Bassanese Bites: Delta delay? – August 23 2021

Global Markets

Global equities suffered a setback last week as minutes from the latest Fed meeting suggested it was closer to “tapering” its bond purchases somewhat earlier than anticipated.  Specifically, the minutes indicated “most” members agreed that tapering could commence this year (as opposed to early next year), assuming the economy continued to broadly recover in line with their expectations.  That said, this meeting took place a few weeks ago – in which time rising delta cases has cast a pall over the nearer-term outlook, as evident with a recent sharp drop in consumer sentiment. On Friday, moreover, one Fed member (Kaplan) indicated he’d be open to delaying tapering until next year if delta starts to have a clearer economic impact – which helped Wall Street rise on Friday.

In other key global news, Chinese retail sales and industrial production data was a bit weaker than expected, which along with concerns over various new regulations and efforts to cut steel production, did not help the emerging market/commodity trades – with both Chinese stocks, iron ore prices and the $A falling further last week.  All this supports my recent call for the $A to test US70c and potentially US68c over the remainder of this year.

Just what the Fed is currently thinking might be a little clearer after a key speech by Powell on Friday at the Jackson Hole (virtual) Conference. If he’s open to a Fed tapering announcement as early as next month’s policy meeting I’d anticipate a few signal in this regard – which could rattle markets later this week.  Ultimately though, I suspect Powell won’t rock the boat at this stage – given lingering uncertainty with regard to delta.

Also noteworthy on Friday will be the July report on the Fed’s preferred consumer price indicator. Markets expect the monthly gain in the core PCE to ease to 0.3% from 0.4% – which while still on the high side might at least support the idea that supply-disruption related price pressures have likely peaked.

Australian Market

China concerns along with local lockdown woes conspired to weaken the local market last week, with the S&P/ASX 200 dropping 2.2%.  Data wise, annual growth in the wage price index was a weaker than expected 1.7% in Q2, which only added to the case for the RBA not to go ahead with plans to taper its own bond purchases at next month’s meeting.

This week we’ll get key Q2 GDP “building blocks” in the form of building construction and capital expenditure on Wednesday and Thursday respectively. As we all know Q3 GDP will be deeply negative, interest remains on whether Q2 can avoid going negative also – thereby avoiding a dreaded lurch back into a double-dip “technical recession.” At this stage though, a negative Q2 outcomes seems unlikely, especially given we already know aggregate weekly hours worked and retail sales volumes rose 2.9% and 0.8% respectively in the quarter.

All that said, we still can’t rule out a technical recession (two consecutive quarters of negative GDP growth) if nation-wide lock downs extend into Q4. While our rapidly rising vaccination rate is great news and bodes well for re-opening, there’s lingering uncertainty over the minimum level of COVID cases State Governments will still find acceptable.

My sense is all the current defiant talk of maintaining a “zero COVID” approach will be quickly jettisoned by States once more than most adults are fully vaccinated and lockdown fatigue sets in further. Technically speaking, it does seems possible to pursue a zero COVID strategy – though only if international and State borders remain permanently closed or States accept ongoing monthly lockdowns to deal with the odd inevitable hotel outbreak. The good news regarding vaccines is that, while they don’t stop completely stop the spread even among the vaccinated, the already relatively low COVID death and hospitalisation rates get much much lower – with lingering risks largely born by those who, for various reasons, remain unvaccinated.

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