Bassanese Bites: Markets consolidate – November 23 2020
Weighed down by rising COVID cases, U.S. stocks pulled back last week – which is likely a consolidation after two solid weekly gains on the back of the U.S. Presidential election and positive vaccine news. While Trump continues to mount legal challenges, the country and financial markets in general appear to have already moved on – most analysts feel it is very unlikely Biden won’t ultimately be certified as the next U.S. President.
Given the positive vaccine news of late, moreover, markets also trying to ‘look through’ the current third wave of U.S. COVID cases and also the slowing in U.S. economic indicators that has likely only just started. October U.S. retail sales, for example, slightly missed expectations last week (+0.3% vs. market expectation +0.5%), though this followed a 1.6% surge in September. Weekly jobless claims also spiked higher last week, though this partly reflected cyclones in Louisiana. In better news, U.S. new and existing home sales are pushing higher, reflecting low interest rates and a COVID-related flight to the suburbs.
In terms of the week ahead, America’s COVID case count will likely remain of most interest – along with any potential further tightening in restrictions (especially in the key states of New York and California). So far at least, these states have not re-imposed the draconian and widespread ‘shelter in place’ restrictions seen earlier this year – preferring instead more targeted measures, like mandatory face masks, school closures and restrictions on indoor dining. Should restrictions intensify, this may well be a cause for a further pullback in equity markets, though the downside may be limited by greater confidence (compared to earlier this year) that restrictions should be only temporary, more fiscal stimulus is coming, a vaccine is seemingly just around the corner, and that economic activity has shown an admirable capacity to bounce back once restrictions are eased.
This week’s U.S. October personal spending should confirm the moderate slowing in consumer spending already evident from retail sales. Weekly jobless claims should also ease back. In Europe, November service and manufacturing indices are expected to slump due to the re-imposition of restrictions.
Australia’s better experience in dealing with COVID-19 is beginning to be reflected in financial market performance, with the S&P/ASX 200 shrugging off Wall Street’s wobbles to lift 2% last week. Melbourne has emerged from lockdown and Adelaide’s new lockdown proved short-lived. Meanwhile, RBA Governor Lowe confirmed the latest round of policy easing partly reflected the global race to the bottom in rates and a concern the $A might become too strong if Australia did not follow suit. He also suggest macro-prudential controls could be used to keep house prices in check if low rates caused a renewed speculative outbreak next year – though it’s less clear the RBA can or would do much to check a potential surge in equity prices if investors chase yield.
More good news came from the October labour market report, with employment surging by a further 178k, albeit with a slight lift in the unemployment rate to 7% as more jobseekers entered the market. Highlighting the challenge the RBA faces in getting inflation up, however, the Q3 wage price index edged up only 0.1%, with annual growth now down to a measly 1.4%!
To a degree, Australia’s recent outperformance (and, in particular, the strength in the long beaten-down financial sector) also reflects a global ‘growth to value’ rotation. How long this lasts remains to be seen, but I suspect all we’re seeing is an unwinding of the COVID-related relative outperformance of the global technology sector (which suddenly became a defensive exposure as people stayed home), rather than the start of a longer-run rotation from technology/growth to the ‘old world’ value sectors of energy and financials. How well the latter do next year will critically depend on the extent to which oil prices and bond yields manage to rebound (not by a lot is my base case).
This week we get a few key building blocks for next week’s Q3 GDP report – construction spending on Wednesday and private capital spending (‘CAPEX’) on Thursday. Both are likely to be weak, reflecting lingering restrictions across states – particularly Victoria. That said, the actual GDP outcome next week should still be positive (after the 7% slump in Q2), thanks especially to a strong rebound in consumer spending.