Posted on 12/10/2020
The latest unemployment figures (August) showed a surprisingly strong leap of +111,000 jobs (+74,800 part time, +36,200 full time) or 0.9% (consensus:
-35,000, +0.2%). Total hours worked for the month however, only increased by just 0.1%. These numbers saw the unemployment rate fall to 6.8% from 7.5% (consensus 7.7%). Traditionally a lead indicator to the economic outlook, the labour market is expected to continue to send mixed signals due to Government’s employment schemes – JobSeeker, JobKeeper and now JobMaker – are seemingly distorting the data and the true pace of improvement. Despite this, total retail sales hit a record high in July, rising by 3.2% (and 12% on an annual basis). Spending rose in major categories (ex-Victoria), with some components of the reading well above their pre-Covid pace and others remaining significantly below. The most noticeable surge is in household goods (+27.9%), food retailing (12.3%), while spending at cafes & restaurants (-13%) remains down sharply. Importantly, these household goods (electrical, furniture and hardware) are typically imported goods, therefore these items do very little to boost domestic production.
The U.S. labour market key indicator, non-farm payrolls, rose by +1.371million (consensus: +1.35m) in August, bringing the unemployment rate down to 8.4% from 10.2%. Although, a series of other data readings are indicating that job losses have since risen, which is not surprising given the Paycheck Protection Program, which was supporting jobs, ceased at the end August. This has led to both the Senate and Federal Reserve call for an additional stimulus package for those affected by the pandemic, yet, unsurprisingly, neither the Democrats or Republicans can agree to the finer details of a package.
Investors continue to keep one eye on the geopolitical tension between the U.S. and China in the run up to the November Presidential Election. The Trump administration imposed export curbs on a number of products (such as semiconductors), making it a requirement now for U.S. firms to hold a license to export goods to China. President Trump again raised the idea of decoupling the U.S. and Chinese economies, vowing in future his administration would prohibit companies from outsourcing to China.
For Commodities, the price of Oil (Crude) remains trapped in a tight range as persistently weak demand permeates through the market. A lacklustre driving season in the U.S has seen the market reassess its views on the supply / demand imbalance for the remainder of the calendar year. OPEC (Organization of the Petroleum Exporting Countries) announced it was looking to tighten member nation adherence to production cuts, with the committee recommending these cuts be extended to years end (from end of August), cushioning the blow from second waves of Covid-19 travel restrictions. Iron ore remained comfortably in the USD$110-120 a tonne range across the quarter, finding a strong support base in President Xi Jingping five-year economic recovery roadmap – which includes a focus on infrastructure and housing investment. However, there was turbulence through September with a strengthening US dollar and Brazilian producer, Vale, coming back online shipping 1.9mt/d in the first 13 days of September, compared to 1.49mt/d in the 21 business days in August. This led investors to question the sustainability of China’s robust demand for the commodity. However, price strength was found at quarters end when Vale was issued with court order to shut down its operations, and a carrier at Port Headland (WA) was stranded after 17 of 21 crew tested positive to Covid-19, delaying shipments from the port.
For the Fixed Income sector, both U.S. Treasury’s and Australian Government Bonds remained anchored in a narrow range across the quarter. There is growing speculation that the two will cut rates again before the end of the calendar year. The unrelenting disconnect between the bond and equity markets remains plagued by the risk-off sentiment as investors hunt for yield. However, despite presenting as a challenge in portfolio construction, it does not change the narrative of the importance of maintaining a well-diversified portfolio.