- Despite some key economies reopening, the Delta variant of COVID 19 remains a real risk Inflationary fears are still with us but bond yields have fallen significantly suggesting it is not a problem
- The US and Chinese economies experienced solid rebound growth
- Monetary and government policies remain accommodative and policy remains accommodative
The Big Picture
Around half of the Australian population was in some sort of lockdown in late July as new COVID infections of the Delta variant surged. This round of infections and lockdowns seems to have started in Sydney with one errant Sydney airport-limo driver not doing the right thing.
Sydney has been in lockdown for over a month and the NSW Premier is telling us it is going to get worse before it gets better. It looks like Sydney will be in lockdown until Christmas.
We know from last year that it’s hard to avoid a recession if much of the economy is on lockdown. But not all states have it as bad as Sydney. It could be a close-run thing; some economists are predicting a recession (formally two consecutive quarters of negative GDP growth). Economics is not called the ‘dismal science’ for nothing.
While new daily infections are in the 30,000 – 70,000 range for the US and UK, their economies are flying – at least for now. Australia’s new infection rate is less than 1% of these comparator nations. Thankfully deaths are relatively low in all three countries compared to the first wave last year.
Not everyone agrees that NSW is holding the correct line on restrictions but all must agree that our vaccination rates are pathetically low. Only around 16% (at time of writing) of Australia’s adult population are fully vaccinated, compared to over 50% in the US and UK. There are reportedly over three million doses of the AstraZeneca (AZ) variant stockpiled in Australia but the only alternative, Pfizer, is as rare as hen’s teeth. In Australia, getting the Pfizer vaccine is like finding gold.
The government is now urging all age groups to line up for an AZ shot – after telling us the risks were too high for the under 60s. That’s a hard sell. Pfizer shots are starting to be imported in significant quantities but not enough by our calculations to get us reasonably fully vaccinated before mid-2022.
Social unrest is climbing in Sydney. A protest march of the order of 2,000 to 3,000 took to the streets and participants were largely unmasked. The population is not happy.
Jay-Z once said, “A wise man told me don't argue with fools. Cause people from a distance can't tell who is who.”
Notwithstanding, the Westpac consumer sentiment index rose a fraction to 108.8 just before the onset of the latest Sydney lockdown. Both NAB business indexes slipped but they still showed optimists outweighed pessimists. It is doubtful that the next surveys will hold that line.
When it comes to hard data, our unemployment rate fell to 4.9% which is the lowest read since 2011! We have to go back to 2008 before the unemployment rate was actually less than 4.9%. Jobs growth was strong at 29,000 new jobs for the month and part-time jobs went backwards as full-time jobs surged 52,000 for the month. It all looked so good!
The US seems to be coping with tens of thousands of new COVID infections per day but there are now calls for masks to be worn again in certain places. There were 850,000 new jobs created last month or about four times a typical good month from before the pandemic. However, there are reportedly 6.8 million jobs lost in the shutdown that are yet to be refilled. At least 40.0% of the new jobs were in the hospitality and leisure industries. The US unemployment rate climbed to 5.9% when 5.6% was expected.
US GDP did miss for the June quarter (Q2) coming in at 6.5% (annualised) against an expected 8.4%. The miss is exaggerated by the way the US presents its growth data. In Australia, we present quarterly figures which, based on the US annualised numbers, would have produced an actual 1.6% against an expected 2.0%. That looks far less dramatic!
Inflation in the US is still well above the norm but the Federal Reserve (Fed) is not seemingly worried. Rate hikes and tapering are a way off. In fact, they are not even talking about tapering yet! The Consumer Price Index (CPI) came in at 5.4% but one third of this increase came from the sales of used cars. With the necessary microprocessor chips for new cars hard to acquire, the pressure is on in the second-hand car market, a similar problem exists in the UK.
Even we got a dose of inflation in Q2. Our reading was 0.8% for the quarter but 3.8% for the year – above the 2% to 3% target range set by the Reserve Bank (RBA). However, this blip has its origins in the heavily subsidised childcare costs last year. That was a one-off unless the current lockdown causes a similar response.
While the US jobs market made a little splutter, Q2 earnings reporting season is firing on all cylinders. A whole swathe of companies easily beat expectations but, of course, there were exceptions. New highs were again made on Wall Street.
The Chinese economy too, has performed more or less in line with expectations. China GDP came in at 7.9%; retail sales were up 12.1% and industrial output was up 7.8%.
The US, through its membership of the G-7 and G-20 groups is still trying to gain traction for the notion of a minimum global corporate tax rate of around 15%. 130 countries supposedly sign up for it but the local opposition parties may have a different view when those policies are voted on back home.
Also, some key countries like Ireland, Estonia and Hungary haven’t signed up. The Isle of Man, in the British Isles, currently has a zero corporate tax rate! The island could get over-crowded if they can hold out alone!
And the billionaire boys set off into space with claims and counter claims being made that Branson and Bezos didn’t go high enough. It all became a bit academic when someone pointed out that one can’t be classified as an astronaut if one doesn’t fly the craft or at least do something useful. Grinning at earth through a window doesn’t cut the mustard.
For us earthlings, we can take some comfort that monetary policy is still extremely accommodative around the world so share markets are still being supported. The 10-year bond rate in the US and Australia each has fallen sharply reflecting the lack of a fear of inflation. With it being hard to park money anywhere but equities to get a possible decent return, shares continue to be the way to go for many – until the punch bowl runs dry. We are still feeling positive about the rest of 2021 – at least! However, care must be taken in watching Covid developments.
July recorded the tenth consecutive monthly gain on the ASX 200 and attained a new all-time-closing-high in the process. Nevertheless, we do not see the index as being in correction territory unless the COVID-shutdown escalates a lot further or the US Fed starts to talk too aggressively about tapering.
Much of the gains in July resulted from buoyant Materials and Industrials sectors. Energy lost ground after a strong June and Financial were only slightly lower.
Our analysis of broker-based forecasts suggests the outlook over the next 12-months gains to be a little below the historical average.
The S&P 500 recorded its sixth consecutive month of gains in July and it too recorded new all-time highs along the way.
Emerging markets took a bit of a beating in July as did the Japanese Nikkei and China’s Shanghai Composite. The UK FTSE and the German Dax were largely flat.
Reporting season has produced some stellar ‘beats’ on Wall Street but there have been some misses – particularly Amazon. When a company get as big as Amazon, it is much harder to keep on producing big gains.
Bonds and Interest Rates
The US yield curve flattened quite rapidly as inflation fears vanished. The Australian 10-year yield fell even more to 1.12% after having been 1.87% in February this year.
The US will hold its annual conference for most central banks in Jackson Hole, Wyoming, in August. We do not expect any major announcements but that won’t stop the media frenzy. The US and others are likely to try to introduce any change in policy rather quietly and slowly. They won’t be looking for a spotlight, but one slip and a headline could appear.
The prices of gold, copper and oil made modest gains in July but the price of iron ore pulled back from a July high of $US222 to $US184.
The Australian dollar lost 1.8% against the greenback over July.
We are at a critical point in controlling the current wave in new covid infections. If we were mostly vaccinated, we could probably ease social restrictions like the UK and US, but we are not. Although we could blame the population’s reluctance to get vaccinated, the real culprit is a lack of supply of the preferred and recommended Pfizer vaccine for the under 60s.
The vast majority of the over 70s have had at least one dose but there are reasonable doubts for the 60-70 group given the governments flip flops over vaccine recommendations.
We do know that the government and the RBA have a co-ordinated fiscal and monetary policy to get us through this period of lockdown – again! It was announced that we started to get weekly shipments of one million doses of Pfizer from mid-July. At two shots per person and only just over 10 million shots ‘in arms’ by now we need another 25-30 million doses to get on top of the situation. Practically this look like it may not occur until 2022 at the current rate of progress.
China’s economy continues to perform well and its performance have helped BHP and RIO amongst others to do very well on the stock market.
The latest GDP growth of 7.9%, while missing the expected rate of 8.1%, is well above the level achieved in the more stable period before the pandemic. Soon we will start to get ‘clean’ readings that will be easier to interpret – but, for now, the China economy is holding up and providing some support for us.
The US inflation blip that Fed chair Powell called months ago is starting to drag on a bit too long. However, there are many little factors – such as lockdowns, micro-chip shortages and the like – that have fuelled this temporary inflation surge. The bond market appears to have stopped worrying about inflation and in the absence of evidence to the contrary, provides a reasonable basis to assume that inflation will not become a problem in 2021.
President Biden is still struggling to get his infrastructure package through the US Senate – even without saying how (or is it because?) he plans to pay for it.
Retail sales came through at +0.6% for the month when a contraction was expected and GDP growth was 6.5% against an expected 8.4%
Europe is still squabbling over the Republic of Ireland / Northern Ireland border since the UK and the republic of Ireland are no longer playing for the same EU team. Perhaps they can resolve some of their differences in Tokyo!
The UK did record an inflation rate of 2.5%. At last, it was above the target but only because of a surge in used car prices – that micro-chip shortage again.
Rest of the World
The Organisation of Petroleum Exporting Countries (OPEC) and other oil producers agreed to end oil production cuts by September 2021, this action saw crude oil prices drop and has acted to introduce more stability to oil prices.
Argentina recently posted a bumper 50.2% inflation rate which puts our ‘problems’ into perspective.
And the Olympic games are struggling along with no crowd. As always there will tears of joy, frustrations and shattered dreams. It doesn’t seem as exciting without a crowd. It’s only three years to the next one!