I can’t take my eyes off this data
Global equity markets posted solid gains over the past week on strong economic data, President Biden’s infrastructure spending plan and optimism about the reopening. For the week, US stocks rose 1.1% and although the US stock market was closed on Good Friday, US futures gained a further 0.4% in response to payroll employment data stronger than expected for March. Australian stocks missed the global rally at the end of the week, but so only rose 0.1% during the shortened holiday week until Thursday, as strong gains in industrial and material stocks were offset by the weakness in utilities, energy, retail and healthcare stocks. . Bond yields generally rose, as did the price of oil, but metal and iron ore prices fell. The A $ fell and the US $ continued to rise.
The markets had a brief fluctuation at the start of last week on news of the liquidation of Archegos Capital Management’s holdings and the usual “worries that there would be no more”. With a name like arch egos, I’m afraid it was doomed from the start! Guess there’s still something – but at least the catastrophic story from the previous week about a ship stuck in the Suez Canal gave way when it took off. I thought that if the Pasha Bulker could be dislodged from the surf beach in Newcastle, then it would surely be easier to release the Ever Given into the Suez Canal. Funnier was VW’s announcement (April Fool’s Day joke) that it would rename VW America as a Voltswagen – some thought it was serious and went nuts on social media.
We remain of the view that the cyclical equity bull market that started in March of last year still has a long way to go given the slack in the labor markets and continued low core inflation, stocks still offering a decent earnings yield spread over bond yields all combined. with economic recovery and earnings and central banks, including the Fed and RBA, falling short of rising interest rates.
President Biden has confirmed that even more government spending is underway in the United States with the announcement of a $ 2.3 trillion infrastructure spending program. This should be part of a total plan of $ 3-4 billion with more to come on health care, education and possibly the climate. In addition to last year’s $ 2.3 billion stimulus package, $ 600 billion earlier this year, and the $ 1.9 billion coronavirus package just passed, some consider that this adds to concerns about too many stimulus packages. However, the last package comes with many reservations: the expenditure will be spread over eight years; it will be financed in part by tax increases (with a plan to increase corporate tax including the corporate tax rate at 28% already announced and other tax increases including the maximum rate income tax is not yet announced); and it will face more challenges to go through Congress, so can be watered down and will take longer to go through. Moderate Democrats are also likely to tone down some of the tax hikes, weakening any worries the stock markets might have about them. In terms of overall fiscal policy, after this year’s huge stimulus, fiscal policy will become a fiscal drag next year, as the next package is spread over many years and with anticipated tax hikes (even if they are are inferior to what Biden proposed), this is especially the case. But with the reopening and massive pent-up demand, this fiscal drag may be less important than normal.
In Australia, soaring house prices are becoming a growing concern with CoreLogic data from March showing their fastest monthly increase since the late 1980s.
The booming real estate market indicates that macroprudential tightening is likely approaching in Australia. While APRA and RBA do not have a mandate to target house prices and believe that we have yet to see a significant deterioration in lending standards on the metrics they review, the Past experience indicates that soaring house prices as we are seeing are now leading to a deterioration in lending standards and increased risks to financial stability. And the measures they are examining are starting to point in the direction of a deterioration in lending standards with record housing finance indicating an acceleration in housing credit growth, with a growing share of loans at high loan-to-appraisal ratios. and a growing share of interest only. loans (although both are starting from a weak base, but the data only goes back to the end of last year with further increases likely since then – see next chart). All of this suggests that it makes sense to start pulling the brakes on the lending standard soon. The first thing to do would be to increase the interest rate buffers used by banks to gauge how much people can borrow, but limits on high loan-to-appraisal ratio loans and high debt-to-income ratio loans. can also make sense.
Australia’s housing finance boom so far has been driven by first-time buyers and homeowners in general, but their share appears to be peaking (with a decline in February) and investor lending continues to soar along with it. an increase of 4.5% in February. suggesting that the real estate market could become more speculative.
The global deployment of vaccines continues to accelerate and numerous studies carried out in several countries now confirm their effectiveness in the prevention of infections and in particular in the prevention of serious illnesses, hospitalizations and deaths. Concerns remain in some countries about the Astra Zeneca vaccine and blood clotting, although it is not clear how much of a problem this is. Vaccine production also continues to ramp up, and herd immunity (around 70% of the population) in most developed countries is expected to be achieved in the second half of the year, although it may be earlier in the United States where 30 % received a dose but vaccination is now nearly 3 million people per day.
Despite the good news on vaccines, new cases of coronavirus around the world have been on the rise for a few weeks now and new deaths are starting to follow. This largely reflects emerging countries like Brazil and India, but is also evident in Europe with the exception of UK, Japan and Canada where vaccination is still low. However, new cases are also appearing in the majority of US states, albeit from a weak base, recalling that there is a danger of reopening too quickly long before collective immunity is reached – even if the vaccine deployment in the United States is rapid and accelerating herd immunity is still in about 3 months.
As new coronavirus cases remain low in Australia, the latest ‘breakouts’ from the quarantine system for returning travelers in Queensland have led to more clusters of local cases and led to brief lockdowns in Brisbane and restrictions tighter distancing around Byron Bay. Provided the lockdowns are kept short (the Brisbane lockdown ending after just one more local case was reported on Thursday) and geographically contained, the economic impact is expected to be minor – like the instant lockdowns already seen this year. But they’re still very disruptive to those affected, and put a big drag on Australians booking interstate vacations. Faster vaccination should help end blockages, but with only around 2.6% of Australia’s population having been vaccinated, herd immunity is likely six months or more away.
Our Australian Economic Activity Tracker has held steady at a high level over the past week, suggesting that the recovery is continuing, although Brisbane’s brief lockdown may depress things a bit in the next update. Our US economic activity tracker has changed little and remains down from a year ago and our European tracker has softened a bit, not helped by news of ongoing lockdowns.
One of my favorite songs is Frankie Valli’s I can’t take my eyes off you from 1967. Pop at its best! It was quickly picked up by other singers including Andy williams which culminated in my version of favor which Andy revisited with Denise Van Outen in 2002. The Pet Shop Boys made a clever crossover of U2 Where the streets have no name and can’t take their eyes off you showing that the first is just as light pop as the second.