US Fed flags potential for sooner than expected tapering

Blog
Friday 18th June 2021

US Fed flags potential for sooner than expected tapering

Blog
Friday 18th June 2021
Written by Chris Lioutas

Markets:

  • Local and global stock markets were mixed this week as investors digested improving economic data, inflationary pressures, and hawkish rhetoric from the US Fed.
  • In local stock news, Coles unveiled plans to spend an additional $1.4 billion next financial year on top of the $1.1 billion spent in the current financial year. The investments are aimed at improving online shopping capabilities, data systems, and new self-serve checkouts. The company will also accelerate the rollout of its new format Liquorland stores.
  • Oil prices continue to rise hitting the highest levels in 32 months - a toxic combination of fast increasing demand as economies re-open, constrained supply via the OPEC cartel (to get prices higher to balance their individual budgets), and lack of new investment in supply as the “green” wave is pushing for faster transition away from oil & gas than is possible . Supply needs to increase, new investment is key.
  • The Aussie dollar fell sharply as the US dollar rose strongly following the US central bank’s hawkish statements following their monthly policy meeting, which also caused the gold price fall.

Economics:

  • Australia’s unemployment rate dropped to 5.1% in May, with a greater proportion of new full-time positions. The drop from 5.5% in April came after 115,200 people joined the workforce. Hours worked were higher as was the participation rate. A strong transition off JobKeeper.
  • The Reserve Bank of Australia’s June meeting minutes were released with the bank outlining the options for its July decision on whether to continue quantitative easing (money printing) efforts of buying $100 billion in bonds every 6 months. Plenty of options on the table. Stopping the program is highly unlikely.
  • According to a new report, Australian households have more mortgage debt than almost any advanced economy and recorded the 4th highest house price growth over the last 20 years. The report found that the main contributing factor to the significant rise in mortgage debt and house prices was local and state government regulations which led to supply shortages. No doubt tax breaks on property investment are also a major contributing factor.
  • Australian business confidence hit a 7-year high according to a key survey. 7 in 10 businesses reported expecting economic “good times” over the next 12 months.
  • Australia’s minimum wage will go up by almost $20 a week (2.5% increase), following a recent ruling, affecting around 2.5 million workers. The move, whilst positive for those workers, will further hurt small businesses that have been the hardest hit due to lockdown policies. The increase comes after a 1.75% increase last year, with both increases well ahead of inflation.
  • Commonwealth Bank household spending intentions for May showed a solid improvement across most spending categories with the strongest intentions coming from home buying, retail, health & fitness, entertainment, and car buying. Education and travel intentions remain low.
  • The US central bank held its 2-day policy meeting, disclosing that 11 out of 18 members were projecting at least two 0.25% increases in 2023 as the economy continues to recover. That is earlier than they have previously maintained. However, the bank reiterated that monetary support will remain until substantial further progress is seen on employment and inflation.
  • US retail sales fell by 1.3% in May, but April’s data was revised higher from a flat result to an increase of 0.9%. Producer prices rose by 0.8% in May to be up 6.6% on the year, which is the biggest annual gain since November 2010.
  • The European central bank renewed its pledge for faster bond-buying (money printing) even as policy makers adopted a more optimistic view on the risks facing Europe’s economy. The Bank does not believe inflation is a threat in Europe, though some members did raise the prospects of upside risks.
  • Consumer prices in the UK rose 2.1% from a year earlier in May, the fastest pace since July 2019. Higher energy prices were the main contributor.

Politics:

  • The G7 leaders met at the beachside suburb of Cornwall (nice holiday) in the UK to apparently solve the world’s problems (funnily enough, the one’s they created). There was no filter on display, as much of their citizens remain in some form of lockdown, with plenty of frivolity and dichotomies including mask wearing (but not whilst seated, only when standing; no masks on their private jets but mask on when disembarking), elbows (instead of handshakes) but with plenty of hugs, plenty of social distance / spacing but only for photo opportunities (otherwise no social distancing), and all whilst fully vaccinated. Gotta love the post-Covid science era.
  • Victoria eased their lockdown restrictions after 2 weeks of utter confusion – no visitors at home, masks outside, 50 people in a restaurant, 10 people at a wedding, 50 people at a funeral, no travelling more than 25km from home but you can’t meet someone either side of the 24km zone without getting fined, gyms closed in Melbourne but open in regional Victoria with social distancing, and brothels open in regional Victoria. Eyes wide open. The UK surprised no one in postponing plans to remove all Covid restrictions in England next week. The easing will be delayed to July 19. PM Boris Johnson is “pretty confident” there won’t be another postponement……..
  • Australia and the UK have agreed to the terms of new free trade deal, the UK’s first since Brexit. The deal will reportedly make it easier for qualified workers from one country to live in the other, and ease tariffs and quotas on a range of goods.
  • The Chinese government has made a 2nd attempt to cool the rising commodity prices it is paying this time reportedly telling state-owned companies to limit their exposure to overseas commodities markets. Trying to shake speculative traders out of commodity markets, but also doubling as a warning shot to their commodity trading partners (ie. Australia). 


Author 

Chris Lioutas, Director, Insight Investment Consultants

Chris holds the position of asset consultant for Maxim Advisors and is a current sitting member of Maxim's investment committee. 

With permission of the author, this article is presented by Maxim Private Clients Pty Ltd ASFL No. 511972

Maxim Private Clients Pty Ltd ABN 47 611 614 398 AFSL No. 511972

Disclaimer: This material has been prepared without considering any potential investor's or clients objectives, financial situation or needs. This article is of a general nature and does not consider the individual circumstances of its recipients. Any information contained within this publication should not be misinterpreted as advice in any way. Please consult your financial advisor should you have any questions or concerns