Since the global financial crisis central bank ‘speak’ has become critical to investment market stability and potential outbreaks of volatility have often been soothed away with a speech or comment from a key figure. We saw another example of this last week as US Fed Chair Powell attempted to ease investor concerns that the Fed’s June ‘dot plot’ didn’t automatically imply the bank was now on a more aggressive path towards rolling back its pandemic crisis measures. “We will not raise interest rates pre-emptively because we think employment is too high [or] because we fear the possible onset of inflation,” Powell said at a US congressional hearing last week thereby helping set a more reassured tone across markets last week.
On the whole global economic data remained strong last week as exemplified by initial June Purchasing Manager Index (PMI) readings that were published for the US, UK and Germany. Readings for the manufacturing sector remained well in the 60s (readings of 50 or more indicate an expanding sector) while those for the service sectors were slightly lower but still indicative of strong growth.
On the domestic front the ESRI published its Summer 2021 quarterly economic commentary last week which forecasted that the Irish economy is set to rebound strongly in 2021 and 2022 with GDP growth rates of 11% and 7% respectively. External trade (exports) will be a key driver of the 2021 performance although domestic demand (consumer spending and investment) is forecast to strengthen later this year and into next year, leading to average unemployment of 7.1% in 2022 compared with 16.3% in 2021.
Global equity markets steadied last week helped by comments from US Federal Reserve measures which appeared to ‘walk back’ any risks of sudden changes in US monetary policy. Sentiment was also helped by Republicans and Democrats agreeing to a $600 Billion infrastructure bill – lower than initially hoped but still of some benefit to the US economy. Elsewhere, the outlook for US bank stock prices got a boost via the latest US stress tests on the sector which showed that the sector could withstand losses of $474 Billion and still emerge with double the required levels of bank capital. This frees up many of these banks to reengage in share buybacks and dividend payments.
Bond markets stabilised last week helped by the Fed comments noted earlier. US May Personal Consumer Expenditure (the Fed’s preferred measure of US inflation) rose 0.4% in May and by 3.9% over the past twelve months. However, the May gain was slightly less than expected which helped ease bond market anxieties about inflation. Credit sectors did a little better over the week compared to government bonds with higher-yielding bonds posting modest gains.
As with equity markets, commodities regained some composure last week. US dollar gains petered out in the week which was a positive for the sector, particularly in the metals space. In energy, oil prices carried on their winning ways helped by data showing the US oil inventories again moving lower. All eyes now turn to the OPEC+ (OPEC + Russia) meeting on July 1 to see what next steps the cartel will take with respect to global oil supply. In our view the cartel is likely to expand supply slowly to as to preserve stable but profitable supply for its members.
Forestry – JP Morgan moves into the expanding forestry investment market!
Recent months have seen a number of large global companies such as Apple enter the forestry market as a means to achieving their ‘net zero’ carbon aims. Last week we saw another example of this with the global investment bank JP Morgan acquiring Campbell Global, a US timberland firm with over 1.7 million acres of forestry under management around the world. Not alone will the acquisition help JP Morgan offset its global carbon footprint, but it is also looking to use the acquisition as a way of creating a forestry option for investors – something we have also done recently through our first Forestry Bond. Interestingly, the acquisition also puts JP Morgan in a good position to be a leading participant in the rollout of voluntary carbon offset markets, markets we believe could grow strongly over the next number of years as more and more companies look to offset their carbon footprint.
Rising Irish consumer confidence should boost prospects for the hospitality sector.
Last week KBC Bank published its Irish consumer sentiment index for June 2021. The findings showed that Irish consumer sentiment continues to gradually recover with the headline index reaching a two year high (see our chart of the week this week). Consumer sentiment has been helped significantly by the rollout of covid19 vaccines across the country. In our view the improving consumer sentiment plus the building economic momentum as highlighted in the ESRI report noted above represent catalysts for a big pick up in hospitality spending over the next year.
House prices climb to record levels in the US and Europe.
It is not only Irish housing market that is experiencing unprecedented price increases, house prices have set records in the US and parts of Europe as vast fiscal and monetary stimulus has helped residential property markets to continue to shrug off the impact of the coronavirus pandemic. The median price for US existing houses rose a record 23.6% year on year to a high of $350,300 last month with every region of the country recording increases, the National Association of Realtors confirmed. Perhaps signalling an ever-increasing dysfunctional market, the number of residential property sales declined in the US, even as prices continued to rise, suggesting that demand is outstripping supply. There are conflicting reports coming out of the US with some economists saying the drop in sales volume could be a sign that the US housing market has peaked while others see further rises to come, fuelled by central bank policies. Closer to home, the European Central Bank reported that in the fourth quarter of last year eurozone house prices were up 5.8% on the previous year — the highest growth rate since mid-2007, with Germany, France and the Netherlands accounting for almost three-quarters of the eurozone’s total increase. Despite being questioned on their ultra loose monetary policy, Christine Lagarde of the ECB noted that there were no strong signs of a credit-fuelled housing bubble in the euro area as a whole but she added that there were “residential real estate vulnerabilities” in some countries and some cities in particular.