“Markets can remain irrational longer than you can remain solvent”. JM Keynes
The above quote from John Maynard Keynes can in some way be applied to the current state of world financial markets. He was perhaps the first economist to pioneer the idea of accommodative monetary policy. Accommodative monetary policy is when central banks expand the money supply to boost the economy. Monetary policies that are considered accommodative include lowering the Federal funds rate. These measures are meant to make money less expensive to borrow and encourage more spending which is what we are witnessing now on a scale never seen before. In terms of markets remaining irrational, central banks can’t keep printing money ad nauseum and at some point, must take their foot of the accelerator. When and how this happens is the great unknown and will be a catalyst for the shine to come off risk assets which is why we continue to view the stability, and relative security of higher yielding corporate bonds and securities as a more than viable alternative.
On the home front the economy continues to pick up steam. The unemployment rate dropped from 6.3% to 5.8% but the RBA continues to see “considerable spare capacity and an unemployment rate that is still too high”. The discussion of house prices was also little changed in April despite a further acceleration in price growth. For the RBA, the focus remains on lending standards versus the level or growth rate of prices. Regarding monetary policy, the RBA remains committed to its 3-year yield target. It will decide whether to extend this program by targeting the November 2024 bond (currently April 2024) later in the year.
Data and events outside of Australia this week continued to focus attention on US strength. Following last week’s stellar data – a US nonfarm payrolls update reporting almost 1.1mn new jobs as at the end of March if revisions to January and February are included, and a 37-year high for the ISM manufacturing survey – this week saw: the ISM nonmanufacturing PMI print an all-time high; the IMF revise up their growth expectations for the US and world; and the FOMC minutes from the March meeting showing the Committee is very pleased with progress to date.
In terms of continues stimulus, while the FOMC are watchful on economic momentum and inflation, they arguably see a potential risk to the economy in terms of financial conditions if inflation expectations were to jolt higher from here and take nominal term interest rates with them. Committee members therefore continue to emphasise that they see the inflation upswing of mid/late-2021 as transitory and, from a structural perspective, are cognisant of the difficulty the US has experienced trying to get inflation sustainably to target ever since the GFC.
We would appreciate any feedback and hear what you would like to see in this note. There is a lot going on around the world creating a highly challenging landscape for investors. We welcome any suggestions and in the event of any questions please feel free to contact the Bond Exchange directly.
That’s the wrap for this week’s newsletter, wishing everyone a prosperous week and watch this space for our next release.
The Australian Bond Exchange Team.