August 16, 2021

Markets Today: Back to uncertainty

US consumer sentiment plunges to below pre-pandemic levels with yields tumbling (US 10yr -8.2bps), but equities steady to higher with the S&P500 +0.2% to a new record high. For bonds, the plunge in consumer sentiment is an amber signal for the near-term, which if realised in real activity may impact on the timing and form of tapering and puts the focus squarely on retail sales on Tuesday

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Overview Pound the alarm

    • US consumer sentiment plunges amid delta concerns, putting the focus on retail this week
    • Yields fall sharply with the US 10yr -8.2bps to 1.28% and retraces all of last week’s moves
    • Equities lift, supported by strong earnings again – S&P500 +0.2% to a new record high
    • USD falls (BBDXY -0.6%) with safe havens outperforming (USD/CHF -0.9%, USD/Yen -0.7%)
    • Week ahead: AU Jobs & Wages, RBNZ, US Retail Sales, Fed’s Powell & FOMC Minutes
    • Coming up today: JN Q2 GDP, CH Activity Indicators, US Empire Manufacturing Survey

    “Pound the alarm; Alarm, alarm, alarm, alarm; Oh, oh, oh, come fill my glass up a little more; We ’bout to get up and burn this floor; You know we getting hotter and hotter”, Nicki Minaj

    US consumer sentiment plunges to below pre-pandemic levels with yields tumbling (US 10yr -8.2bps), but equities steady to higher with the S&P500 +0.2% to a new record high. For bonds, the plunge in consumer sentiment is an amber signal for the near-term, which if realised in real activity may impact on the timing and form of tapering and puts the focus squarely on retail sales on Tuesday. As for equities, earnings continue to support with 90% of S&P500 companies reporting so far and 88% of those beating expectations. Tech continues to outperform with Disney +1.0% after reporting blockbuster earnings and higher than expected subscriber numbers for Disney+ after the close on Thursday. Trading was also thin amidst the summer holiday season with the S&P500 recording its lowest daily trading volume of 2021. The USD fell alongside yields with the broad BBDY ‑0.6%. Safe havens outperformed slightly with USD/Yen -0.7% and USD/CHF ‑0.9%. Bond and FX markets continue to be more cautious than equities amid the delta variant.

    First to the plunge in US Consumer Sentiment . Headline Consumer Sentiment fell 13.5% in August to 70.2 from 81.2 previously and expected, which is not only below the pandemic low of 71.8 recorded in April 2020, but is also the lowest since December 2011. As for the percentage fall, the 13.5% fall is the seventh largest monthly fall in the history of the survey that dates back to 1953, and in recent times is beaten only by the GFC (-18.1% in October 2008) and the initial phase of the pandemic (-19.4% in April 2020). The University of Michigan notes delta concerns was the primary  driver, noting that “c onsumers have correctly reasoned that the economy’s performance will be diminished over the next several months, but the extraordinary surge in negative economic assessments also reflects an emotional response, mainly from dashed hopes that the pandemic would soon end” (see University of Michigan for further details). Inflation expectations also moved higher with the 5-10 year at 3.0% from 2.8%, but still relatively anchored given 3% is what it was in 2013 with core inflation undershooting the Fed’s 2% target since 2012.

    Does the survey signal an imminent turn in the US economy? We doubt it given vaccine efficacy remains high and the hit to sentiment likely means more people will get vaccinated (61.7% of US adults are fully vaccinated compared to 76.7% in the UK). Instead the delta surge in the US is more a case of delay rather than derail as far as the recovery is concerned. The experience of the UK and Israel continue to show high vaccination rates severely weaken the link between new cases and hospitalisation, allowing countries to start to transition to living with the virus with a high vaccination rate. As for the short-term economic impacts from the delta surge, it is worth noting that on Thursday South Western Airlines warned that it had seen a deceleration in bookings and a rise in cancellations due to the delta variant, while the WSJ notes SafeGraph reported traffic at grocery stores, gas stations, gyms and restaurants fell starting in late July, after having surpassed 2019 levels earlier in the summer. A Covid outbreak in China has also partially shut China’s Ningbo-Zhoushan port, which also suggests supply chain disruptions will continue for some time due to delta.

    Yields fell swiftly in the wake of the sentiment plunge with the curve bull flattening after its bear steepening last week. The US 10yr yield fell 8.2bps to 1.28% to be 2bps lower than it was at the start of the week. The fall was driven by both the implied inflation breakeven (-3.7bps to 2.38%) and the real yield (-4.3bps to -1.11%). The 5s30s curve flattened 1.9bps to 115.3bps with the 30yr yield at 1.93% and the 5yr at 0.77%. US Fed Chair Powell’s comments on Tuesday will be closely watched to see whether the delta surge is likely to delay a likely tapering announcement (or form of taper). In FX the USD fell across the board with the BBDXY -0.6%, with only USD/CAD bucking the trend at -0.0%. EUR was +0.5% and GBP +0.4%, with the AUD +0.4% and NZD +0.5% moving similarly. Despite the broad-based fall in the USD, risk havens outperformed slightly with USD/Yen -0.7% and USD/CHF -0.9%. Over the week the AUD is up 0.3%, similar for most other majors with EUR +0.3%. Commodities were mixed, with copper (+1.1%) and gold (+1.6%) rising on the back of the weaker USD, while WTI (-0.9% to $68.44) fell on growth concerns.

    Australia’s virus outbreak also appears to be going from bad to worse. Sydney’s protracted lockdown has been widened to the whole of NSW, with Sydney’s lockdown set to be extended into September and perhaps even into October. Meanwhile Melbourne’s two week lockdown (coming just 8 days after a 12 day lockdown) looks like it may be extended for another two weeks. The RBA’s most recent August SoMP forecasts are in danger of being out of date within just a week with the detraction in Q3 GDP likely a lot larger than what the RBA had pencilled in. PM Morrison on Friday noted 762,879 NSW people who had lost hours had received income support so far as had 252,843 in VIC. Much of the adjustment in the labour market is likely to come through hours (rather than outright employment losses), though the risks to outright unemployment rises each week. We get the first update on Employment on Thursday in the July Labour Force. NAB still expects a swift rebound in activity once restrictions start to ease when the 70-80% vaccination hurdles are met – on our projections these could be reached by mid-November. Thus the rebound may not occur until late Q4.

    Finally in political news, House Democrats are set to progress both the $1 trillion bi-partisan infrastructure bill and the $3.5 trillion budget framework simultaneously, which may increase the probability of the infrastructure bill passing. Note the House reconvenes on August 23. Meanwhile in geopolitics Afghanistan looks like it will fall to the Taliban who are now on the outskirts of Kabul. We do not think this development will have an immediate impact, though it could prove to be a source of regional instability in the medium term.

    Coming up this week

    • Australia: A big week domestically with Employment for July on Thursday, Q2 Wages on Wednesday and the RBA Minutes on Tuesday. In many respect all three data pieces are very dated given Sydney’s protracted lockdown is expected to stretch into September and perhaps even October, while Melbourne’s lockdown is likely to be extended beyond the scheduled two weeks according to the press. As for Employment for July the survey spans the two weeks to July 17 and thus only really picks up the very beginning impact of Sydney’s protracted lockdown that began on June 26. In other words, no matter what prints on Thursday, brace for worse figures to come. As for some taste of that, PM Morrison indicated 763k people have received payments for those whose hours have been cut. For the record NAB pencils in -30k jobs and for the unemployment rate to rise a tenth to 5.0% from 4.9%. As for Wages on Wednesday NAB looks for 0.6% q/q and 1.9% y/y.
    • New Zealand: Across the ditch the RBNZ meet with my BNZ colleagues expecting a 25bps rate hike for the first time since 2014, with the risk of a 50bps move (the market prices the OCR at 0.55%, implying around a 20% probability of a 50bps move). Assuming the RBNZ raises the OCR by 25bps, the focus will then shifts to the shape and peak in the OCR track. The last OCR track, from the May MPS, showed hikes starting in mid-2022 with the OCR reaching 1.78% at the end of the forecast horizon, in mid-2024. The OCR track will likely be brought forward with a higher terminal rate. It’s possible the peak in the OCR could be above 1.9%, which is the RBNZ’s most recent estimate of the ‘neutral OCR’, if the RBNZ deemed that restrictive settings will likely be required to get inflation sustainably back to 2.
    • Internationally: the focus will be on the US and China – the former because of the much weaker than expected consumer sentiment figures and the later because of ongoing growth concerns. For the US, Retail Sales are on Tuesday where core sales ae expected to be flat at 0.0% m/m. Earnings commentary from retailers are also likely to be closely scrutinised with Walmart and Home Depot on Tuesday. Fed focus also remains with Chair Powell talking on Tuesday, while the FOMC Minutes are on Wednesday – both events scrutinised for any guide on the timing and the likely form of tapering, which could also help inform the probability of more of the FOMC pencilling in a H2 2022 rate hike at the September FOMC Meeting. As for China, key monthly activity indicators are out today amid fears of a slowdown, even before the recent delta outbreak. It is also an important week politically for China with the National People’s Congress Standing Committee meeting for four days from Tuesday through to Friday. Among the agenda items include adding a sanctions law to Hong Kong and Macau, as well as changes to family planning in an item to boost birth rates in the country.

    Coming up today

    A big day in Asia with Japanese Q2 GDP and Chinese Activity Indicators headlining. Domestically there is nothing scheduled amid ongoing focus on virus counts and lockdowns. Details below:

    • NZ: Services Index: unlikely to be market moving and no consensus available; last month was 58.6.
    • JN: GDP – Q2: Consensus sees 0.1% q/q, barely positive after last quarter’s -1.0% q/q.
    • CH: Retail/Industrial Production/Fixed Asset: The monthly indicators take greater than usual focus given fears of a slowdown, even before the recent delta outbreak. Consensus sees Retail at 10.9% y/y, Industrial Production at 7.9% q/q and Fixed Asset Investment at 11.3% y/y. Downside risks are likely given delta’s description to tourism and the summer vacation period.  A weaker than expected result would firm up expectations of further monetary stimulus.
    • US: Empire Manufacturing Survey: consensus sees a sharp fall to 28.5 from July’s highly unexpected surge to 43.0 from June’s 17.4

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