Strong economic data supports tightening of monetary policy, the markets remain resilient, and more

Updated: Mar 28

Despite the ongoing geopolitical conflict in Ukraine, markets have remained resilient and saw strong gains last week. The ASX 200 was up 1.53%, the S&P 500 increased 1.81%, and tech-heavy Nasdaq 100 soared 2.62%. This was on the back of positive economic data as well as a positive reaction by the market to a further hawkish pivot by members of the Federal Reserve. This included commentary throughout last week from the Fed chair as well as regional Fed Presidents from Chicago, San Francisco, and St. Louis.

Federal Reserve chair Jerome Powell addressed the National Association for Business Economics, where he commented that a rate hike of 50 basis points was certainly on the table at the next meeting. This would be a part of the push to get rates to around 2% by the end of the year. Leading investment bank Goldman Sachs expects the Fed to hike rates by 50 basis points at both the May and June meetings, as consumer prices continue to remain elevated.

Powell reiterated that he believes the US economy is in a strong enough position to remain resilient through this tightening cycle. This was boosted by last week’s print for initial jobless claims at 187,000, beating forecasts of 212,000. This was the lowest weekly jobless claims since 1969, which underscores how tight the labour market is in the US. This could also push wages up further as employers are looking to tightly hold onto their current employees as well as incentivise others to fill job openings – which have been hard to fill due to the US edging towards full employment.

Traditionally, investors have remained wary of tightened monetary policy as higher risk-free rates result in a higher discount for future earnings. This time investors have realised that keeping prices in check is the bigger priority, so the market reacted positively once the news set in.

In fact, if these rate rises are successful in controlling inflation, this will have a positive impact on earnings as cost pressures on key inputs will start to ease. These cost pressures have been a constant theme in the last few earnings seasons in which companies have tried to balance between passing these costs onto consumers or having these costs eat into their bottom line.

The US 10-year Treasury hit a multi-year high, closing out the week at 2.47% as investors priced in a more aggressive rate hike cycle. The 2-year Treasury, which is the most reflective of Fed policy, climbed to 2.28%. We do note that the yield curve is quite flat between the 2-year and 10-year Treasury, as in the long-term rates barely reach above 2.5% to 3%.

In the commodities markets, Brent Oil increased back up to over US$120 a barrel, and iron ore prices remain elevated at over US$150 per tonne. Strong commodities prices have contributed to the resilient performance of the Australian share market, which is heavily weighted towards miners. This has also led to a strengthening of the Aussie dollar, in which the AUD/USD is above 0.75.

Looking the week ahead, those invested in BHP and CBA will be happy to see that dividends will be paid this week.

This week the print for a few leading economic indicators in the US will be closely looked at. The market will be hoping to see figures that continue to show the US economy is in a strong enough position to remain resilient through the tightening of monetary policy.

US GDP growth for the fourth quarter of 2021 is expected to come in at 7.1%, which will signal that the US is growing strongly and can afford to slow a bit.

The US Consumer Confidence index is forecasted to be 108. This index is a leading predictor of consumer spending, which plays a major role in economic activity. An indicator above 100 signals a boost in the consumers' confidence towards the future economic situation, which means they are less prone to save and more inclined to spend money.

The US is expected to add 450,000 nonfarm payroll jobs, which would contribute to reducing the unemployment rate from 3.8% down to 3.7%. Figures such as these indicate that the need for accommodative monetary policy is unnecessary.

Interesting Finance Fact

Stock market declines of 5% to 10% generally require a month’s recovery time

Stock market crash statistics pulled from historical data showed that it didn’t take long for investors to recoup their losses if they stayed long and didn’t panic sell out of the market. In fact, panic sells usually result in investors selling close to the bottom, and then buying back in close to the top as they try and chase the recovery, albeit somewhat too late. Even a much larger drop of 10-20% usually takes just four months of recovery.

Although past performance isn’t a reliable indicator of future performance, it does give a lot of comfort that historically speaking, the markets have recovered sooner rather than later.

Have a great week,

Sam Waldron - Research Analyst

10 views0 comments