300 gained 1.86% and the S&P 500 0.83%.
New case numbers continue to improve in US and most places around the world.
Singapore is an outlier, walking back some re-opening measures after a material resurgence in cases.
Severity of infection is proving far lower in vaccinated people. About 98% of recent Covid cases experienced either no symptoms — or only mild effects — in the 28 days before becoming positive.
Pfizer has asked the FDA to approve the vaccine for 5-to-11-year-olds. The FDA took about 30 days to approve the Pfizer vaccine for 12-to-15-year-olds.
Israel last week became the first country to effectively make vaccine boosters mandatory.
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Six months after a second vaccine dose, Israelis now require a third dose to retain a fully immunised “green pass” allowing entry into restaurants, gyms and other venues.
Over the past two months Israel has provided boosters to 39% of its population, significantly ahead of all other countries.
The case count there has been pushed down by 54% over the past two weeks. Health outcomes appear materially better than for those with just two doses.
Friday’s US employment had been eagerly awaited for some read-through to Fed policy. But there was not enough clarity to read one way or the other.
There were expectations that September non-farm payrolls would see a material rebound given a reduction in unemployment benefits, the return to school after summer break and continued vaccinations.
But the headline came in weaker than expected with 194,000 jobs added versus consensus expectations of 500,000.
That said, the previous two months were revised up by 169,000 jobs. There was also a distortion from government jobs, which have been volatile and fell by 123,000.
Private payrolls were up 317,000 month-on-month. Hiring in tech-related service sectors remained strong. Leisure and hospitality was less buoyant (up 74,000) reflecting difficulties in recruitment.
The question is whether this meets the definition of “decent” economic momentum Powell flagged in September to keep tapering on track.
A key point of debate remains around the extent to which displaced workers are retiring or re-training rather than returning to old jobs.
Earlier explanations for lack of labour — such as the effect of benefits or the summer break — seem to be falling by the wayside.
The jobless rate fell to 4.76%, down from 5.2%. The modest pace of hiring will be enough to push the US towards full employment, since the labour force participation rate for prime-aged workers fell.
Average hourly earnings rose 0.62% month-on-month, ahead of a 0.4% expectation. The means the question of the Fed needing to tighten sooner rather than later remains live, although a mix shift of more growth in lower-paid hospitality jobs may see wage growth ease going forward.
The RBA left policy settings unchanged, as expected, including the cash rate target, the 2024 yield target and the pace of Quantitative Easing purchases.
The RBA maintained its positive medium-term view while noting ongoing disruptions from lockdowns in Sydney and Melbourne.
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The RBNZ lifted its official cash rate by 25bp to 0.5%, also in line with expectations. It maintained a moderate, hawkish bias, noting that “further removal of monetary policy stimulus is expected over time”.
APRA announced an increase in the minimum serviceability buffer of 0.5% (from 2.5% to 3%) The market had generally expected APRA would wait until early 2022. Clearly regulators appear more concerned about risks in the housing market than anticipated.
The message is that while banks are “well capitalised and lending standards have generally remained sound”, action is being taken to offset the “heightened risks for the financial system from lending at very high levels of indebtedness”.
Basically regulators are worried about households taking on too much debt relative to incomes at a time of record low rates. The increase in serviceability buffers will be effective from the end October.
Elsewhere, business surveys and consumer sentiment survey results have fallen as a result of lockdowns, but importantly they remain high compared to pre-Covid levels.
Bond yields rose materially last week. Commodity prices also rose which, in combination, underpinned a continued rotation away from growth.
A rebound in iron ore provided some much-needed respite for the major miners.
Energy (+4.49%) and Financials (+3.27%) did best, while Health Care (-0.26%) and Technology (+0.25%) lagged.
Worley (WOR, +9.8%), AGL (+7.9%), Woodside (WPL, +6.7%), Origin (ORG, +6.5%), Santos (STO, +6.0%) and Oil Search (OSH, +5.37%) all had a strong week as energy prices continued to climb. The oil price benefited from news that the US are unlikely to tap strategic fuel reserves.
Higher bond yields supported the financials, particularly QBE (QBE, +8.1%), IAG (IAG, +6.8%) and Challenger (CGF, +5.4%).
Insurers had good news with a federal court ruling that was largely in their favour in the second test case for Business Interruption (BI) related claims from Covid.
The outcome was seen as more commercial-friendly then consumer-friendly, which differs from many judgements globally. An appeal is set down for November 21 with further clarity expected on December 21.
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.
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