Emergency stimulus is not standard operating environment

Mathan Somasundaram

Deep Data Analytics

Local market followed the US market higher and stayed there unlike recent days. Miners and Energy were the green leaders while Tech was the only negative sector. It was a day where big global trades on large caps at the open and at lunch time moved the market into a big positive day while month end window dressing by local fund managers pumped small to micro cap stocks higher. The market is worried about inflation and tapering but the prices are ignoring it. Inevitably there will be an event that drives reality. 

Smart money has been betting on Personal Consumption Expenditure (PCE) data in the US tonight to be a catalyst for reality check. PCE is another way inflation is measured and historically it has always been a step lower than CPI. Time will tell if PCE update eventuates as a catalyst for rise in volatility.

Even accommodating for the massive index change turnover yesterday, we have had 10 consecutive weeks of aggregate weekly turnover below $40b. Volatility is very low. Financial stress is starting to tighten from historic low levels. Money printing from all the major Western central banks are still running full throttle. Western economies are coming out with new budget update after budget update that delivers bigger war time deficits with no plans to pay it all back. 

The central banks and governments are caught between corporate greed and election cycles. Reform is too hard while money printing is lazy work. Emergency stimulus is not standard operating environment. The only thing that can stop Central Banks and Governments making the mess worse is inflation. We are currently ignoring it and hoping it goes away. Inflation is like a teenager looking for attention. Ignoring it does not solve the problem. The teenager just creates bigger and bigger problems till your hands are forced to act. Time will tell how long this game of ignoring reality will hold up.

The Chinese Yuan against the USD is on a flyer since the pandemic. It is getting very close to the decade high level reached in early 2018. It was not the most positive time for global markets and USD Index was also down near the current levels. 

In the brave new world, success in currency wars are needed to dethrone a global super power.

 China has managed to keep control of their currency despite trade wars and pandemic while US is in a substantial debasement cycle despite being the default global currency. Time will tell how this plays out in the next decade.

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

The GfK Consumer Climate Indicator in Germany increased to -7 heading into June of 2021 from a revised -8.6 in May and compared with market forecasts of -5.2. Improvements were seen for income (19.5 vs 9.3) and business (41.1 vs 7.3) expectations as a decrease in coronavirus cases and further progress with vaccinations were opening the door to more easing steps in the coming weeks. In contrast, willing to buy decreased (10 vs 17.3) although once all lockdown measures are lifted, households are ready to splash out over the summer months as they put aside a lot of money during the pandemic, GfK consumer expert Rolf Buerkl said. Germany still stuck in pandemic wave and recovery is still slow.

Average weekly earnings of non-farm payroll employees in Canada advanced 7.4% year-on-year to CAD 1,125 in March of 2021, reflecting a number of factors, including the changes over the period in the number of hourly paid and largely lower-paid employees, compared with salaried employees, and changes in the industries of employment. The largest gains were seen in information and cultural industries (19.1% to CAD 1,618); forestry, logging and support (12.8% to CAD 1,293); management of companies and enterprises (11.8% to CAD 1,586); arts, entertainment and recreation (9.7% to CAD 732); and construction (8.6% to CAD 1,362). Across Canadian provinces, employees saw their earnings rise the most in Ontario (9.9% to CAD 1,171); British Columbia (8.0% to CAD 1,111); and Manitoba (7.6% to CAD 1,009). Canadian wages growth is an interesting problem for RBA and the government. The reform policy mix in the last 5-6 years have been mainly targeting lower wages while lockdown and money printing may deliver the opposite. Time will tell how this plays out but history suggests that borders will be opened soon after the election to suppress wage growth pressures.

New orders for US manufactured durable goods fell 1.3% month-over-month in April of 2021, following an upwardly revised 1.3% rise in March and defying market forecasts of a 0.7% increase. It is the first decline in durable goods orders in almost a year, as supply shortages continued to impact production. Orders fell mostly for transportation equipment (-6.7%), namely motor vehicles (-6.2%) and communication equipment (-3.5%), amid a global semiconductor chip shortage. Excluding transportation, new orders increased 1.0% and excluding defense, new orders were virtually unchanged. Orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, jumped 2.3%, after an upwardly revised 1.6% rise in March, easily beating forecasts of a 0.8% gain. US recovery is starting to fade despite the excessive money printing.

The number of Americans filing new claims for unemployment benefits dropped by 38K to 406K last week, the lowest level since the pandemic first hit the labor market in March 2020 and below market expectations of 425K as Covid-19 cases steadily decrease due to the vaccination campaign and as restrictions on businesses are being lifted. Also, many states recently decided to withdraw from federal unemployment benefit programs, following reports that it has been more difficult to hire as the benefits pay more than most minimum wage jobs. Meanwhile, unadjusted claims dropped to 420 thousand last week from 455 thousand the week before, with the largest declines being recorded in Washington, Florida, New Jersey, Texas and Ohio. Job market recovery in the US will start to drive wages growth and more inflation.

Pending home sales in the US surged 51.7% year-on-year in April of 2021, the biggest increase ever amid a low base effect from last year when sales sank at a record pace because of the pandemic. All four US regions recorded year-over-year increases. On a monthly basis however, pending home sales dropped 4.4%, compared to forecasts of a 0.8% rise, with only the Midwest witnessing month-over-month gains. "Contract signings are approaching pre-pandemic levels after the big surge due to the lack of sufficient supply of affordable homes," said Lawrence Yun, NAR's chief economist. "The upper-end market is still moving sharply as inventory is more plentiful there". Yun anticipates housing supply to improve as a whole as soon as autumn. He points to an increase in the comfortability of those listing, as well as a rise in sellers after the conclusion of the eviction moratorium or as they exit forbearance. No property bubble worries here…add sarcasm!!!

Import prices in Germany jumped 10.3% year-on-year in April of 2021, accelerating from a 6.9% rise in March and slightly above market forecasts of a 10% gain. It is the biggest increase since December of 2010, mainly due to energy prices which soared 101.3%, namely crude (198%), mineral oil products (76.6%), natural gas (57.6%) and electricity (209.6%). There is also a base effect from last year when the coronavirus pandemic brought demand to its lowest point and pushed prices down. Excluding crude oil and mineral oil products, import prices increased by 6%. On a monthly basis, import prices were up 1.4%. Germans are facing inflation in lockdown!

Comments on US market last close…

US market had another uneventful day with opening up thematic holding up. Started positive and faded to flat as recent trend while opening up helped DOW and RUSSELL. RUSSELL +1.06%, DOW +0.41%, S&P +0.12% and NASDAQ -0.01%. Jobless data keeps improving and Whitehouse keeps coming out with more spending plans that add more debt and more taxes. Bond yields popped back above 1.60% and held USD flat while most commodities ticked higher. EUR and Yuan are flying against USD. Miners and Banks lead the sectors while Utilities and Staples were the laggards. Markets are waiting to see the next inflation data point in PCE tonight.

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Mathan Somasundaram
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...

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