The week that was

Markets were more settled last week, but interest rate expectations continued to set the tone with the US market proving especially sensitive. Markets were at first buoyed by Fed Chair Jerome Powell’s insistence that inflationary pressures would abate later in the year but the next day an annual US inflation print of 7% put markets on the back foot again and long-term interest rates spiked again on Friday. This is the fourth week in a row that long-term rates have been on the rise and the third week the Nasdaq tech index has ended in the red.

In Australia long-term rates are now just below 2% which at least makes them at least roughly equivalent to long-term inflation expectations. At a sector level, the inflationary theme continued with energy stocks again being the stand-out performers (up by 6% overseas and 4% in Australia), followed by materials which was of particular benefit to the local market (BHP, Rio, Fortescue and Woodside were all up between 5% and 10% last week). As signs of easing in China became more tangible, Chinese tech and healthcare stocks also rebounded strongly. Elsewhere performance was mixed as the market switched focus from weak December consumption data to the upcoming US earnings season. Expectations remain quite high but some weaker than expected bank results on Friday was an ominous sign. Either way it is likely to be a noisy earnings season as the strong rebound of 2021 is juxtaposed with an uncertain but potentially improving post-Omicron outlook. Wesfarmers is a case in point. It was one of many Australian Consumer Discretionary and Consumer Staple stocks that fell sharply last week amid concerns over supply chain disruptions and Omicron induced labour shortages, only to rebound today when the trading update confirmed the market’s fears. ‘Sell the rumor, buy the news’ as they say. That left the local market down almost 1% alongside Japan and Europe and behind the UK and US (both flat for the week) and emerging markets (up more than 2%).

Most commodity markets were up again, apart from precious metals and copper which were flat. This could be due to an increasing sense that, as COVID numbers seem be peaking the market is looking through the current disruptions and seeing buoyant production activity, or it could also be due to expectations of persistent supply chain disruption. The broad based and steady rises we have seen recently perhaps imply the former explanation and bond markets may be supporting this thesis. The last half of 2021 was characterised by significant volatility in short-term rates while the last four weeks has seen steadier rises in both nominal and real rates of interest across the interest rate maturity spectrum and perhaps especially at the long end. Corporate bond spreads eased again very slightly and certainly didn’t display any signs of distress at the prospect of higher funding rates. If the Chinese authorities, the Fed and smaller central banks like the RBA have a playbook for quietly exiting the post-COVID regime of extreme monetary stimulus this is probably what they were hoping for. So far so good.