Global Economy has become the Central Bank’s augmented reality show

Local market started positive and then faded to negative territory after lunch before recovery back to slight positive by the close. It was another weird day of low turnover trading with a lot of non correlated moves in the market. All the size categories were up slightly while Mid Caps were flat. Tech and Staples were the best sectors while Utilities and Energy. Zip in the Buy Now Pay Later fintech space was the big mover on media articles pointing to strategic investor in hiding was likely CBA backed Klarna. Since no one really knows, no news released to the market.

NSW and Australian Governments were doing backflips on recent updates and markets were reading between the lines. NSW government has started to blame the Southwest for not behaving when the problem started with East not behaving and the state government not moving to a fast/solid lockdown. Now it has got out everywhere and exposure sites are popping up everywhere like money laundering in corporate Australia. Australian government let the cat out of the bag by relaxing standards for minimum handout. Market was reading between the lines and it looks like the lockdown extension is unlikely to be the last one. Never buy a stock on the first downgrade and NSW just started the lockdown downgrade. The probability is leaning towards more extension to come. I feel for the parents and the kids stuck at home learning. They are going to pay for the mistakes of a few in the East and the bad management by governments. Vaccination was always the answer but the lack of supply and late/weak lockdown means it is going to be Q4 at best. Given the track record, not betting against another random delay on that too.

As we showed yesterday, the big thematic in play is the collapse in the bond yields around the world. It is now flowing into other markets. AUDUSD is breaking down and hitting new 7-8 month low. Hong Kong markets have broken below 200 day Moving Average for the first time since post pandemic bounce and it is the first major market index to do that in 2021. The reason we are seeing these random moves in the market is that the investors are waking up to the fact that the market is substantially overvalued and only stimulus is keeping it elevated. The structural problems in the economy have not been fixed. Central Banks are all actively ignoring inflation and flagging QE tapering while keeping rate hike cycle in the long term. They are all hoping that cost inflation hits consumer spending and slows the economy and inflation. That will prove that inflation is transient while growth will be too. The problem is that will hit markets as substantial growth expectation are built into the historical high multiples.

The bond markets are running up with investors buying negative real yield over equities. What does that say about equities? Then you have US Fed buying massive amount of mortgage backed securities while the property market is red hot. RBA updates today basically accepted that they will not move against the property bubble while migration rates have been kept high over time to keep wages low and property prices high. What does that say about the priorities of the Central Banks and Australian Government? We are basically building one ponzi scheme on the back of another ponzi scheme and hoping that the pyramid scheme doesn’t fall over. Inflation is the asset bubble popper. When one asset bubble pops, the domino effect will take down the rest. There is a reason why all Central Banks keep saying growth will be stable while inflation is transient. In the current macro, you can’t have growth without inflation. If one fades, the one will follow. You can’t have the cake and eat it too.

The supply side issues, currency debasement, economic structural issues and historic high debt means inflation is likely to remain higher than growth after the current short term recovery pop. Central Banks are starting to wake up to that problem like markets. Stagflation is not going to be easy on the majority of the population and the natural reaction of more stimulus will only make it worse. There is a reason why Central Banks gravitated to job market strength and wages growth as indicators to raise rates. That probably won’t happen for years…if not, for a decade. Expect to see more industrial actions start to play out as workers struggle under stagflation. Capitalism for the majority and Socialism for the select few has been made possible with fake theories like endless debt, trickle down economics and asset bubble handouts. 

Central Banks do not want to let the economic cycle play out and want to remain in charge of the augmented reality show that is the current global economy. It is not working for the majority and the cracks are starting to appear. What could go wrong? Time will tell.

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

Germany's industrial output dropped by 0.3% for a second consecutive month in May 2021, missing market expectations of a 0.5% growth mostly due to semiconductor delivery problems. The biggest drag was the production of capital goods (-3.4%) with car manufacturing slumping 7.2% followed by energy (-2.1%). By contrast, there were increases in the production of consumer goods (4.1%), intermediate goods (0.6%), and construction (1.3%). On a yearly basis, industrial output grew by 17.3% in May, following a record 27.6% jump in April, due to the low base effect and as the economy consolidated its recovery from the pandemic hit. Compared with February 2020, the month before restrictions were imposed due to the coronavirus outbreak, production in May 2021 was 5% lower.

House prices in the UK increased 8.8% year-on-year in June of 2021, following an upwardly revised 9.6% rise in the previous month which was the highest in 14 years, according to Halifax. On a monthly basis, prices were down 0.5%, the first decline since January as the stamp duty holiday wind down. “With the stamp duty holiday now being phased out, it’s was predicted the market might start to lose some steam entering the latter half of the year, and it’s unlikely that those with mortgages approved in the early months of summer expected to benefit from the maximum tax break, given the time needed to complete transactions", Russell Galley, Managing Director, Halifax, said. The average house price was GBP260,538, GBP21,000 higher than last year.

Foreign exchange reserves decreased to USD 3.214 billion in June of 2021 from USD 3.22 trillion in May, slightly higher than forecasts of USD 3.2 trillion. Meanwhile, the value of the gold reserves fell to USD 110.45 billion from USD 119.02 billion.

Mortgage applications in the US declined 1.8% in the week ended July 2nd, the second consecutive decline, and pushing the index further down to the lowest since the beginning of 2020. Applications to refinance a home loan went down 2.3% and those to purchase a home declined 1.1%. The average fixed 30-year mortgage rate edged fell 5 bps to 3.15%, the lowest in 3 weeks. “Swift home-price growth across much of the country, driven by insufficient housing supply, is weighing on the purchase market and is pushing average loan amounts higher. The 30-year fixed rate was 11 basis points lower than the same week a year ago, but many borrowers previously refinanced at even lower rates” said MBA's Joel Kan.

The number of job openings in the US rose to a new record high of 9.209 million in May 2021, from a revised 9.193 million in April and below market expectations of 9.388 million. Job openings increased in a number of industries with the largest gains being recorded in other services (+109,000), state and local government education (+46,000), and educational services (+35,000). On the other hand, openings decreased in arts, entertainment, and recreation (-80,000); state and local government, excluding education (-56,000); and federal government (-17,000). Meanwhile, the number of hires fell by 85 thousand to 5.927 million, while total separations including quits, layoffs and discharges, and other separations declined by 485 thousand to 5.318 million.

The IBD/TIPP Economic Optimism Index in the US slipped by 2.1 points to 54.3 in July of 2021, the lowest since February as stimulus fades and inflation percolates. The six-month outlook for the US economy fell by 4.8 points to a five-month-low of 50.8 and the federal policies subindex, a measure of Americans' confidence in government, decreased by 4 points to 52.4. Meantime, the personal finances subindex measuring how Americans feel about their own finances in the next six months rose by 2.4 points to 59.7, the highest of the Covid era.

The value of loans in Japan increased 1.40% in June of 2021 over the same month in the previous year.

Stock Investments by foreigners in Japan decreased by 310.10 billion yen in the week ending July 3 of 2021.

Comments on US market last close…

US market delivered a positive day after US Fed minutes did not spook the markets. US Fed minutes confirmed tapering chat but no timeline. CDC confirmed that delta variant is now the dominant COVID in US. China continues to come down on their local techs and overseas listings while opening up more reserves to stabilise commodity prices. RUSSELL -0.95%, NASDAQ +0.01%, DOW +0.30% and S&P +0.34%. VIX slide more to 16.2 while yields fell 5-6 bps with 30 year falling below 2%. USD, Gold and Copper higher while Oil keeps sliding on OPEC+ infighting. AUDUSD fell below 75 cents again. Energy and Retail were the weakest while Miners, Utilities and Health Care were the best.

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