Bond market called the Central Bank bluff and forced US Fed into yield control

Mathan Somasundaram

Deep Data Analytics

Local market delivered a flat day despite the strong numbers out of US and China on decent turnover. It is the week of the option expiry moves. Aussie market had its option expiry flows through in the morning and US will see it tonight at the open. It is much more important for US markets due to historical high margin lending and option exposure growth. In recent months, US markets tends to outperform for a few weeks into the option expiry and underperform for a few weeks after the event. Time will tell if that cycle continues. Gold and Property were the best sectors while Energy and Utilities were the worst.

Expect volatility to pick up from 12 month low levels over the next week as fund managers returns from holiday period. We are only a few weeks away from “Sell in May and go away” getting media coverage. It was clear last night that the US Fed moved into “Yield Control” mode after retail sales was red hot. It was the same pattern from the red hot inflation data day when yields were taken down by accelerated QE buying. Last night the US 10 year bond yields were taken down by 10 bps but it’s already recovered 5bps. If the US Fed doesn’t extend QE to do more yield control, then equity markets are likely to get tested sooner than later as red hot retail sales, rising costs and falling currency will push bond yields higher on reflation.

COVID cases are rising in more US states than not while India is putting up more than 200k cases a day. Australia vaccine rollout disaster keeps running into more road blocks while Federal government is bringing in the States to coordinate so that they stop hurting their political election cycle. Aussie economy has been evolved for globalization and pandemic issues limits that. It is a matter of time before the government opens the borders and raises the risk of covis cases. We are going to get new variants and let us hope they are not immune to the vaccines. Federal government is clueless and even the hard-working health workers can’t bail out Australia when a vaccine immune variant gets out.

Retail sales in the US jumped 9.8% mom in March of 2021, following a downwardly revised 2.7% fall in the previous month and easily beating market forecasts of a 5.9% gain. It is the biggest increase since May of 2020, as more businesses reopened, the $1,400 checks were sent starting in mid-March and the weather improved after unusually cold temperatures and winter storms in Texas and some other parts of the South region in February. Double-digit increases were seen for sporting goods (23.5%), clothing (18.3%), motor vehicles (15.1%), food services and drinking places (13.4%), building materials (12.1%), gasoline stations (10.9%), electronics and appliances (10.5%). Gains were also recorded for miscellaneous store retailers (9%), general merchandise stores (9%), nonstore retailers (6%), furniture (5.9%), health and personal care (5.7%) and food and beverages (0.7%). Consumers are confident there is quarterly checks coming from the government and are out shopping. Still not seeing US inflation going out of control? Time will tell.

Chinese GDP grew 18.3 percent year-on-year in the March quarter, accelerating sharply from a 6.5 percent growth in the fourth quarter and compared with market consensus of 19 percent. This was the strongest pace of expansion since data first began being published in 1992, boosted by strengthening domestic and global demand, strict virus containment measures, and continued fiscal and monetary support. The latest reading reflected a low comparison base in 2020 when activity plunged due to the COVID-19 shocks. For this year, China expects the economy to grow by more than 6%. In 2020, the country's GDP expanded 2.3%, the slowest pace in more than four decades.

Given that Chinese economy grew by 18%, it is only logical to assume that US should have grown by 6-9% at worst….and the consensus view is around that ballpark. The deluge of Chinese data today follows the deluge of US data overnight. We should get a deluge of EU data tonight but markets don’t care much. Property prices, retail sales, input costs etc are all pointing to higher inflation in China and by default higher inflation in US. The endless money printing and US Fed balance sheet expansion for yield control is debasing the USD and making inflation even greater. Not to worry…Despite their abysmal track record, Central Banks want the markets to trust them that they have it under control. What could go wrong? Time will tell.

Comments on US market last close… US market was up on strong economic data and potential yield control moves by US Fed. Retail Sales lead the deluge of economic data and it was a massive beat. It was clear that US Fed used the QE to ram down yield before markets panicked. Retail sales were hot due to historic fiscal and monetary stimulus....it was expected but not that level pop. US Fed did exactly like what they did when inflation data popped hard. They used QE to smash the yields. This time 10 year yields fell nearly 10bps before recovering to close 1.55%. Financials continue report strongly as expected and US consensus is too low as expected. Just about everything beats consensus but that’s been going on for years. NASDAQ +1.3%, S&P +1.1%, DOW +0.9% and RUSSELL +0.4%. Its your classic holiday pump on central bank action against economic reality. Market should be popping 2-3% on such strong economic data but it is mostly in the price while inflation worries are starting to take off. Growth stocks were the big movers today as central bank fudge was bigger catalyst than economic pop. USD keeps sliding and commodities keep rising. No inflation to see here...sarcasm! Gold was the best sector by a margin with Property, Tech and Health Care coming distant second. Energy and Banks were the only negative sectors.

Full SUNSET STRIP report with end of day market stats are on the attached link.

(VIEW LINK)


........
Deep Data Analytics provides this financial advice as an honest and reasonable opinion held at a point in time about an investment’s risk profile and merit and the information is provided by the Deep Data Analytics in good faith. The views of the adviser(s) do not necessarily reflect the views of the AFS Licensee. Deep Data Analytics has no obligation to update the opinion unless Deep Data Analytics is currently contracted to provide such an updated opinion. Deep Data Analytics does not warrant the accuracy of any information it sources from others. All statements as to future matters are not guaranteed to be accurate and any statements as to past performance do not represent future performance. Assessment of risk can be subjective. Portfolios of equity investments need to be well diversified and the risk appropriate for the investor. Equity investments in listed or unlisted companies yet to achieve a profit or with an equity value less than $50 million should collectively be a small component of a balanced portfolio, with smaller individual investment sizes than otherwise. Investors are responsible for their own investment decisions, unless a contract stipulates otherwise. Deep Data Analytics does not stand behind the capital value or performance of any investment. Subject to any terms implied by law and which cannot be excluded, Deep Data Analytics shall not be liable for any errors, omissions, defects or misrepresentations in the information (including by reasons of negligence, negligent misstatement or otherwise) or for any loss or damage (whether direct or indirect) suffered by persons who use or rely on the information. If any law prohibits the exclusion of such liability, Deep Data Analytics limits its liability to the re-supply of the Information, provided that such limitation is permitted by law and is fair and reasonable. Copyright © Deep Data Analytics. All rights reserved. This material is proprietary to Deep Data Analytics and may not be disclosed to third parties. Any unauthorized use, duplication or disclosure of this document is prohibited. The content has been approved for distribution by Deep Data Analytics (ABN 67 159 532 213 AFS Representative No. 1282992) which is a corporate approved representative of BR Securities (ABN 92 168 734 530 and holder of AFSL No. 456663). Deep Data Analytics is the business name of ABN 67 159 532 213.

1 topic

Founder & CEO
Deep Data Analytics

Over 25 years’ experience in the finance/tech industry. Mathan has worked extensively in all parts of the finance sector (i.e. County NatWest, Citi, LIM, Southern Cross, Bell Potter, Baillieu Holst and Blue Ocean Equities). Currently Founder and...

I would like to

Only to be used for sending genuine email enquiries to the Contributor. Livewire Markets Pty Ltd reserves its right to take any legal or other appropriate action in relation to misuse of this service.

Personal Information Collection Statement
Your personal information will be passed to the Contributor and/or its authorised service provider to assist the Contributor to contact you about your investment enquiry. They are required not to use your information for any other purpose. Our privacy policy explains how we store personal information and how you may access, correct or complain about the handling of personal information.