U.S. inflation concerns captured the headlines this week as the prospect of another major fiscal stimulus package for the U.S. economy saw investors positively recalibrate their expectations for growth and inflation, sparking a sell-off in U.S. government bonds. The U.S. 10-year Treasury yield pushed to its highest level in nearly a year, trading above 1.30%.
A combination of continued accommodative monetary policy, better-than-expected fourth-quarter U.S. earnings; and progress in the roll-out of COVID-19 vaccines, further underpinned improved growth expectations.
U.S. jobless claims unexpectedly jumped to a four-week high of 861,000. Consensus was for 773,000 claims. Treasury Secretary, Janet Yellen told CNBC that the labour market strain shows why the U.S. needs $1.9 trillion in stimulus, stating that the real U.S. jobless rate is around 10%, not January's official 6.7%, as many Americans have stopped looking for jobs.
A Bloomberg report released in the week suggested that vaccine supply is expected to double by April, in part due to the approval of additional vaccine candidates. At the same time, minutes from the Federal Reserve’s FOMC meeting showed that Fed officials agreed to keep rates very low and continue with bond purchases “for some time”.
European economic data releases during the week were ahead of expectations. The second estimate of 4Q20 Eurozone GDP registered a decrease of -0.6% (QoQ) compared to the first estimate of -0.7% (QoQ). The Eurozone economic sentiment index also recorded an unexpected increase to 69.6 compared to 58.3 in the prior month.
UK Prime Minister Boris Johnson said that England’s lockdown would be eased in “stages” based on a “cautious and prudent approach.” The latest UK health data showed that the number of coronavirus cases in England, Wales, and Northern Ireland fell to their lowest levels since early October.
Chinese economic data over the Lunar New Year holiday highlighted efforts to discourage travel following a flareup of coronavirus infections in northern China. Travel plummeted 71% over the three weeks from January 28, reflecting the government’s campaign to dissuade people from using public transportation. However, consumer spending was strong. Retail spending climbed 29% from the year-ago period when the virus was still spreading and from the corresponding period in 2019, according to China’s Commerce Ministry.
With the exception of U.S. markets, global equities had a positive week. In the U.S., the Dow Jones (+0.12%), S&P 500 (-0.72%) and Nasdaq (-1.57%) were mostly softer for the holiday-shortened week, whilst the Euro Stoxx 50 (+0.48%), FTSE 100 (+0.52%) Nikkei 225 (+1.69%) and Shanghai Composite (+1.13%) Indices were all stronger. Bitcoin’s market value reached $1 trillion for the first time, as the world’s largest cryptocurrency has added $450 billion in value this year.
Market Moves of the Week
Locally, Eskom won a court ruling, allowing the power utility to recover 10 billion rand through a tariff. This will result in an average tariff percentage increase of 15.63% during the 2021/2022 financial year and will likely stoke South African inflation.
South African inflation rose by 3.2% on a year-on-year basis in January, compared to an advance of 3.1% in the prior month. Markets were expecting CPI to increase by 3.2%. At the same time, retail sales were better than expected, easing by 1.3% in December, compared to market expectations for a decline of 3.5%.
The JSE All Share Index ended the week up +2.02%, led higher by the resource (+6.41%) and industrial (+0.97%) sectors. The financial sector (-2.96%) was relatively weaker. By Friday close, the rand was trading at R14.66 to the U.S. Dollar, weakening against all of the major developed currencies this week.
Chart of the Week
The Nikkei 225, the best-known measure of the Japanese stock market, is above 30,000 for the first time in three decades. It initially dropped below 30,000 in August 1990, on the news that Saddam Hussein’s Iraq had invaded Kuwait. Since then, the Japanese stock market's uphill climb to regain lost ground has been the longest in the history of any major economy. The long slump can be contributed to factors including a strong yen, low economic growth, deflation, and foot-dragging by Japanese companies resistant to reform.