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

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.

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