Central Banks to prioritize asset bubbles over the economy

Local market started strong positive on global buying before fading through the day to finish positive. Asian markets were choppy after US markets bounced back to recover most of the losses from the day before. Markets continue to struggle for sentiment as high inflation and fading growth get exaggerated by new pandemic waves. Size mattered with Micro Caps being the best while Mid Caps were the worst. Health Care and Banks lead the sectors while Industrials and Tech were the worst.

The main thematic in play is the slowing economic growth and strong and persistent inflation. Despite the Central Banks talking up the opposite, the economic reality is hitting and they are gradually moonwalking back towards more stimulus than less. Japan is already flagging potential for more stimulus to deal with stagflation risk while EU is on the way to reclassify standards to allow them to add more stimulus. Japan started this trend. They started the classic strategy of adding stimulus linked with reform agenda that included tax rises to pay for it. At every stage, they deliver stimulus and then follow it up with very small (i.e. negligent) reform and almost no tax rises. They have replayed that strategy for nearly three decades. It worked as long as the rest of the world didn’t join the ponzi scheme. 

EU has been gradually falling into the same trap since the GFC and it is too far down the rabbit hole now. EU has even started to defend negative rates as an economic growth driver. Capitalism just turned in its European grave!!!

US and Australia are showing signs of following EU into the never ending ponzi economic cycle. Extraordinary stimulus was used to cover historical miss management of the pandemic at different levels. Both are looking unlikely to deliver tax rises and interest rate normalization to build back buffer for the next crisis. US is trying to address inequality and other structural reform albeit at very slow pace. Australia has chosen to ignore all types of reform. The sad part of the whole cycle is that it will end up hurting the very people this ponzi scheme is suppose to save. Rising inflation and economic slowdown will only get worse with stimulus boosted inflation. Central Banks may not say it but they have consistently risked the economy to save asset bubbles on the basis of trickle down economics. After a decade of this policy failing to deliver sustainable recovery, we are left with asset bubbles and massive debt. The definition of insanity is to do the same thing again and again while expecting a different result. When will RBA flag endless QE and rate rise pushed back to 2030? 

Lazy policy work has moved from politics to central banks. In the end, the middle to low income workers, retirees and the young generations will pay for decades to fix the mess we are creating now.

NSW case numbers keep showing more mockdown than lockdown. We already know that it is going into August. Will the NSW lockdown extend to Sep? Will we infect more states? The vaccine supply outlook suggest we will not be covered enough till late Q4. The federal government has an election problem. They were planning on Sep/Oct election cycle but numerous problems meant that has now been pushed back. The economic data coming out in Q4 will be weak after the Q3 lockdowns. The economy should do better in Q4 on the simple basis that there should be less lockdowns. Economic data and vaccine supply issues suggest that the election should be pushed back to late Q1. That means they will have to do another backflip and deliver more handouts to improve the declining voting support. There is nothing like self interest to get the government to help the population. 

Markets are now starting to worry about lockdowns driving a double dip recession in Australia. Keep an eye on the bond and currency markets. If the bond yields and AUDUSD keeps free falling, history suggests equities will panic soon. AUDUSD is now below 73 cents (i.e. 8 month low) and Aussie 10 year bond yield is below 1.17% (i.e. 5 month low). It may be different this time!

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

Germany's producer prices rose by 8.5% from a year earlier in June 2021, following a 7.2% advance in the previous month and slightly beating market expectations of 8.4%. It was the largest increase in producer costs since second oil crises in January 1982, reflecting a low base effect from last year due to the coronavirus-induced restrictions and the ongoing economic recovery. Main upward pressure came from intermediate products (12.7%) and of energy (16.9%), followed by durable consumer goods (1.8%), non-durable consumer goods (1.5%) and capital goods (1.3%). On monthly basis, producer prices rose by 1.3% in June, also above forecasts of 1.1%.

Building permits in the United States dropped 5.1% from a month earlier to a seasonally adjusted annual rate of 1.598 million in June 2021, missing market expectations of 1.7 million. It was the third straight period of decline in building permits, which hit their lowest level since October 2020. Single-family authorizations dropped 6.3% to a rate of 1.063 million while permits for the volatile multi-segment fell 2.6% to a rate of 535 thousand. Permits were down across all regions: the South (-3.0% to 871 thousand); the West (-7.4% to 376 thousand); the Midwest (-6.7% to 208 thousand); and the Northeast (-8.3% to 143 thousand).

US housing starts jumped 6.3% mom to a seasonally adjusted annual rate of 1.643 million in June of 2021, the highest in 3 months and above forecasts of 1.59 million, amid strong demand from buyers, elevated materials costs and shortage of qualified workers. Single-family starts were up 6.3% to 1.16 million and those for buildings with five units or more grew by 6.8% to 0.474 million. Starts were up in the West (12.6%) and the South (9.7%) but fell in the Midwest (-7.5%) and the Northeast (-9%).

Stocks of crude oil in the United States increased by 0.806 million barrels in the week ended July 16th, 2021, after a 4.079 million fall in the previous week and compared with market expectations of a 4.167 million decline, data from the American Petroleum Institute showed.

Exports from Japan soared 48.6% yoy to a three-month high of JPY 7,221 billion in June 2021, compared with market forecasts of a 56.2% growth and after a 49.6% rise in May. This was the fourth straight month of growth in sales, amid strong signs that a recovery in global trade gained strength and low base effects from last year. Exports of machinery jumped 42%, led by power generating machines (39.2%); while those of transport equipment surged 68.1%, boosted by motor vehicles (102.8%), and cars (100.6%). In addition, there were rises in shipments of electrical machinery (39.9%), driven by semiconductors (24.7%); others (47.3%), led by scientific instruments (26%); chemicals (39.6%), driven by plastic materials (43.1%); and manufactured goods (56.7%), due to iron and steel products (73%). Sales rose to most countries: China (27.7%), Taiwan (27.8%), Hong Kong (18%), South Korea (36.4%), Thailand (98.7%), the US (85.5%), Germany (51.3%), and Australia (55.6%).

Imports to Japan jumped 32.7% yoy to JPY 6,838 billion in June 2021, above market forecast of 29% and after a 27.9% gain in May. This was the fifth straight month of growth in inbound shipments, amid robust domestic demand in the wake of the pandemic. Purchases of mineral fuels surged 86.1%, boosted by petroleum (181.6%) and LNG (21.6%); while those of electrical machinery climbed 28.1%, led by semiconductors (25.1%), and telephony (41.6%). Also, arrivals of others gained 14%, driven by scientific instruments (15%); and those of chemicals rose 11.8%, mainly due to medical products (7.5%). In addition, there were rises in imports of machinery (7.4%), led by power generating (32.2%); manufactured goods (35.1%), led by nonferrous metals (98.2%); raw materials (69.8%), due to iron ore and concentrates (208.1%); and transport equipment (145.8%). Purchases rose from China (17.6%), Hong Kong (41.8%), Taiwan (25.7%), South Korea (40.6%), the US (27.3%), Germany (28%), and Australia (9.8%).

The Westpac-Melbourne Institute Leading Economic Index in Australia edged down 0.07% month-over-month in June of 2021, after a 0.06% fall a month earlier, pointing to the second straight month of decline. Meantime, the six-month annualized growth rate, which indicates the likely pace of economic activity relative to the trend of three to nine months, advanced 1.34%. "We now expect that the New South Wales economy will contract by 3.1% in the September quarter and the Victorian economy will contract by 0.1%," the Westpac said. It added that contractions in the two biggest states will mean that the national economy is likely to contract by 0.7% in the September quarter.

Retail sales in Australia declined by 1.8% month-over-month in July 2021, compared with market expectations of a 0.4% fall and after a final 0.4% gain a month earlier, preliminary data showed. This was the first drop in retail trade since February, due to the impact of coronavirus restrictions across multiple states, including Victoria and New South Wales. Cafes, restaurants, and takeaway food services, and clothing, footwear, and personal accessory retailing saw the largest falls. In contrast, sales grew for food retailing (1.5%). Victoria (-3.5%) led the state falls, with the impact of the state’s fourth lockdown more pronounced in June than May (-0.9%). New South Wales (-2.0%) and Queensland (-1.5%) also fell due to stay-at-home restrictions and reduced interstate mobility. On a quarterly basis, the preliminary estimate showed retail trade rose by 1.3% in Q2, after a 0.1% drop in Q1.

Comments on US market last close…

US market had 2/3 bounce back on short covering after the bashing. Everything reversed direction except USD. S&P +1.52%, NASDAQ +1.57%, DOW +1.62% and RUSSELL +2.99%. VIX pulled back just below 20. Yields bounced with commodities despite USD moving higher. Miners and Banks lead the green day with Staples and Utilities as laggards. Markets are dealing with fading growth and not so transient inflation while new pandemic waves are hitting the supply chains. Central banks are moving away from tapering like a MJ moonwalk. Stagflation risk is starting to rise and keep an eye on bond and currency markets as they are leading equities.

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