Financial markets had a quiet week and Government bond yields were steady with our 10y bond currently sitting at 0.91%. One of the major economic announcements was the Australian jobless rate which hit 7.1% in May up from 6.2% in April (highest unemployment since October 2001) which was slightly higher than economists had been expecting. The number of jobs lost totaled 227,700 in May, compared to a revised 607,400 jobs lost in April. The treasury secretary Steven Kennedy stated that they are expecting unemployment to reach 8% by September. On a more upbeat note the OECD published some analysis which predicts Australia will outperform other countries during the pandemic. Further positive comments on these numbers came from the RBA Governor saying “Three or four months ago I thought hours worked in Australia could fall close to 20 per cent, I think the number now is more like 10 per cent, so it’s not nearly as bad as anticipated.”
The A$ initially got sold off down to US$68.49 before recovering again back up closer to US$70. The continued strength of our A$ could once again become a problem however recent comments by RBA Governor Philip Lowe provided further support. He told an ANU panel that he wasn’t fazed by the recent strength in the local currency. This could become an issue at some point, but he did not think Australia was there yet.
Clearly, the recent 2nd wave outbreak in Victory is a reminder that we are still a long way off from some sort of normality and the thread of a renewed lockdown weighs heavily on business and consumer confidence. Our Prime Minister Scott Morrison urged states once again to continue to reopen and has warned that Australia can’t just shut up everything forever. The PM stressed again that he had never been aiming for eradication of the virus but was instead attempting to run our economy, run our lives and run our communities alongside this the COVID-19 virus.
On some international news, we saw the Bank of England leaving rates on hold with an additional 100bn Pounds of QE which had been expected by most market commentators. However, the pace of QE was slowed more than expected and the BOE was more upbeat on the near-term outlook. Some more good news came from the manufacturing and service sector activity for June which improved in Germany and the region, which is consistent with the general recovery.
There is plenty of press starting to surface on an imminent pullback in equities given the current liquidity-driven rally. The US market is edging its way towards its record close prior to the pandemic but there is no clarity on the fallout. On the back of this we are likely to see a major shift in asset allocations towards fixed income. We still believe portfolios in Australia are generally underweight bonds, a trend that we are sure will change and continue to recommend this asset class for its income and security.