Todays podcast

https://soundcloud.com/user-291029717/high-hopes-big-concerns-and-fewer-babies?in=user-291029717/sets/the-morning-call

Overview

• Equities at new record highs with the S&P500 +1.0% and up 2.0% on the week despite Delta
• Yields little moved (US 10yr -0.2bps to 1.28%), USD up (BBDXY +0.1%), Oil up (Brent +0.4%)
• Delta concerns persist, Facui says US is “going in the wrong direction”, masks might be back
• This week: AU Q2 CPI, FOMC Meeting, US Q2 GDP, EZ Q2 GDP, Earnings with 165 of S&P500
• Coming up today: very quiet everywhere with only the German IFO of note and Tesla reports

“’Cause she’s so high; High above me; She’s so lovely; She’s so high; Like Cleopatra; Joan of Arc; Or Aphrodite; Da-da-da-da-da; She’s so high; High above me”, Tal Bachman 1999

Strong earnings continue to outweigh Delta concerns with the S&P500 reaching a new record high , closing up 1.0% on Friday and 2.0% on the week. Strong earnings by Twitter (+3.0%) and Snap (+23.8%) highlight that firms are paying up for digital advertising amid the strong rebound, which should flow through to strong earnings for Alphabet (+3.6%) and Facebook (+5.3%) this week. So far 87% of companies reporting have beaten expectations and if maintained would be the strongest earnings beat since 2008 (note 165 S&P500 companies report this week – see below for details). Delta variant concerns though persist and notably bond markets continue to trade with a cautious tone. US 10 year yields were little changed on Friday at 1.28% and while for the week are only down 1bps, they did reach a low of 1.13% last week. Aside from Delta concerns, the key themes for this week will be the FOMC announcement, US and European Q2 GDP figures, as well as earnings. As for Australia we have Q2 CPI figures on Wednesday, though virus numbers will overshadow with Sydney in a protracted lockdown that will persist into August.

Likely to dominate Delta news was an Israeli study that showed vaccine effectiveness declines with time and provided updated estimates of vaccine effectiveness. While Pfizer/BioNTech vaccine was found to be 91.4% effective in avoiding serious illness, it was only 39% effective in preventing against infection (albeit mildly). Importantly effectiveness in preventing infection fell to just 16% for those vaccinated in January, compared to 75% for those vaccinated in April. The three broad implications are that a high percentage of the population needs to be vaccinated, social distancing restrictions may need to continue for fully vaccinated people until the country-wide vaccination threshold lifts enough, and booster shots may be required. It is within this context that the US’ Chief Medical Officer Fauci is looking to recommend mask mandates for fully vaccinated people and that some Americans may need booster shots. For developed economies that likely pushes back the full recovery by a quarter as countries seek to lift vaccination rates (COVID passes/passports are being used in Europe to encourage this), but for emerging markets the recovery may take longer.

Economic data was generally strong on Friday with the PMIs supporting the notion that European growth may be set to overtake the US in Q3. The Eurozone Composite PMI reached its highest level since 2000 at 60.6 (vs. 60 expected). The services index rose to a 15-year high at 60.4 (vs. 59.3 expected), while manufacturing dipped slightly to a still very high 62.6 from 63.4. The US Services PMI in contrast eased back to 59.8 from 64.6 and 64.5 expected. While the US PMI is less well followed then the ISM, the PMIs do suggest a pick-up in European growth into Q3. IHS Markit cautioned that while the PMIs painted a positive picture, there were signs the spread of the delta variant was starting to dampen business expectations for the year ahead which will be important to watch for global activity going forward. The usual supply chain anecdotes and pricing pressures were notable and Intel on Friday also noted that it expected the global semiconductor shortage to stretch into 2023, in contrast to the more optimistic take from TMSC.

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.

Coming this week

A busy week this week with Australian Q2 CPI and virus numbers, while offshore the focus is on the FOMC, and then in terms of data Q2 GDP figures for the Eurozone and the US. Earnings also continues. Details below:

• Australia: Q2 CPI on Wednesday would normally take top billing, but virus numbers should overshadow with Victoria and South Australia finding out whether their snap lockdowns are lifted as scheduled on July 27. Sydney’s lockdown though is expected to be more protracted with most expecting it will drag on until at least the end of August with a notable change in the language from the NSW Premier on Friday towards minimising transmission (rather than strict elimination). As for CPI, NAB expects another subdued print with Headline at 0.6% q/q and the RBA’s preferred Trimmed Mean measure at 0.4% q/q, which is slightly below the 0.5% consensus for trimmed mean. Base effects though will see the Headline y/y rate hit 3.6% y/y, but the effect will fade next quarter. Look forward, Sydney’s lockdown will also likely see a subdued Q3 CPI print and speculation continues that the RBA will reverse its QE taper at the following week’s August meeting.
• Europe: Q2 GDP is on Friday with consensus at 1.5% q/q and 13.2% y/y. Going forward the latest PMIs suggest Europe may be set to outperform the US in the next couple of quarters as activity starts to rebound strongly, and as US activity starts to normalise. Also out in the week are CPI figures with Core CPI expected to be subdued at 0.7% y/y.
• United States: The FOMC decision is on Wednesday. While this meeting should be less eventful than the June FOMC given there is no dot plot, all eyes will be on Chair Powell’s press conference and on any hints on the timing for tapering. Expectations are not high with the Delta variant another reason to remain cautious and many still look to Jackson Hole in late August as a key signpost for the timing and form of tapering (e.g. MBS vs. Treasuries). Also out in the week is Q2 GDP on Thursday with consensus at 8.5% quarterly annualised, which is higher than the Atlanta Fed’s GDP Now of 7.6%. Q2 is expected to be the peak of growth in the recovery with growth set to slow sharply thereafter as stimulus fades. The PCE deflators are also out with Core PCE expected to be 3.7% y/y.
• Corporate earnings: It is also another big week for earnings with around 165 of the S&P 500 companies reporting and the focus will be on tech and industrials. Earnings are under focus with the S&P500 at a record high, though 87% of companies that have reported so far have beaten expectations. As for the key names: Tesla (Monday), Apple/Alphabet/Microsoft (Tuesday), Facebook (Wednesday) Amazon (Thursday), Other major U.S companies reporting in the week ahead include Boeing (Wednesday) and Caterpillar (Friday).

Coming up today

A quiet day domestically with nothing scheduled. Offshore it is also a very quiet start to the week in what is a big week for data, events and earnings. Details below:

• NZ: Trade Balance: Unlikely to be market moving, consensus is at $469m.
• JN: Jibun PMIs: The preliminary PMIs are out for Japan with no consensus available.
• GE: German IFO: The Current Assessment is expected to rise to 101.8, while Expectations are expected to be little changed at 103.6.
• UK: BoE’s Vlieghe: BoE MPC member Vlieghe is speaking on ‘what we have learnt over the past six years on demographics, debt and income’.

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