Bassanese Bites: Bad news is good – May 10 2021

Global markets

It was a case of ‘bad news is good news’ again in global markets last week, with equities enjoying a boost from weaker than expected U.S. economic data which appeared to reduce the risk of high inflation and interest rates any time soon. The first soft data point earlier in the week was the ISM U.S. manufacturing index which fell back a little more than expected in April, to a (still strong) 60.7 from blisteringly strong 64.7 in March.

But the major highlight was the much softer than expected April growth in U.S. employment of only 266k (versus market expectation of +678k), with various explanations being suggested – ranging from simple statistical volatility/rogue number, to reduced worker desire to take on jobs due to lingering school/transport restrictions and/or higher unemployment benefits. What few contest, however, is that employment demand is clearly very strong – which, contrary to last week’s market reaction, is actually potentially bearish if it means we might get an earlier than anticipated uptick in wage growth to lure more into the workforce.

Treasury Secretary Janet Yellen briefly unsettled markets early last week when she suggested higher interest rates might be needed to contain strong demand, especially if boosted by Biden’s infrastructure package. Within hours she quickly backtracked after markets weakened, which highlighted both Wall Street’s continued sensitivity to interest rates and Washington’s continued sensitivity to Wall Street.

All that said, following recent moves by the Bank of Canada it seems we’re slowly but surely inching closer to wider global ‘taper talk’ – which could eventually cause equities to endure at least a mini-tantrum. While most Fed speakers last week continued to trot out the line that there’s no need to even think of tightening anytime soon, Robert Kaplan, president of the Federal Reserve Bank of Dallas, was a notable exception who said he’d prefer to start talking about tapering bond purchases sooner rather than later.

And while the Bank of England kept its year-end bond holdings target unchanged at £895 billion, this nonetheless implies some tapering in weekly bond purchases in the months ahead (lest it reach its target months ahead of schedule), and a complete end to UK bond buying by year-end. The outgoing BOE Chief Economist, meanwhile, dissented in last week’s policy meeting by advocating a reduced bond buying target.

The recent easing back in bond yields and the $US has helped boost gold prices of late, which last week broke above their 30-week moving average.

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