- Central banks ready to hike rates
- Biden signs infrastructure bill
- Chinese economy stops the slide
The Big Picture
Up until near the end of November, most of the market chatter was about the persistence of inflation – or otherwise. Central banks – in particular, the US Federal Reserve (the Fed) – were insistent that inflation was likely to be above target levels only for a short time.
The start of this inflation ‘blip’ coincided with the lifting of the US COVID restrictions but it was subsequently fuelled by supply-chain blockages and energy price inflation. There is little doubt that most central bankers are now getting nervous.
The Reserve Bank of New Zealand (RBNZ) has already hiked rates twice in this cycle – the first country in the developed world to do so. The Czech central bank just did its biggest rate hike in 24 years. The Bank of England looks set to raise rates very soon.
The Reserve Bank of Australia (RBA) had been saying that it didn’t expect to raise rates until 2024. It removed reference to that year in the latest minutes but it did end its so-called ‘yield curve control’ by which it attempted to hold down medium-term bond yields of two to three years in duration by buying bonds (by buying bond the RBA kept upward pressure on bond prices which move in the opposite direction to yield i.e. higher bond prices equals lower bond yields).
President Biden nominated Jerome Powell for a second four-year term as the Fed Chair – rather than recommend Lael Brainard, the other favoured candidate, giving her the Vice Chair instead. Brainard is thought to be more dovish. That is, Brainard was more likely to put off hiking interest rates.
The market, as measured by the CME Fedwatch tool, now expects one to four interest rate hikes by the Fed in 2022 with very high probability. Previously the Fed had been leaning towards 2023 for the first hike – or possibly just one at the end of 2022. It has already started the tapering process of reducing the bond-buying programme. Indeed, it is already talking of speeding up that plan.
Our position throughout this debate has been that raising interest rates would not reduce supply-chain blockages or energy prices. Monetary policy is not the way to tackle these problems. Biden has been trying to improve the landing and distribution of containers arriving at US ports.
At the end of November, the game changed. A new strain of COVID-19, labelled Omicron by the World Health Organisation (WHO), sprung onto the scene in Southern Africa. The ASX 200 fell sharply on the news last Friday (and again on the open of the following trading day) and Wall Street fell in tandem on that last Friday. However, during Monday’s trading, US futures were strengthening and our market responded positively. Wall Street was buoyed by Biden’s comment that a fresh lockdown was unlikely. The S&P 500 roared to life and the ASX 200 followed suit on the last day of November. But Powell burst that bubble the next day in his Senate hearing testimony. He spoke of the need to discuss a faster tapering of the Feds bond buying programme and markets did not like that.
There have been 12 previous strains given names by WHO before Omicron but only Delta has caused heightened concern since the original Alpha variant. It is far too early to judge how Omicron will affect public health but many countries swiftly moved to close borders.
The Netherlands and Austria had already gone into forms of lockdown prior to Omicron being brought to our attention owing to increasing infections from the Delta variant. The USA also put Germany and Denmark on ‘no fly’ lists.
One good thing to come out of this latest scare is that oil prices fell very sharply which may help contain global inflation fears.
We have held the position since early in the pandemic that we should ready ourselves for ‘aftershocks’ as new outbreaks or lockdowns arise. It is quite possible that this new more transmissible variant will not worsen the severity of health outcomes. Markets are just taking precautions. The scientists say that it will take some time to assess the effectiveness of current vaccines against Omicron.
The possible good news being floated in some quarters is that Omicron might indeed be more transmissible but less severe and so the unvaccinated will rapidly build up some immunity at low risk. Of course, it could turn out that Omicron is worse than Delta. It will take time to follow cases and produce statistical analyses. So far there have not yet been significant reports of more serious health issues.
We feel almost certain that this will not be the last pandemic-related scare in this round of COVID-19. Prudent investors should be positioned to withstand market volatility.
Our market was, perhaps, more nervous about the Omicron news since market analysts knew that our quarter 3 (Q3) GDP growth number would be released on December 1st and that it would be bad. The ‘whisper number’ was a substantial decline 3%, its magnitude due to the prolonged lockdowns during the period.
Although expectations are meant to be factored into markets, it is common for such really bad news, even if it comes out as expected, the news release would cause at least a little extra volatility.
Growth came in better than expected at 1.9% for the quarter and the market barely reacted. The household savings ratio jumped from 11.8% in Q2 to 19.8% in Q3. Presumably, people had less reason, or less opportunity, to spend given the size and length of the lockdowns. This bodes well for a Q4 bounce as people get back closer to normal – Omicron notwithstanding.
Our latest retail sales growth figure was particularly strong at 4.9% for the month. Our unemployment rate did rise from 4.6% to 5.2% but that was more due to a statistical aberration in the previous month. We lost 46,000 jobs and one million hours of labour. The economy has a long way to go before we could pronounce a strong and stable labour market at full employment.
Our Q3 data were greatly affected by the long Sydney and Melbourne lockdowns and other restrictions. Without Omicron we were looking forward to a reasonable Q4 and a good 2022. We still expect a bounce back in Q4 but we need to know more about Omicron before we can reasonably reset our forecasts.
US data were generally strong. 531,000 jobs were created and the unemployment rate was reasonable at 4.6%. Wage growth for the month was high at 0.4% reflecting the incentives being offered to get people back into the workplace.
A variety of US wholesale and consumer price inflation data were published and all were on the high side. US retail sales rose 1.7% just for the month but consumer confidence was at a 10-year low.
Biden signed the $1.2 trillion infrastructure package into law and the more general $1.75 trillion economic and climate change package moved through the House. These packages will help boost the economy through 2022 and beyond.