ASX 200 to bounce + Why the Big Four Banks could be a "pain trade"

MARKETS

• S&P 500 finished higher in relatively uneventful trade
• US 2-Year Treasury yield continues to come off last week’s 5.0% highs
• Markets in waiting mode ahead of US inflation data and earnings season
• Citi cut their US outlook to Neutral from Overweight, saying growth stocks may be set for a pullback as AI euphoria enters a digestive phase
• Barclays raised their S&P price target from 3,725 to 4,150 but suggested equities likely range bound through to year-end and don’t expect tech-oriented rally to broaden
• US earnings season unlikely to fuel gains for US market (Bloomberg)
• S&P 500 braces for more pain amid profit warnings and rate fears (Bloomberg)
• China stocks face $28bn wave of selling pressure (Bloomberg)
• Fed's QT program set to be felt in coming months (Bloomberg)

STOCKS

• US banks to report biggest jump in loan losses since the pandemic (FT)
• Microsoft could push US$3.1tn valuation on AI gains (Bloomberg)
• Meta's Threads hits 100m users, which surpasses ChatGPT as fastest growing platform to hit that milestone (Reuters)
• Online used car retailer Carvana said it expects exceptional growth within its used EV segment as consumer demand skyrockets (CNBC)
• Sports betting company Draftkings rallied after Jefferies included the company on its list of stocks to benefit as it approaches profitability (CNBC)

ECONOMY

• Factory-gate prices fall further in China, adding to deflation concerns (FT)
• China’s deflation pressure builds as consumer prices falter (Reuters)
• Eurozone sentiment weakens for fifth consecutive month (Reuters)
• Japan's current account surplus misses expectations(Nikkei)
• Manheim Used Vehicle Index fell 4.2% m/m in June, largest decline since start of pandemic (CNBC)

DEEPER DIVE

China has a deflation problem

Although inflation has been the bogeyman of Western markets for the last year and a half, deflation is very quickly going to become the buzzword for Chinese investors.

Chinese inflation fell to 0% year-on-year and its producer price inflation was -5.4% year-on-year. Both were well below economist expectations and both are a sign that depressed consumer sentiment is feeding through to the world's second largest economy.

Deflation, unlike disinflation, is a major problem because it places buyers into a cycle of putting off spending in the hope of prices going even lower. That sends economies into periods of low growth and even a recession.

China has been in deflation on four previous occasions in the modern era, all of which coincide with major global events. "Those global events also brought syncronised global easing, which China benefited from. But this time, global interest rates are still rising. Deflation and debt at 290% of GDP suggests a very challenging economic situation in China," says Richard Yetsenga, ANZ Bank Chief Economist.

For better or worse, China's producer price print historically suggests headline deflation in the US as well.

Are we "pre-programmed" to love the Big Five banks?

If you've read this note over the last year, then you'll know I really enjoy writing about the sell-side views on banks (I think it's got something to do with how much I love macro). But this different angle caught my eye yesterday. Citi argues that most investors remain "significantly underweight" the Big Four but not because of any economic reasoning. Citi says it's to do with the fact that many investors are simply scarred by the experiences of 2008 and 2020.

Here is their full reasoning:

• "The banks are often considered to be the barometer of the economy, yet investors remain significantly underweight. This current positioning seems reflective of investor’s belief that bank sector performance is set to play out like it did in the last two downturns – 2020’s COVID-19, and 2008-09’s GFC. However, these two downturn events were characterised by a much weaker economy and particularly, a worsening labour market."
• This time around, we expect a more resilient labour market and lower corporate leverage to deliver a more benign asset quality cycle. This combination has us turning to the performance of the banks sector during 2002/03 downturn which is more akin to the current conditions. This period delivered a defensive performance from banks, that if it plays out today, would deliver a significant ‘pain trade’ for many investors."

That's saying something considering only one of the Big Four is BUY-rated at Citi (ANZ). Year-to-date, the banks' share prices are down 6% but Citi argues the pain trade could last at least six more months if earnings hold up better than expected.

A giant departs the stage

Finally, if you haven't read about it already, a giant of Australian economics is about to exit stage left (but not retire altogether). Bill Evans, who's been Westpac's chief economist since 1991, will move to a newly created senior advisory role next year.

Evans hasn't had that many great calls of late but his view changes still shake the Australian rates and currency markets - highlighting the power he has over traders in that area of the market.

And while Westpac could have promoted any one of five very qualified internal candidates, they've chosen to go external. Luci Ellis, who is currently the Reserve Bank's deputy head of economic analysis, will join Westpac in October. Ellis has not been considered by the financial media as someone who was on the shortlist for Governor Lowe's job and this move appears to confirm that.