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US jobs weaker as RBA leaves rates on hold

Global equity markets managed to shake off a mid-week slump following comments from US Treasury Secretary Janet Yellen that interest rates may need to rise in the medium term.

The comments were made in response to the continued growth we have seen in the US and global economies as a result of unprecedented levels of fiscal policy intervention to combat the negative impacts of COVID-19.

Despite global equity markets appearing to take fright on Tuesday at the prospect of a rise in rates, investors drove equity markets higher in the second half of the week with the MSCI World Index closing flat in AUD terms.

There were a range of factors that drove markets higher with higher energy and commodity prices a key driver.

Other key factors were strong economic and earnings data out of the US. Services data from last month showed the US recovery remains well and truly in an expansionary phase with the ISM services index expanding in April for the 11^th consecutive month.

Major components of the services data continue to show demand increasing because of progress made in vaccinations which have ultimately led to businesses reopening.

Non-farm payrolls released on Friday showed the US economy added 266,000 jobs in April which was below analyst forecasts and well below the 770,000 jobs added in March. As a result, the unemployment rate rose from 6% to 6.1%.

Lastly, commentary from the Federal Reserve further downplayed the prospect of interest rate rises and inflationary concerns. Federal Reserve vice chairman Richard Clarida last week stated that “the data is [showing] there is going to be some upward movement but that it won’t persist over a long period of time.”

Essentially the Fed is reminding investors not to be alarmed by any ‘higher’ inflation readings in the short term.

It is to be expected that short term inflation readings may spike as the economy continues to expand but the Fed’s long-term narrative has and remains the same for the time being – for inflation to be sustainably within their target objective.

The 2.6% annualised US inflation figure recorded in March was a primary example of this given its sharp increase on the preceding 11 months, however, we remain confident that the Fed is looking for a much larger sample size before considering any adjustments to rates.

This dovish commentary culminated in the S&P 500 rising +1.2% for the week.

Escalating tensions with China

Tensions between Australia and China continue to escalate.

What started as a largely innocent inquiry into the origin of coronavirus, followed by the banning of Huawei from building a 5G network has led to increased tariffs on a number of key Australian exports such as wine and beef.

China announced on Wednesday that it was indefinitely suspending key economic dialogue with Australia in what is undoubtedly a further blow for both parties.

Surprisingly, the AUD managed to shake off an intraday move that saw it fall -0.5% and ultimately rounded out the week +1.6% although much of this move in the currency can be attributed to the continued strength in the price or iron ore which climbed +10% last week and traded through US$200/tonne on Friday morning. 

RBA leave rates unchanged at 0.1%

The RBA as widely expected left rates unchanged at its meeting last week whilst announcing it would maintain its yield target on the three year bond yield of 0.1%.

In similar rhetoric to that of the Federal Reserve, the RBA said the global economic recovery was continuing and the outlook was improving.

A major driver of the improvement in the Australian economy has been the strong pickup in demand for commodities – namely iron ore which along with other ores makes up more than a quarter of Australia’s total exports in any given year.

The RBA provided further evidence of its outlook by upgrading its economic growth forecast to 4.75% in 2021 – a steep increase on its 3.5% forecast provided in February. The RBA also lifted its 2022 GDP forecast to 3%.

From an employment perspective the RBA anticipates further declines in the medium term as more individuals re-enter the workforce.

We have and continue to remain cautious of a rise in the unemployment rate in the short term as the JobKeeper benefits taper off although looking out further we do expect unemployment to normalise at around the 5% level.

Surprisingly, the RBA has forecast a 4.5% unemployment rate by the end of 2022 which would represent a remarkable improvement on the 7.5% unemployment rate registered in July last year.

The path forward for the RBA is to keep interest rates low, drive down unemployment which it believes will in turn translate to higher nominal wages and ultimately inflation which remains subdued.

Importantly the RBA indicated that rates are unlikely to rise until 2024. Our base case is that rates may move slightly earlier than this should the data remain on its current growth trajectory. Nevertheless, we remain comfortable with the RBAs approach and as such believe the outlook for equities remains positive.

ASX Weekly Wrap   

Given their constituent weights as a percentage of the ASX200 the 1H earnings releases from ANZ, NAB and WBC were always going to be significant drivers of the overall market performance.

Combined these three banks make up 12% of the wider market.

Westpac (WBC) was the best performing bank of the three much to our delight given it is the equal biggest portfolio weight in the Prime Australian Growth SMA.

WBC reported a better than expected 1H cash profit of $3.5b and importantly for investors reinstated its interim dividend at 58c per share having suspended the interim dividend last year due to the pandemic.

WBC revenues advanced a modest +1% to $10.7b whilst its tier 1 capital climbed 153bps to 12.3%. Importantly, we witnessed strong growth in mortgages with the Australian mortgage book increasing by $2.6b in the 1H whilst balance sheet strength was another positive.

In a further boost for investors CEO Peter King announced an aggressive cost out strategy which aims to strip out nearly 40% of its current cost base in the next four years, targeting a 2024 cost base of $8b compared with $12.7b in the last fiscal year.

WBC shares rose +4.4% last week.

Meanwhile, ANZ and NAB reported cash profits of $2.98b and $3.34b respectively with ANZ slightly lagging on analyst forecasts and NAB modestly beating expectations.

The improvement in underlying economic conditions enabled both banks to increase their interim dividends with NAB doubling its previous dividend at 60c.

Importantly, whilst the backdrop is improving and so too momentum, the recovery is uneven with all banks citing the ongoing impact to the travel and hospitality industries.

ANZ shares fell -3.4% whilst NAB shares rallied +0.5% last week.

The ASX200 outperformed its peers last week rising +0.8%.

Miners were the best performing sector rising +4% ahead of energy stocks which climbed +1.8% on the back of rising commodity prices and oil which climbed around +2%

IT (-11%) weighed on attribution as we continue to see investors book profits in stocks that are sensitive to increases in interest rates and at risk from rising bond yields. 

Best performing stocks in the Prime Australian Growth SMA last week were BHP, CBA and WBC which all rallied around +5% whilst Ramsay Healthcare (RHC) lagged falling -6% as recovery in surgical volumes continues to be impacted by snap lockdowns in various states.

Looking ahead

Monday 10th May 2021 – Friday 14th May 2021

• Monday: AU NAB Business Confidence (APR), Retail Sales (MAR)
• Tuesday: AU New Home Sales (APR), FEDERAL BUDGET, CN Inflation Rate (APR), M2 Money Supply (APR)
• Wednesday: AU Westpac Consumer Confidence (MAY), Building Permits (MAR), UK GDP (MAR), US Inflation Rate (APR)
• Thursday: AU Q1 Wage Price Index, US Weekly Jobless Claims
• Friday: US Retail Sales (APR)

Friday 7th May, 5pm values

Friday 7th May, closing values

Key dividends

Monday 10th May 2021 – Friday 14th May 2021

• Monday: Div Ex-Date – ANZ Bank (ANZ), Janus Henderson (JHG), Seek Limited (SEK)
  Div Pay-Date – Metrics Master Income Trust (MXT), Metrics Opportunities Trust (MOT)
• Tuesday: Div Pay-Date – NB Global Corporate Income Trust (NBI)  
• Wednesday: Div Ex-Date – ResMed (RMD)  
• Thursday: Div Ex-Date – National Australia Bank (NAB), Westpac Bank (WBC)
• Friday: Div Pay-Date – Charter Hall long Wale REIT (CLW), MFF Capital Investments Limited (MFF)

Contact

If you would like to discuss your situation, please speak to your adviser or email clientservices@primefinancial.com.au

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