Central Banks are the stimulus cartel

Local market ran into profit taking from global investors early and then from local investors through the day. We saw a lot of tax loss selling turning into month end window dressing as seen from share price moves on no updates. Mid Caps were the size category for today. Tech and Miners were the only green sectors while Health Care and Energy were the worst of the red sectors. It was another lower than usual turnover day. Overall macro indicators remain risk off as USD remains in a short term break out higher while US bond yields are in a death cross lower.

US Fed Chair Powell confirmed overnight that they are hitching their wagon to the marketing pitch that inflation is transient while growth will remain robust despite structural economic problems being covered over by historic high stimulus. The reality is simple. The Fed has done the bare minimum and will chase inflation. It has no choice but keep excessive emergency style stimulus going as long as they can till it all falls apart. Expect US Fed speakers to start taking their own views like Bullard and start flagging earlier rate hike cycles. This is a clear signal that investors should be moving all in for inflation trade. The bonds are outperforming equities on a risk weighted basis. This should not be the case in a reflation cycle. But when you have Central Banks trading trillions for guaranteed loss to sustain asset bubbles, logic goes out the door. What are the sliding bond yields and recovering spot gold telling the market? Is market preparing for fireworks? Time will tell. 

The definition of insanity is to keep doing the same thing and expecting a different result. Central Banks have reached insanity level stimulus. Like any drug dealer, they can’t say no to a market that is addicted to more stimulus!!!

There is a race in the banking sector to predict the RBA rate hike cycle. Westpac is in 2023 while Comm Bank is late 2022. We have always held the view that RBA will follow US Fed. They have no choice. If they don’t, they risk substantial devaluation of AUDUSD and that will create inflation. Then they will have to raise anyway. We are already in stupid level lending standards and bubbles in property and commodities. We are already in QE when the economy is red hot with massive job creation…so we have been told by ABS…sarcasm! There is an election coming and soon after that we are going to have border opening, austerity budget cuts and rate cycle. It is always the middle to low income that pay the price of all the bad management. Expect higher rates and higher GST in 2022!!!

Let us run through the main data points released in the last 24 hours…

Public sector net borrowing in the United Kingdom was GBP 24.3 billion in May 2021, GBP 19.4 billion less than in May 2020 and compared with market expectations of GBP 26.1 billion, as the recent recovery in the economy boosted tax revenues and limited spending. Still, this was the second-highest May borrowing since monthly records began in 1993, as the coronavirus pandemic had a substantial impact on public sector borrowing and debt. Central government receipts were GBP 7.5 billion higher than in May 2020, while spending was down GBP 10.9 billion. Public sector net borrowing declined to GBP 53.4 billion in the financial year-to-May 2021, from GBP 91.1 billion in the same period last year but still the second-highest financial year-to-May borrowing since monthly records began in 1993.

The Confederation of British Industry's order book balance rose 2 points to +19 in June 2021, the highest level since an all-time high reached in May 1988 and slightly above market expectations of +18, according to the latest monthly CBI Industrial Trends Survey. UK manufacturing output volumes in the three months to June grew at the fastest pace on record and are expected to expand at a quick pace in the coming quarter, driven by the motor vehicles & transport equipment and food, drink & tobacco sub-sectors. In addition, export order books improved to their firmest in more than two years. Meanwhile, manufacturers reported that stock adequacy in June worsened to its weakest since 1977. Additionally, output prices are expected to grow rapidly in the next quarter, with this month’s outturn marking the strongest expectations since 1982.

Existing home sales in the US fell for the 4th consecutive month to 5.8 million in May of 2021, compared to forecasts of 5.72 million. It is the lowest reading in 11 months, with only one major region recording a month-over-month increase, while the other three regions saw sales decline. The median existing-home price for all housing types was $350,300, up 23.6% from May 2020. Total housing inventory amounted to 1.23 million units, up 7.% from April and down 20.6% from one year ago. "Home sales fell moderately in May and are now approaching pre-pandemic activity. Lack of inventory continues to be the overwhelming factor holding back home sales, but falling affordability is simply squeezing some first-time buyers out of the market", Lawrence Yun, NAR's chief economist, said.

The Manufacturing Activity Index in the US fifth district including the District of Columbia, Maryland, North Carolina, South Carolina, Virginia, and most of West Virginia rose to 22 in June of 2021 from 18 in May. It was the highest reading since October 2020, driven by an increase in the new orders index (35 vs 18 in May), while the other two component indexes, shipments (8 vs 12) and employment (19 vs 25) also remained in expansionary territory. Survey results indicated that many manufacturers increased employment and wages in June and expected further increases in the next six months. Firms struggled to find workers with the necessary skills, a difficulty that manufacturers expected to continue. Overall, respondents saw improvement in local business conditions and were optimistic that conditions would continue to improve in the coming months.

Stocks of crude oil in the United States fell by 7.199 million barrels in the week ended June 18th, 2021, following an 8.537 million drop in the previous week, and compared with market expectations of a 3.625 million decline, data from the American Petroleum Institute showed.

The IHS Markit Australia Manufacturing PMI decreased to 58.4 in June of 2021, down from May's record high of 60.4, preliminary data showed. Factory orders and output slowed in June while employment growth momentum also eased. On the price front, both input costs and output prices increased at slower rates compared to May.

The IHS Markit Australia Services PMI decreased to a three-month low of 56 in June of 2021, down from 58 in the previous month, preliminary data showed. Business activity and employment growth momentum slowed with Australia’s Victoria state lockdown affecting business conditions. On the price front, input costs rose at a softer while output charge inflation reached new highs.

The au Jibun Bank Japan Manufacturing PMI fell to 51.5 in June 2021 from a final 53.0 a month earlier, preliminary data showed. This was the weakest reading since February, amid renewed curbs in some parts of the country following the latest wave of local COVID-19 infections. Output shrank for the first time since January and at the quickest pace seen since November 2020, while growth in new orders softened marginally. Positively, job creation continued for the third month running, with the rate of growth picking up slightly to reach the fastest since January 2020; while backlogs of works increased less than those in May. Regarding inflation, input cost went up at a slower rate, as did with output prices. Looking ahead, sentiment remained positive, despite optimism dipped to a three-month low.

The au Jibun Bank Japan Services PMI rose to 47.2 in June 2021 from a final 46.5 in the prior month, a flash figure showed. Still, this was the 17th consecutive month of contraction in the service sector, amid coronavirus disruptions. New business reduced at a broadly unchanged pace compared to May, extending the current sequence of decline to 17 months. At the same time, job creation continued for the fifth month running, with the pace of growth remaining marginal while backlogs of works falling at a steeper rate. Meanwhile, export orders fell at a slower pace. On the cost front, both output prices and input cost went up faster. Lastly, confidence strengthened, amid expectations of the accelerated vaccination program.

The index of leading economic indicators in Japan, which is a gauge of the economy a few months ahead and is compiled using data such as job offers and consumer sentiment, was revised higher to 103.8 in April 2021 from the preliminary figure of 103.0 and after a final 102.4 in the previous month. This marked the highest level since February 2014, as a recovery in the economy from the coronavirus crisis gained steam.

Comments on US market last close…

US market started slightly positive and then took another positive step after Chairman Powell comments before fading back. DOW +0.20%, RUSSELL +0.43%, S&P +0.51% and NASDAQ +0.79%. VIX fell below 17. NASDAQ lead the move higher today as yields came back. US Fed chairman’s comments were as expected...inflation transitory, keep support till job market improves dramatically etc etc... but did flag inflation was stronger and unpredictable. Only major data point was existing home sales and it was down...that’s four consecutive negative growth months. USD was mainly flat and that kept most commodities mainly flat as well. Bitcoin had a choppy day like all crypto currencies on China moves. It closed mainly flat after falling below $30k. Retail and Tech lead the green sectors while Utilities and Property were the worst red sectors. The day was all about the US Fed manipulated yield curve that has delivered a death cross. The bond market is looking more bullish than the equities market.

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