Weekly Market Update – 21 June 2021

Stronger data driving a more hawkish outlook.

Global equity markets were dominated by news last week that the Federal Reserve is starting to become more hawkish.

Having signalled in March this year that it anticipated raising interest rates in 2024, the Federal Reserve last week raised its expectations for inflation this year and signalled earlier than previously anticipated increases to the cash rate.

Whilst unanimously agreeing to leave the current cash rate unchanged and providing no indication as to when it will begin to consider tapering its bond purchasing program, the Federal Reserve’s ‘dot plot’ which signals the outlook for interest rates indicates rates will rise sooner than originally forecasted.

On the back of rising bond yields and improving economic data, there has been a growing school of thought that cash rates would need to rise faster than initially flagged in order to keep the economy from overheating.

We have been stating for some time that there is a genuine risk that rates are hiked earlier than the Fed has been indicating. Recall that the Fed has long been stating it is looking for sustained inflation and full employment.

Well, we are not there yet but we are certainly moving in the right direction.

With an improving health situation, increasing numbers of people being vaccinated and a better-than-expected economic recovery we are beginning to see inflation overshoot.

The Fed now expects headline inflation to be 3.4% this year, up from its forecast just three months ago of 2.4%, while core inflation is expected to be 3%, up from its previous forecast of 2.2%.

The Fed is on record saying that it would be willing to allow inflation to overshoot in the short term in order to stabilise at its longer-term objective. Despite calling the recent inflationary spike transitory (inflation rose to 5% in May up from 4.2% in April) it seems the Fed will not allow inflation to run hot for too long.

Improving health and economic data coupled with stimulus cheques, supply chain bottlenecks and improving commodity prices have all contributed to a rise in prices so whilst the market was somewhat surprised by the Fed’s hawkish stance, we have been cautious of this for some time.

For context, 13 out of the 18-person policy board see rates rising in 2023 compared to only 6 in previous meetings.

The more hawkish outlook triggered a sell-off in US bonds across the short end of the curve (2-year US Treasury yields climbed from 0.15% to 0.25%) whilst the longer end of the curve (10-year Treasury yields widened from 1.45% to 1.58% before tightening).

The US dollar rallied to a 6-month high compared to the AUD after the Fed’s announcement saw renewed interest amongst currency traders in the safety of the USD.  

Global equity markets rallied +1% last week whilst US equities fell -1.9% after having rallied for three previous weeks.

Unemployment rate

Australia’s unemployment rate continues to trend in the right direction with May’s unemployment rate falling by 0.4% to 5.1%.

This now places the unemployment rate at the same level it was in February 2020 pre-covid which is a remarkable turnaround having seen the unemployment rate peak at 7.5% last July.

Of course, much of this employment or unemployment was insulated by the impact of JobKeeper, however with JobKeeper subsidies now having subsided the health of the labour force appears to be recovering strongly.

We had forecast a potential increase in the unemployment rate when JobKeeper officially rolled off and remain pleasingly surprised that the labour market continues to tighten in its absence.

May’s unemployment rate was the seventh consecutive monthly fall which continues to align with the strong increases in job vacancies.

Some of the highlights from this month’s labour force data include more than 115,000 jobs being added in May whilst the underemployment rate (those who are employed but seeking additional working hours) decreased to 7.4% which is the lowest it has been since 2014.

Pleasingly, of the 115,000 jobs added, 97,500 were full-time positions meaning the risk of the underemployment rate rising is further reduced.

Disappointingly, the strength of the jobs market is not yet transpiring into rising wages with no “upside surprises” to wages growth. This is one of the key metrics the RBA wants to see increase (upwards of 3%) in order to drive inflation higher.

RBA Minutes

In contrast to the updated rhetoric from the Fed, the RBA held firm in June minutes, reiterating its expectation that interest rates will remain at record lows until 2024.

The RBA once again cited the need for inflation to be sustainably within its target band of 2-3% before considering hiking rates which is predicated on the need for a material increase in wages growth.

The RBA noted the stronger than anticipated recovery in Australia but continued to highlight that the recovery remains uneven whilst inflationary pressures in Australia were not increasing at their required levels just yet.

Importantly, there is an expectation for a pick-up in inflation with the reversal of some COVID-19 price reductions, however, the expectation is that this will be “gradual and modest”.

Given inflation is measured against its prior corresponding period in the prior year we can expect a material uplift in inflation when the data is released next month. June 2020 saw quarterly inflation contract by -1.9% so the current annualised inflation figure of +1.1% to end of March is likely to exceed 3% next month.

Should inflation overshoot the RBAs targets in September and or December we would likely see a similar pivot in the RBA rhetoric to what we have just witnessed by the Federal Reserve.

ASX Weekly Wrap

The ASX200 was stronger last week advancing +0.8% on the back of strong employment data and accommodative monetary policy commentary from the RBA.

IT stocks led the way advancing +6% ahead of consumer discretionary stocks and healthcare which both rallied +4%. 

The laggards were the miners who fell -4% despite iron ore rallying +1.6%. Commodity prices in general were weaker with copper and nickel prices faring worst down around -7% and -5% respectively. Energy stocks performed only marginally better falling -2.2% after oil prices pulled back.

A firmer US dollar makes oil (priced in US dollars) more expensive in other currencies which traditionally weighs on demand.

At a stock level buy now pay later provider Zip Co Ltd (Z1P) was the best performer on the ASX200 climbing +14% with growth stocks and momentum outperforming value last week.

Sleep apnoea medical device business ResMed (RMD) was also stronger (+13%) after one of its key competitors saw a product recall across 3.5m ventilation devices.

Wesfarmers (WES) was the best performer in the PRIME Australian Equities Portfolio last week rallying +5% despite there being no major news release whilst Westpac (WBC) continues to charge towards the $28 level which would represent an 18-month high.

Disappointingly, Northern Star Resources (NST) weighed on performance last week falling -14% following a sustained pull back in the gold price. The gold price was weaker following the Federal Reserve’s announcement that it intended to raise rates sooner than initially forecast.

We continue to view NST favourably and believe some exposure to gold is important given it provides some form of protection to portfolios when markets enter periods of volatility.  

Looking ahead

Monday 21st June 2021 – Friday 25th June 2021

  • Monday: CN Loan Prime Rate, US Chicago Fed National Activity Index (MAY)
  • Tuesday: UK Public Sector Net Borrowing (MAY)
  • Wednesday: AU Markit Manufacturing PMI (JUN), US Existing Home Sales (MAY)
  • Thursday: UK BoE Interest Rate Decision, US GDP Growth Rate (Q1), Durable Goods Orders (MAY)
  • Friday: UK Consumer Confidence (JUN), US Personal Spending (MAY)

Friday 18th June, 5pm values

 IndexChange%
All Ordinaries 7624+47+0.6%
S&P / ASX 2007369+57+0.8%
Property Trust Index1564-5-0.3%
Utilities Index6258+2+0.0%
Financials Index6674+140+2.1%
Materials Index16737-731-4.2%

Friday 18th June, closing values

 IndexChange%
U.S. S&P 5004166-81-1.9%
London’s FTSE7017-117-1.6%
Japan’s Nikkei28964+15+0.1%
Hang Seng28801-41-0.1%
China’s Shanghai3525-65-1.8%

Key dividends

Monday 21st June 2021 – Friday 25th June 2021

  • Monday: Div Ex-Date – WBCPG (WBCPG)
    Div Pay-Date – ANZPG (ANZPG), ANZPH (ANZPH), NABPE (NABPE)
  • Tuesday: Div Pay-Date – WBCPH (WBCPH), WBCPJ (WBCPJ)
  • Wednesday: Div Pay-Date – WBCPE (WBCPE)
  • Thursday: Div Ex-Date – Fisher & Paykel Healthcare (FPH)
    Div Pay-Date – AusNet Services Ltd (AST)
  • Friday: Div Pay-Date – Westpac Bank (WBC)

Contact

Mark Johnson – Chairman of Investment Committee(03) 8825 4738
Guy Silbert – Investment Manager(03) 8825 4750

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

Mark JohnsonT: (03) 8825 4738Cameron MorcherT: (03) 8825 4737
Livio Caiolfa T: (03) 8825 4748Michelle BromleyT: (03) 8825 4751
Marcus AingerT: (02) 9134 6292Nicole LewisT: (03) 8825 4734
Dylan CresswellT: (03) 8825 4707 Nicholas Miller T: (03) 8825 4722
Jarrod Rodda T: (03) 8825 4729

The information in this article contains general advice and is provided by Primestock Securities Ltd AFSL 239180. That advice has been prepared without taking your personal objectives, financial situation or needs into account. Before acting on this general advice, you should consider the appropriateness of it having regard to your personal objectives, financial situation and needs. You should obtain and read the Product Disclosure Statement (PDS) before making any decision to acquire any financial product referred to in this article. Please refer to the FSG (www.primefinancial.com.au/fsg) for contact information and information about remuneration and associations with product issuers. This information should not be relied upon as a substitute for professional advice, and we encourage you to seek specific advice from your professional adviser before making a decision on the matters discussed in this article. Information in this article is current at the date of this article, and we have no obligation to update or revise it as a result of any change in events, circumstances or conditions upon which it is based.

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