The big news from last week was Fed Chair Jerome Powell suggesting that tapering will be accelerated. He said the Fed was considering wrapping up its bond buying a few months before its initial target of June 2022. This isn’t necessarily a negative as it is an indication of a strongly recovering economy.
Whilst we strongly believe the drivers of inflation are transitory (unprecedented stimulus, pent-up demand out of lockdowns, and supply constraints), the market has started to bake in a small level of sustained inflation into expectations. This becomes a self-fulfilling prophecy. For example, as companies raise prices on their goods due to expectations of inflation, these raised prices ultimately causes inflation. However, at these levels and with a strongly performing economy, we do not have any significant concerns.
However, this acceleration is not set in stone as they are waiting for further clarity on the Omicron variant. Initial indications show that the Omicron variant spreads more but is weaker (producing milder symptoms), with some epidemiologists suggesting that having a weaker variant to run through the population might be exactly what is needed to end the pandemic. As we are not qualified epidemiologists ourselves, we will wait for the release of the data and analysis from the experts in a weeks’ time.
Notably, GDP figures for Australia were reported. This was down 1.9% from the previous quarter, driven by lockdowns in Sydney and Melbourne so a contraction was to be expected. It is important to note that this was much better than economists’ expectations of a 2.7% decline.
Back overseas, the China Manufacturing PMI print for November cracked the 50.0 mark, coming in at 50.1. Any figure above 50.0 marks an expansion of manufacturing activity, which is what we like to see. Who knows, they might even start buying more of our iron ore!
Nonfarm payrolls increased by just 210,000 for the month, though the unemployment rate fell sharply to 4.2% from 4.6%. Hiring has been hampered by worker shortages. The unemployment rate is predicted to fall below 4% in the coming months where the US will be at full employment. Furthermore, the labour force participation rate increased for the month to 61.8%, its highest level since March 2020.
Looking ahead to this week, the highlight will be the RBA meeting. Although there is no doubt that the overnight cash rate will remain the same at 0.1%, we are more interested in what they have to say about the economy looking forward. This comes after the RBA changed its tune in the last meeting by admitting a rate hike would occur before 2024, as well as in light of the Federal Reserve’s slight shift last week as mentioned.
However, there are different factors at play in Australia. Most importantly, Australia is not seeing the same level of sustained wages growth as in US and other advanced economies. This is important as the RBA sees wage increases as key to indicating more sustained levels of inflation. Based on this, the RBA are maintaining that a rate hike will not occur before 2023. We are interested to see if they continue to hold the line regarding this, which they should. Just like the Fed and most other central banks, the RBA will wait until more is found out about Omicron before making any potential further shifts.
Over in the US, Core CPI for November is expected to come in at 0.4%. The JOLTS (Job Opening and Labor Turnover Survey) will also be released this week, showing the amount of job openings. This is a key forward looking measure to indicate how the US economy is tracking as companies are anticipating the need of more employees for future demand. This is expected to come in at 10.44 million for October.
A quiet week on earnings front, all our attention is turned to Costco (NASDAQ: COSTCO) who will be reporting. Costco is a core holding of ours, which we like due to its scale as the fifth largest retailer in the world, its loyal member base, low-frill warehouses, and durable competitive and cost advantages. Its earnings per share is expected to come in at $2.57 and revenue at $48.76 billion.
Have a great week,
Sam Waldron - Research Analyst