Below trend growth to continue
The Delta variant continues to spread, vaccination rates have slowed, and case numbers are rising.
Today’s song title evidently doesn’t apply to the US equity market where it been more a case of ‘turnaround Tuesday’ with the S&P500 closing with a gain of 1.5% so reversing most of Monday’s 1.6% loss, but rather the AUD/USD which continues not to be able to step out of its own shadow, kissing 0.7300 level overnight though somewhat mercifully pulling back up to 0.7330 as I type, getting a little bit of love perhaps from the rebound in risk sentiment and higher commodity prices. Oil has recovered about 1.5% or $1 of Monday’s sharp, post-OPEC+ deal losses and metals prices are mostly higher. US bond yields are also a couple of basis point or so higher coming into the New York close, but only after the 10-year Treasury hit a low of 1.13% earlier in the day.
It’s hard to point to an obvious driver for the rebound in stocks, other than to note that a buy-the-dip mentality when it come to the US equity market remains very much in evidence. Europe hasn’t seen quite the same degree of enthusiasm for buying Monday’s drop even though US gains were mostly chalked up during the European afternoon (Eurostoxx 50 ended with a gain of 0.7%). Sector wise, US industrials (+2.7%) and financials (+2.4%) led the gains for the S&P 500, consistent with faith in the global reflation trade not being dead and buried – ditto commodity markets – though the performance of bond and currency markets in recent months seems to tell a very different tail. Certainly its hard to argue that all asset classes are dancing to the same tune this year. Netflix reported on the NYSE closing bell with its Q2 increase in paid streaming services beating the 1.12m street estimate at 1.54m but its Q3 guidance of 3.5m net new subscribers well short of the 5.86m estimate .Its stock fell by about 3% in after-hours trade immediately following its results.
There isn’t any obvious covid-related news to justify the US stock market rebound. Indeed, Rochelle Walensky, the head of the US Centre for Disease Control (CDC) says that 83% of new US infection cases are from the Delta strain, up from 50% in the week ending Jul 3, and with two third of US counties having a vaccination rate of below 40%, warns of a ‘pandemic of the unvaccinated’, amid warnings elsewhere that the full re-opening of the US economy may need to be recalibrated. On one positive note, are reports that two-thirds of India’s population are displaying covid antibodies, offering hope for bringing the spread of the disease there under control (India’s infection curve has been falling quite sharply in recent weeks).
The US intra-day bond market turnaround has seen longer dated yields claw back above Monday’s closing levels, 10s ending +3bps at 1.22% and the 30-year a bigger 56bps to 1.88. 2s meanwhile are ending the New York 1,6bps lower, so a reasonable degree of cure-re-steeping that, as mentioned, has helped the financial sector outperform.
In FX, the US dollar can still do no wrong, continuing to trade as though it’s very much more ‘risk off’ than ‘risk on’ in defiance of what equity and commodity markets are for the most part suggesting. The DXY and BBDXY indices we track are both up just under 0.1%. Amongst the major currencies, the CAD (+0.6%) is the only one up against the USD, helped by the oil price bounce, though the NOK (-0.6%) is the worst. Go figure. The NZD has fared a little worse than AUD, the former down 0.4% with an overnight low of 0.6881 and AUD -0.2% and a low of exactly 0.7300. The negative technical picture for the Aussie continues to show no signs of reversing, though at the same time it’s hard to argue that the lockdowns here and the heavy economic toll they will exact are the reason, given the better performance of the AUD/NZD cross so far this week (last week’s falls very much driven by the shift in RBNZ thinking towards an August first rate hike).
Yesterday’s RBA Minutes noted that the Board agreed when discussing tapering, “that there should be flexibility to increase or reduce weekly bond purchases in the future, as warranted by the state of the economy at the time” and that even at the July Board Meeting “ members acknowledged that an argument could be made to retain the pace of bond purchases at $5 billion per week, given that economic outcomes were still well short of the Bank’s goals for inflation and employment.” The RBA has signalled via the media that should current lockdowns in Sydney and Victoria extend into August, the Bank would actively think about whether it should reverse its July decision to taper QE to $4bn a week from $5bn a week following the end of the current tranche of purchases in September.
The only significant economic data overnight was for US housing starts and permits. Starts rising by more than expected in June (6.3%) while permits unexpectedly fell to an eight-month low (-5.1%). The former is the leading indicator and offers more signal than the noise that is the monthly volatility in starts. Permits have been trending lower alongside mortgage applications. Thus, overall the data adds to the story of fading economic activity for the housing market.
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