Growth and Inflation are two sides of the same coin

Local market had another positive day on weak turnover despite US inflation beating expectations. You know the market dynamics are messed up when core inflation beats expectations and hits multi decade high and yet bond yields fall. That’s right…this time it is different. Local market started with growth sectors moving higher on NASDAQ bounce while miners started negative. Then the sentiment in miners improved through the day and that pushed the market back into positive territory. We have finished the 12th consecutive week with daily turnover below $9b when ignoring the index change day. Miners and Tech were the best of the green sectors while Banks and Property were the worst of the red sectors.

US inflation overnight was hot overnight. It was 13 year high hot. Even the fake measure of core inflation was over 20 year high. CPI up 5% and core inflation up 3.8% while both beat expectations. Bond market played the game as well as anyone by making billions on the back of the money losing trade by US Fed’s QE buying. US Fed always jams up QE bond buying on inflation linked data days and the bond market was betting on economist being wrong again. And they were right again. They were sitting on shorts and the bonds fell on the news of hot inflation data in the morning. As with any good traders, bond market covered their shorts and jammed up longs ahead of US Fed’s QE buying frenzy to lock up a massive pay day on US taxpayer’s expense. 10 year bond yields moved up 5-6 bps on the open and then fell 8-9 bps through the day. Basically, the bond market made money using the US Fed’s QE due to weak market consensus view. It did look like a bit of a set up but then again, it is like the 80-90% earnings beat in the US equities becoming farcical as well. How bad are the forecasters or are the numbers being padded down for macro traders? Time will tell. The market players are getting better at filleting the passive and government money to their benefit. RUSSELL fell as the consumers and corporate profits are under threat from reflation. NASDAQ basically moved the exact opposite to bond yields. NASDAQ fell on the open and then bounced on QE buying. S&P was pushed higher by the NASDAQ bits while DOW was flat. 

Sadly, every economist out there will use the bond market move to justify that inflation is transitory. Funnily enough the move in the bond market was created by the weak forecasts by the economists than the fact that the data is transitory. If it was transitory and economy has bounced back, why do we still have QE? Let’s not expect logic in asset bubble pumping. Growth and inflation are two sides of the same coin. If one is transitory, the other one has to be as well. Central Banks are trying remove economic and corporate cycles. Not sure that is going to work out too well.

Costs are going up fast. They are going up so fast that Chinese corporates are in a downgrade cycle and that is forcing China to curb commodity prices. China is ramping up Yuan to limit the inflation hitting their consumers. China is now exporting inflation. Pandemic waves are hitting all parts of the global supply chains and that is going to remain the case through 2021. Inflation may not hold up at 5% for long but it may stay more than 3% into 2022. That is a problem for US corporates and middle to low income consumers. Transitory or not, their profits and disposable incomes are under threat. China is moving to handle inflation while US remains in denial.

US Fed balance sheet expanded to just over $2 trillion to save US from the economic disaster that was GFC. Then over the decade US Fed expanded balance sheet to just over $4 trillion ahead of the pandemic crash. This week US Fed has surpassed $8 trillion for balance sheet expansion. The next crisis will likely need another $8 trillion worth of balance sheet as rates are already nothing. The inflation risk for US is that they don’t have much buffer to play with. If inflation goes wrong, they can’t stop it without crashing the economy. US can’t do what China does to control inflation. US also is the global currency and will experience currency debasement from endless stimulus and that will make inflation great again. Globally central banks are adding over $350 billion worth of QE on a monthly basis. Economies are evolving to absorb more and more cheap debt from the government. Central Banks are moving from economic growth and inflation to “full employment” target in the job market as a guide for stimulus. In simple terms, Central Banks are planning to do endless stimulus as job market targets are unlikely to be achieved for years to come.

We are sitting on bubbles in all asset classes with historical low rates and historical high stimulus while inflation is running hot. There is no plan B. Just more of plan A. Corporate profits and consumer spending are the likely stress points ahead. July reporting season coming…outlook statements on costs are going to be shining like Gold!!!

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

Outstanding yuan loans grew an annual 12.2% in May of 2021, matching forecasts and below 12.3% in April. The value of new yuan loans provided by the Chinese banks went up to CNY 1500 billion in May of 2021 from CNY 1470 billion in April, beating market forecasts of CNY 1410 billion. Figures compare with CNY 1480 billion a year earlier. M2 money supply grew 8.3% yoy, above 8.1% in April and forecasts of 8.1%. Outstanding yuan loans grew an annual 12.2%, matching forecasts and below 12.3% in April. The PBoC is trying to normalise policy by reducing pandemic-driven stimulus and contain debt as the economy rebounds from the coronavirus-hit. China's policymakers are close to setting an average annual economic growth target of around 5% for the next five years, at the lower end of ranges previously considered as global risks cloud the outlook, Reuters reported citing policy sources.

Total social financing in China increased to CNY 19200 billion in May of 2021 from CNY 18500 billion in April but was below forecasts of CNY 2002 billion.

Broad M2 money supply in China rose 8.3% from a year earlier to CNY 227.5 trillion in May of 2021, above 8.1% in April and market expectations of 8.1%.

Annual inflation rate in the US accelerated to 5% in May of 2021 from 4.2% in April and above market forecasts of 4.7%. It is the highest reading since August of 2008 amid low base effects from last year when the coronavirus pandemic hit the economy hard, rising consumer demand as the economy reopens, soaring commodity prices, supply constraints and higher wages as companies grapple with a labour shortage. Biggest price increases were recorded for gasoline (56.2%), used cars and trucks (29.7%), utility gas service (13.5%), transportation services (11.2%) and apparel (5.6%). Shelter costs were up 2.2% and food also went up 2.2%.

Core consumer prices in the United States increased 3.80% in May of 2021 over the same month in the previous year, the largest 12-month increase since the period ending June 1992.

The number of Americans filing new claims for unemployment benefits dropped to 376 thousand in the week ending June 5th, the lowest level in nearly 15 months and compared with market expectations of 370 thousand, as the labor market continues to be supported by broader economic re-opening amid a steady decline in the number of daily COVID cases and the rapid pace of vaccinations. In addition, many states recently decided to withdraw from federal unemployment benefit programs as large and small businesses have been complaining about the difficulty to hire, saying the benefits pay more than most minimum wage jobs.

Comments on US market last close…

US market had a positive and volatile day after US inflation update. RUSSELL -0.68%, DOW +0.06%, S&P +0.47% and NASDAQ +0.78%. ECB update before market open had no effect as they are in double dip recession and plan to keep printing for a while yet. EU has now mostly stuck in money printing forever strategy like Japan. US inflation was hot...13 year high…Core inflation was over 20 year high. CPI up 5% and core up 3.8%...both beat expectations. Bond market was betting on economist being wrong and they were right. They were sitting on shorts and it fell on the news. As with any good traders, bond market covered their short as US Fed QE buying jammed up bonds. 10 year bond yields moved up 5-6 bps on the open and then fell 8-9 bps through the day. Basically the bond market made money using the US Fed QE due to weak market consensus view. It is a bit of a set up...like the 80-90% earnings beat in the US...the players are getting better at using the passive and government money to their benefit. RUSSELL fell as the consumers and corporate profits are under threat. NASDAQ basically moved the exact opposite to bond yields driven by passive bots. S&P’s NASDAQ bits pushed it to positive while DOW was flat. USD ticked lower with yield. Gold and Oil moved higher while Copper moved lower. Banks and Miners were the worst while Health Care and Property were the best. Gold sub sector outperformed all the major sectors. NASDAQ has now ticked above 14k for the third time in six months. It’s the market driver and running purely on yield slide. Inflation trend is global and looks to be more persistent. Yields are going up medium to long term and that means NASDAQ is going lower. Question now is... when will the market react to higher costs hitting corporate profits and the bottom 50% consumer spending? It looks inevitable and reporting season starts in July. We may get the delayed reaction in the next week or two!

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