Bassanese Bites: Melb Cup cut – October 19 2020

Global markets

Global equities were largely flat last week, reflecting disappointment on U.S. fiscal stimulus talks and concern over new social distancing restrictions in Europe as COVID-19 cases mount. The $US firmed and gold weakened, while bond yields eased back.

U.S. economic data was mixed, with ongoing strength in retail sales yet a worrying spike higher in weekly jobless claims. All up, it’s consistent with an ongoing but slower-paced U.S. economic recovery as fading fiscal stimulus, election uncertainty and stubbornly high COVID-19 cases weigh on the economy. Somewhat ignored by the market last week, the Q3 earnings season has had an encouraging start, with almost 90% of the 10% of S&P 500 companies reporting so far beating market expectations.

In terms of the week ahead, focus will be on the progress (or lack thereof) in U.S. stimulus talks, as well as the degree to which new COVID-19 restrictions are imposed in Europe. U.S. manufacturing and service PMI indices for October are released on Friday, and should show overall activity at still reasonably firm levels.

Australian market

Households, it seems, liked the big spending Federal Budget, with consumer sentiment surging 11.9% in October. Employment also dropped back a little less than expected in September, with the unemployment rate edging down to 6.9%. Despite all this, however, the big news last week was the speech by RBA Governor Phil Lowe in which he appeared to strongly signal a further significant policy easing next month. We should expect the cash rate and 3-year bond yield target to be cut from 0.25% to 0.1%. And the RBA will also start buying up both 3-year and longer term government bonds – not because it needs to in order to keep yields down, but simply to keep up with the pace of balance sheet expansion by other central banks!

In the increasingly contorted logic of the RBA, Lowe felt that further stimulus now might have greater “traction” precisely because the economy is starting to recover. And despite lip service paid to financial stability concerns, Lowe then suggested easier policy could “help private sector balance sheets and lessen the number of problem loans”. In other words, far from worry about an asset price bubble, the RBA wants to encourage it to the extent it can make households feel a bit wealthier in the short run at least!

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