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Overview Walk it Back

• Week ends with new record high for the S&P 500, further US curve re-steepening and softer USD
• AUD higher Friday but fails to recapture the 76 handle in front of month, quarter, half-year and year-end
• President Biden Saturday walks back on tying bipartisan infrastructure deal to passage of his American Families Plan
• Sydney (et al) lockdown impact a local focus this week; Friday’s US non-farm payrolls the global highlight

Walk it back, Walk it back, Walk it back, What, what would you have had me say? Instead of what I said – R.E.M.

It wasn’t a big night for markets on Friday, lacking major data surprises or other market moving events, though over the week it has been a good one for stocks globally; the US Treasury curve has re-steepened somewhat after the dramatic post-FOMC flattening the week before with 10s now back above 1.50%, while in the context of a US dollar that lost 0.8% in BBDXY index terms, AUD/USD finished the week up some 1.5%. It failed though to gain a foothold back above 0.76 as we head into month, quarter, half and financial year-end on Wednesday.

Of note since Friday’s New York close, US President Biden on Saturday walked back his threat to refuse to sign a $1tn bipartisan infrastructure deal unless it is accompanied by a larger and more comprehensive spending package, in what the FT for one described as a ‘sharp U-turn by the White House just two days after reaching the landmark cross party deal’. The abrupt shift from Biden came after Republicans reported balked at the US president’s insistence on Thursday that the fate of the two pieces of legislation be tied together.

“At a press conference after announcing the bipartisan agreement, I indicated that I would refuse to sign the infrastructure bill if it was sent to me without my Families Plan and other priorities, including clean energy,” Biden said in a statement on Saturday. “That statement understandably upset some Republicans, who do not see the two plans as linked,” he added. “My comments also created the impression that I was issuing a veto threat on the very plan I had just agreed to, which was certainly not my intent.”

In so far as one of the catalysts for US equities achieving new record highs last week was the news of a the handshake deal between the president and a bipartisan group of Senators, but  some Republican Senators now ‘smell a rat’ in so far as voting for the infrastructure bill could be akin to also voting for the American Families Plan then developments here promise to be one source of market volatility in the week ahead.

Fed speakers on Friday night included Boston Fed President Eric Rosengren (2021 non-voter) who while aligning himself with the view that current high inflation is likely to prove transitory in so far a large outliers (used car prices especially) accounted for most of the recent movement, he did say that the conditions could be met for a first rate rise by the end of 2022. Minneapolis Fed President Kashkari professed not to be surprised by some of the current inflation readings and is still of the view they will normalise to bring inflation back down (he cited the recent sharp fall back in lumber prices as one example). Former US Treasury Secretary Larry Summers meanwhile is still having none of it, saying he sees inflation at 5% at the end of this year and that he “doesn’t see the basis for policy makers’ serenity”.

On the data front, US Personal Incomes fell 2.0% in May, reflecting the fading impact of the stimulus payments made under the March covid relief bill, better than the -2.5% consensus. Real personal spending fell 0.4%, weaker than the -0.1% consensus, though April was revised up to 0.3% from -0.1%. The core PCE deflator rose 0.5%, below the 0.6% expected but the yr/yr rate lifted to 3.4% from 3.1% as expected, a smaller jump that in the already-released may CPI data, due to rents having  lower weight in the PCE data and differences in the way airlines fares are calculated, which our friends at Pantheon Economics note throw up month-to-month anomalies even though they trend together over time.

The final University of Michigan June Consumer Sentiment Index came in at 85.5, below the 86.4 preliminary and 86.5 expected. 5-10 year inflation expectations were unchanged on the preliminary at 2.8% while 1-year expectations were 4.2%, above the 4.0% preliminary and 4.1% expected.  China industrial profits data released on Sunday showed profits up 36.4% in May on a year ago, down from 57.0% in April, reflecting some fading of year-ago base effects that were at their peak in March when profits were up 92.3% yr/yr.

Equities Friday & Weekly

It was a good night – and week – for US equities on Friday with the S&P500 closing at a new record high for the second successive day and the VIX at a new post-pandemic low of 15.6 (not quite back to pre-pandemic levels, but pretty close). Financials led Friday’s moves (+1.25%) benefiting both from the announcement after last Thursday’s close that all 28 large US banks had comfortably passed the latest Fed stress tests (so heralding potential fresh share buy-back and/or dividend increases) and the further re-steepening in the US yield curve following the prior week’s dramatic flattening.

The Dow, (+3.44%) S&P (+2.74%) and NASDAQ (+2.35%) were the best three performing major global equity indices last week. The ASX 200 was down on the week due to the impact of some stocks going ex-dividend on Tuesday, but did okay on Friday (+0.5%) despite the latest covid infection news and anticipation of more widespread lockdowns being announced at the weekend, which duly arrived on Saturday with all of Greater Sydney put into lock-down, initially for two weeks.

Bonds Friday & Weekly

In bond markets, longer dated yields continues to recover from their prior week’s post-FOMC bashing, with 10-year Treasuries and Bunds both up 3bps, UK gilts +4bps and Italian BTPs +6bps. On the week, US 10s are up 8.5bps, 2s up 1bps and the 30-year +13.5bps. In contrast, Australian 10-year cash bonds lost 3.5bps to 1.56%, narrowing the spread over US10s to some 4bps from 16bps a week before.

FX Friday & Weekly

It turned out to be a quiet Friday in currencies with the USD losing a touch (-0.09%) and only the CAD (+0.26%) and NZD (+0.18%) showing much movement. AUD was up just shy of 0.1% and did manage to spend some time above 0.7600 (high of 0.7617) but ended the week at 0.7590, up 1.5% on the prior week’s lows. It has opened s little softer this morning (0.7580) doubtless as market’s asses the economic fall-out from the covid related restrictions announced over the weekend.

Finally commodities generally did well on Friday, e.g. aluminium up 2%, iron ore futures +2.4% and a 0.8% rise in Brent crude lifting it to $76.18 ahead of this week’ OPEC+ meetings. The LMEX index of base metals closed Friday at its best level in 8 days to be up 3.6% on the week.

Coming Up

• Progress or otherwise in covid infection containment amid the two-week stay-at-home orders for Greater Sydney will be dominating the headlines locally this week. The outbreak has postponed an event that the RBA Governor was due to present at on Wednesday, meaning we won’t hear from the RBA again until the 6 July Board Meeting. On the data side, a new record trade surplus for May is expected on Thursday, along with Quarterly Job Vacancies which will be watched to further confirm recent labour market strength. There is also plenty of second-tier data including Private Sector Credit on Wednesday and Housing Finance Approvals on Friday.
• US market focus will, alongside any significant developments on the bipartisan $1tn infrastructure bill, be on the June payrolls report on Friday. Homebase data suggests a very strong Payrolls number of around 1.5m, which is well above the current consensus of 700k. Before Payrolls, Thursday’s Manufacturing ISM is expected to remain high at 61.0, monitored also for what it reveals about supply chain bottlenecks and inflation. There is also plenty of Fed speak, inclusion NY Fed President Williams on Monday.
• In China, Politics dominate with the 100-year anniversary of the founding of the Chinese Communist Party on Thursday. Data wise Official PMIs are on Wednesday and are likely to be closely watched given some signs of slowing in the monthly activity indicators recently. Manufacturing is expected to be at 50.8 (previous 51.0) and Non-manufacturing at 55.5 (previous 55.2). Later in the week is the Caixin Manufacturing PMI.

Market Prices

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