Bond yields were up again last week but so were equity markets which was a nice change that led to the first up week in the last four. In fact, while markets have been on the back foot recently, most commentators have been pleasantly surprised that they haven’t reacted too badly to an apparent wind shift in the gusty inflationary data. Perhaps even more surprising was that the biggest rise came on Friday when an important data release showed just how strong the US domestic services sectors continue to be (that’s the bit the Fed is particularly worried about and which it feels it can control with higher rates). Government bonds were down on the news (with long term yields reaching 4%). The US earnings season, which has just drawn to a close, saw corporate profitability contract by around 5%, but analysts are forecasting that this was the trough in what would be a very shallow setback. This also assumes away a recession later in the year, something which corporate bond markets also seem to agree with as yield spreads also contracted last week. Lastly, oil and other commodity markets were fairly strong adding to the sense that the market is starting to discount a global recovery. This week we get to see how hard the Fed will push against this optimism when Jerome Powell testifies to the US senate over 2 days, as too much exuberance could make his job of reining in inflation harder and ultimately lead to higher rates and, arguably, more economic pain later on. Then later in the week the US Non-Farms Payroll report is expected to potentially test the market and the Fed’s resolve.  

Overall, that left markets across the world up by around 2%, with only Australia being left behind with a flat result for the week as a fairly lacklustre reporting season came to a close, and more importantly one where the guidance from companies was even more gloomy. Many investors are getting behind the prospect of a sustained Chinese re-opening and recovery (even though the Chinese data is thus far a little mixed). This served to propel iron ore and energy prices higher and with it our large miners and energy exporters. It also served to mask the underlying weakness of the rest of the market, with every other sector in negative territory, especially those that are seen to be reliant on domestic consumption.  

At the time of writing the RBA had just increased rates by an expected 0.25% and did it without sounding too hawkish (while leaving the door open for a few more rate rises).  The market liked this and promptly lopped of half of an expected 0.25% rate rise. Unsurprisingly perhaps, offshore markets didn’t flinch but the rest of the week in the US could be more eventful, and many will be hoping that Powell adopts a similar demeanour.        

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