Markets ended what was a turbulent week on a positive note on Friday, with the S&P500 pushing up to a record high amidst positive corporate earnings. The US 10-year rate tracked sideways, ending the week just below 1.30%, and currency moves were also minimal. The week ahead includes the July FOMC meeting, the first estimate of US Q2 GDP and Australian CPI.
Having been away for a week and checking market prices over the weekend, it would appear like not much had changed. Equity markets are at record highs, bond yields are still stuck at low levels, and changes on the week in currencies were minimal. Of course, a closer look reveals substantial intraweek volatility, with sharp falls in equities and bond yields at the start of last week, amidst fears that the delta variant could impede the global recovery, and then an equally sharp recovery later in the week, with these concerns evidently receding.
On Friday, attention returned to positive corporate earnings, helping to support risk appetite and equity markets. Both Twitter and Snap posted better than expected earnings on Friday morning, lifting sentiment towards the broader tech sector ahead of earnings reports from a number of the heavyweights this week, including Facebook, Alphabet, Apple, Microsoft and Amazon. Around a quarter of S&P500 companies have now reported earnings, with 88% beating analyst expectations. If this were to be maintained through the remainder of the earnings season, it would mark the largest proportion of positive earnings surprises since 2008.
The S&P500, NASDAQ and EuroStoxx 600 were all up just over 1% on Friday, bringing their gains on the week to 2%, 2.8% and 1.5% respectively. All three indexes closed at record highs. Trading activity was light, with the S&P500 recording its second lowest trading volumes of the year.
Economic data on Friday was also generally strong. The Eurozone Composite PMI reached its highest level since 2000, at 60.6, implying a strengthening in growth momentum heading into Q3. The services index rose to a 15-year high, more than offsetting a small decline in the manufacturing survey. In contrast, both the services and manufacturing PMIs slipped in the UK (albeit to what are still very strong levels on a historical basis) amidst broad-based supply constraints and widespread worker absences, with thousands needing to self-isolate. The US PMIs, which usually garner less market attention than the ISM surveys, were mixed. The manufacturing index reached an all-time high while the services index was weaker than expected although, like the UK, it remains very elevated on a historical basis. While the PMIs provided a generally upbeat view of near-term growth, IHS Markit cautioned that there were signs the spread of the delta variant was starting to dampen business expectations for the year ahead in all three regions.
Supply chain issues, difficulty finding labour and acute pricing pressures were features in all the PMIs. The European PMI revealed near-record high selling prices while US selling prices remained extremely high, albeit lower than two months ago. On the issue of supply-chain disruptions, Intel’s CEO mentioned on Friday that the global semiconductor shortage, which has been hampering car production and leading to sharp increases in the prices of new and second-hand cars, could stretch into 2023. This contrasts with the more optimistic take from TMSC, the world’s largest contract chip marker, which said last week it expected semiconductor shortages in the auto industry to ease in the next few months.
Global rates were little moved on Friday, despite the bounce in equity markets. The US 10-year rate ended the week at 1.28%, unchanged on the day and little different from a week ago. Rates were generally lower outside the US last week, albeit with little movement on Friday. Last week saw the German 10-year yield fall 7bps, to -0.42%, the Australian 10-year yield 9bps, to 1.20%, and the NZ 10-year yield 10bps, to 1.64%, despite the RBNZ’s QE bond buying ending on Wednesday. Extremely low long-term bond yields in developed market countries are consistent with a very pessimistic view of the medium-to-long term growth outlook, although it’s likely that ongoing bond buying by major central banks is distorting the underlying macro signals from the bond market, at least to some extent.
FX moves were minimal on Friday, with all currencies except the JPY moving less than 0.2%. The Bloomberg USD index (BBDXY) was up 0.1% on Friday and 0.25% on the week; it continues to hover near its highest level since early April. On the week, the AUD was the worst performer, down 0.5% to around 0.7365, amidst the ongoing lockdowns in Greater Sydney, Victoria and South Australia. The JPY was close behind last week, down 0.4%, reflecting more positive risk appetite and higher equity markets. The NZD ended last week around 0.6975, little changed on Friday but down 0.35% on the week.
We made some modest NZD forecast changes on Friday, mainly reflecting the stronger starting point for the USD. Our end-Q3 NZD target is reduced from 0.75 to 0.72, which assumes Covid concerns fade before the end of the current quarter, while our end-Q4 target is reduced by just one cent, to 0.75. Underlying this revised projection remains an optimistic view that the spread of the virus is brought under control and there is no major outbreak in NZ. We have nudged up our NZD/AUD forecasts to take account of the widening in NZ-Australian rate spreads and now see the cross centred around 0.95-0.96 for the next few quarters.
The centrepiece for the week ahead is Thursday morning’s FOMC meeting, with the market on alert for when the Fed will signal and start tapering of asset purchases. The first estimate of US Q2 GDP comes on Thursday, with the quarterly annualised growth rate expected to accelerate from 6.4% to 8.5%. There is also the possibility that the $1tn bipartisan US infrastructure bill is passed this week. In Australia, annual headline CPI is expected to jump to 3.7% y/y (0.7% q/q), mainly due to base effects from the depressed levels of Q2 2020, while the RBA’s preferred trimmed mean measure of core inflation is expected to remain depressed, at just 1.5% y/y. In New Zealand, the ANZ business survey for July is released on Thursday.
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