Except for London’s FTSE index, most major equities markets and the world index suffered major losses during January. The reporting season in the US, which is near its end, does appear to have been somewhat weaker than those of 2021 – particularly in the mega-cap tech sector. This was to be expected as the recovery matures.
Like with the ASX 200 we see a reasonable upward trend after the volatility subsides. The fundamentals outside of tech look favourable. ‘Catching a falling knife’ as in buying in volatile times before a bottom has reasonably been determined is ill-advised for most investors. However, we do have the S&P 500 as a whole being relatively attractive even after an extremely promising two-day rally to close off January.
Bonds and Interest Rates
The Fed all but confirmed a rate hike at the next meeting in March with three to five more to follow this year. The bond-purchasing programme is set to end – also in March. The Fed is in no rush to deal with its inflated balance sheet debt of $9 trillion – but it flagged it is plotting a course. The Fed will likely let some bonds ‘run off’ after their terms expire and in a controlled fashion.
The market is pushing the RBA to act on rates but we see little need for such a policy in Australia just yet. We are lagging behind the US and the UK in coming to terms with the pandemic. If the RBA does act this year, we think it will be a gentle response – at least at first – to test the water. The RBA is not known for swift policy action in either direction.
The PBoC cuts its reference rate in an attempt to assist its struggling economy. Its latest growth rate was a healthy 8.1% but the prospect for softer growth is lurking in the wings.
Bond yields in the US and Australia have lifted across the term structure. However, we do not see enough movement to make bonds attractive compared to equities any time soon.
There were big double digit growth rates in the prices of oil and iron ore during January. The price of iron ore rose to nearly $150 / tonne after spending a good part of late 2021 well under $100.
The Australian dollar fell by 3.4% during the same period. Gold, however, was unexpectedly flat, losing 1.4% in January.
With an election looming and the economy not in its most robust state, neither major party is likely to want to rock the boat on the run in. There will be, at least, promised stimulus on the way. Of course, it is one thing to promise and another to get a policy voted in by both Houses.
Our jobs data, on the face of it, were promising. There were 64,800 new jobs created in the latest month (December 2021) when only 45,500 were expected.
The unemployment rate fell from 4.5% to 4.2%. While 4.2% would ordinarily be considered to be classified as full employment there are so many factors such as the pandemic and international travel to make it harder to interpret. It was August 2008 when we last had a lower unemployment rate!
Our inflation rate, on the other hand, was unequivocally good. The headline rate was 3.5% but the RBA’s preferred ‘trimmed mean’ estimate that strips out more volatile items was 2.6%.
We do not have the 4%, 6% and 8% inflation rates that plague other major countries. We, therefore, do not need to follow their lead on monetary policy. We can go our own way.
There is much anecdotal evidence that bars and restaurants in Australia are operating at well below even COVID-era capacity. But, as more of the population gets their COVID vaccination booster, perhaps clients will return and spend those hard-saved ($260 bn) dollars from the lockdowns.
The economy might be a little slow at the start of 2022 but we reasonably expect growth to pick up during the remainder of the year.
China’s economic data are largely at the weaker end of expectations. GDP growth at 8.1% is certainly strong but some of this figure is due to measuring GDP from a lower pandemic base.
The Winter Olympics, like the Summer Olympics in Tokyo, are struggling to make a fist of it. On top of all of the COVID issues, hesitancy on the part of some to take part due to humanitarian issues is likely to cast a shadow on the overall success of the games.
China has largely dealt with the fallout from the property sector debt issues. Indeed, it has started to stimulate the economy with a rate cut.
The US jobs data only recorded 199,000 jobs (for December 2021) when 422,000 had been expected. These data are subject to statistical aberrations and there has been a recent tendency for the jobs data to be scaled up in subsequent revisions. Some wage growth – at around 4% – is starting to emerge. The Q4 growth was very strong at 6.9%.
Some of the GDP growth was due to movement in inventories which might not be expected to continue. However, the consumer segment was unequivocally strong at above 3%. However, the latest retail sales growth of 1.9% did not support that view and raises some concerns for the near term.
Biden is not doing well in the polls and he struggles to get his bills through Congress. Nevertheless, some much-needed fiscal stimulus is getting through. The half-Senate elections are approaching in November, so both parties might be trying to attract the spotlight in these next few months.
Boris Johnson has been caught out for attending parties during lockdowns. He seems to be brushing the commotion aside. Importantly, the UK is opening up to overseas visitors without vaccinations. Djokovic has a possible berth at Wimbledon!
Russia appears to be on the edge of conflict in the Ukraine. Biden let it slip that he would allow a ‘small incursion’ but not an invasion by Russia. Sometimes it is better to say nothing.
We are not in a position to shed any light on the likelihood of conflict, let alone US involvement. Obviously, any action in that part of the world is likely to spill over into more market volatility. There is too much at stake for either side to be silly. Putin is looking to a ‘president for life’ job. Would sabre rattling help? Possibly, but war might be a bridge too far.