Bassanese Bites: Yield spike – August 17 2020

Global markets

Global equities pushed higher last week despite a continued U.S. impasse over further fiscal stimulus. Talk of a Russian vaccine and still generally encouraging U.S. economic data helped keep equity bears at bay. The risk-on sentiment was also evident in a spike in bond yields, correction in gold prices, and a still soggy $US. The S&P 500 touched an intra-day record high, and ended the week within a whisker (0.2%) of its mid-February peak.

Data-wise, U.S. jobless claims were a bit better than expected for a change, finally breaking below the 1 million mark. July U.S. retail sales were slightly weaker than expected, but still not bad – rising 1.2% – which still leaves sales miraculously higher than pre-COVID levels. Thanks to huge household income support, U.S. retail sales (along with sales elsewhere, even Australia) have clearly enjoyed a V-shaped recovery so far, even with employment levels still well below their peak.

Chinese data revealed their economy also continued to enjoy a V-shaped recovery in industrial production in July (thanks to traditional pump priming through infrastructure projects) though retail sales continued to lag somewhat. This in turn is helping keep iron-ore prices and the $A aloft.

This week’s focus will again be on whether Washington can come to a deal on extending unemployment benefit payments, rather than rely on the legally dubious executive orders that President Trump has issued so far. Along with the recent spike in COVID-19 cases, a premature tapering of this income support risks slowing America’s economic rebound – but so far at least Wall Street remains confident a fiscal deal will be struck and/or the Fed will ride to the rescue with even more monetary firepower.

Minutes of the latest Fed meeting are released on Wednesday, which could shed light on how much closer it is to unleashing more stimulus. On Friday, U.S. August manufacturing and non-manufacturing indices should depict an economy continuing to recover. Also in focus will be the tail end of the U.S. Q2 reporting season, with major retailers such as Walmart set to reveal their results (which should overall be fairly encouraging given the strength in retail sales).

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