In the land of asset bubbles, stimulus is king

The local market started positive and finished flat on relatively low turnover to start the new week with US closed tonight on July 4th long weekend. The main news for the day was the bid on Sydney Airport and that drove infrastructure stocks higher. If you strip out that sector, the market had a negative day. There was slight positive green for the large-caps while mid, small and micro-caps were all in the slightly red category. Industrials and energy were the best green sectors while tech and retail were the worst red sectors.

The markets are looking forward to RBA update tomorrow and then US Fed and ECB minutes coming out later this week. There is a lot of media beat up about a potential RBA tapering. RBA is knee deep in denial about the QE popping up property bubble. Banks have already moved to raise fixed rate home loans to take the steam off the market. It is a scary concept of risk management when banks have to move due to RBA inaction. It would be very surprising to see RBA taper QE pumping of asset prices anytime soon. Historical trend suggests that they will say it is coming but somewhere in the future…bit like the economic reform or vaccine rollout plan. RBA is likely to follow US Fed rather than move ahead. US Fed is still buying mortgage backed securities like it’s GFC while property prices are breaking new all time highs.

We are in a fantasy world where there are no economic or business cycles and asset prices always go higher. 

Stimulus was always designed to bring forward consumption and growth. It was always a short term booster. Never ending stimulus creates inflation due to excessive consumption that can’t be satisfied by limited supply. Wages growth will take years to catch up to the real growth in costs and asset prices. Ignoring reality will only make the problem worse. It will inevitably hit consumer spending and hence slow down the economic growth. Central banks are risking economic slowdown to protect asset bubbles. It is becoming clear that the central banks will soon have to pick between the markets or the economy. History suggests they will choose markets over economy despite that being unsustainable. It may be different this time!

Excessive QE programs have delivered negative real yielding bond markets. Central banks like BOJ and ECB are stuck in an endless cycle adding more debt and then adding more QE to buy them. US Fed is in the cusp of falling over into the same ponzi scheme. Historical trend of falling bond yields and rising USD in a reflation cycle does not hold well for the markets. Central Banks may prove that inflation is transient by letting the economy slowdown due to cost inflation. It may be the least bad option when you are facing asset bubbles and debt bubbles. 

Central Banks are unlikely to move till the markets force them to act. Then it will be too late to taper. We expect the Central Banks to follow the “The Four Stage Strategy” explained perfectly in the BBC comedy 'Yes, Prime Minister'. If you haven’t seen the youtube clip, the link is below. It is worth every second. Any link to local vaccine rollout 4 phase strategy is purely random.

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

Producer prices in the Euro Area jumped 9.6% from a year earlier in May 2021, a near record rate of increase and slightly above market expectations of 9.5%. Producer prices in the Euro Area rose 1.3 from a month earlier in May 2021, a 12th consecutive month of increase and above market expectations of 1.2%. Main upward pressure came from energy (2.1% vs 1.2% in April), intermediate goods (1.8%, the same as in April), and capital goods (0.4% vs 0.3%). On a yearly basis, producer prices jumped 9.6% in May, a near record rate, reflecting a low base year due to the pandemic and the re-opening of the bloc's economy.

The value of building permits in Canada slumped 14.8% mom to CA$9.5 billion in May of 2021, following four consecutive months of record highs. Every component was down, with multi-family dwellings in Ontario accounting for nearly three-fifths of the overall national decline. The value of permits issued in the residential sector pulled back 16.0% to CA$6.5 billion, as permits for multi-family dwellings dropped 20.6% to CA$3.3 billion in May, the lowest value since August 2020. Construction intentions for the non-residential sector were down 12.2% to CA$3.0 billion, with Ontario and Quebec falling 21.5% and 22.9% respectively.

Canada posted a trade deficit of CA$1.39 billion in May of 2021 following a downwardly revised surplus of CA$0.46 billion in the prior month and against market expectations of a CA$0.37 billion surplus. Total imports went up 2.1% month-over-month to CA$50.9 billion, with increases seen in 7 of 11 product sections, driven mostly by purchases of metal & non-metallic minerals (+17.7% to a record CAD 5.3 billion); followed by miscellaneous goods & supplies (+15.1%), and pharmaceutical & medical products (+8.2%). Total exports dropped 1.6% to CA$49.5 billion, with losses observed across 8 of 11 product sections, significantly weighed down by consumer goods (-8.8%), amid plummeting shipments of prepared & packaged seafood products (-46.5%), as the snow crab fishing season opened earlier and exports began in April rather than May. Major negative contributions also came from sales of motor vehicles & parts (-5.8%), although the current semiconductor chip shortage had a less severe impact.

The American economy added 850,000 jobs in June, the strongest job growth in 10 months, and well above market forecasts of 700,000. Notable job gains in June occurred in leisure and hospitality (343,000) as pandemic-related restrictions continued to ease in some parts of the country; public (230,000) and private education (39,000); professional and business services (72,000); retail trade (67,000) and other services (56,000). Still, nonfarm payroll employment is down by 6.8 million, or 4.4%, from its pre-pandemic level in February 2020. Labour shortages continue to weigh on capacity production as many companies struggle to hire employees as enhanced unemployment benefits, ongoing child care responsibilities and health concerns may discourage some workers to find a job. To cope with the absence of workers, companies raise wages and benefits. Average hourly earnings increased 0.3%, below forecasts of 0.4%.

Average hourly earnings for all employees on US private nonfarm payrolls rose by 10 cents, or 0.3% to $30.40 in June of 2021, following a downwardly revised 0.4% rise in May and slightly below market expectations of a 0.4% gain. Average hourly earnings of private-sector production and nonsupervisory employees rose by 10 cents to $25.68 in June. Year-on-year, average hourly earnings have increased by 3.6%, following a downwardly revised 1.9% rise in May and slightly below market consensus of a 3.7% increase. The data for recent months suggest that the rising demand for labor associated with the recovery from the pandemic may have put upward pressure on wages.

Factory orders in the US surged 1.7% month-over-month in May of 2021, following a downwardly revised 0.1% drop in the previous month and slightly higher than market forecasts of a 1.6% gain. Transportation equipment recorded the biggest rise (7.7%), namely ships and boats (88%) and nondefense aircraft and parts (27.9%). Orders for primary metals increased 2.2% while orders for computers and electronics (-0.3%) and fabricated metals (-1.4%) were lower. Excluding transportation, factory orders increased 0.7%.

The Australia AiG Construction PMI dropped to 55.5 in June 2021 from 58.3 in the prior month, pointing to the lowest reading since November 2020, reflecting the latest COVID-19 lockdown in Victoria. House building activity and engineering construction slowed while apartment construction moved into mild contraction. Meanwhile, employment grew at a softer rate (58.3 vs 64.4 in May), amid reports of skill shortages across construction occupations and locations. At the same time, supplier deliveries were stable, with this index close to neutral at 50.9. New orders, meantime, accelerated (56.1 vs 55.2), as more orders being added to the existing pipeline of future work. On the price front, inflationary pressures persisted, with the indices for both input cost (98.3 vs 95.8) and selling prices (85.2 vs 78.2) hitting new highs.

Retail sales in Australia rose by 0.4% month-over-month in June 2021, compared with the preliminary figure of 0.1% and after a 1.1% growth a month earlier. This was the third straight month of increase but the softest pace in the sequence, amid COVID-19 restrictions in Victoria during the last week of May. There were rises in sales of food retailing (1.1% vs 1.4% in April), other retailing (0.7% vs 1.7%), and cafes, restaurants, and takeaway food services (0.7% vs 2.3%). At the same time, clothing, footwear, and personal accessory retailing were flat after gaining 1.2%. On the other hand, sales fell for household goods retailing (-1.1% vs 1.5%), and in department stores (-0.7% vs -6.7%).

The seasonally adjusted estimate for total dwellings approved in Australia declined by 7.1% month-over-month to 20,163 units in May 2021, compared with market consensus of a 5.1% fall and after a final 5.7% drop in the prior month, pointing to the second straight month of fall, preliminary data showed. Private sector houses fell 10.3%, coming off the back of the record high in April. In contrast, private sector dwellings excluding houses went up 1.2% after tumbling 24% in April. Among states and territories, building permits fell in Queensland (-13.1%), South Australia (-11.9%), New South Wales (-10.9%), and Western Australia (-8.7%). In contrast, dwelling approvals rose in Victoria (3.2%) and Tasmania (2.0%).

Job advertisements in Australia rose by 3.0% month-over-month to 211,854 in June 2021, after a downwardly revised 6.8% gain a month earlier. This was the 13th straight month of gains in job ads, as dmand for labor remained strong despite the latest COVID-19 lockdown across the country. "Recent history shows that workers laid off or stood down during lockdowns tend to be reinstated or find new jobs quickly once restrictions lift, given the underlying strength in the labor market and overall demand," said ANZ senior economist, Catherine Birch. "Vacancies are twice their pre-pandemic level, and there are now 1.9 unemployed people per vacancy, easily the lowest ration on record," Birch added. On an annual bases, job ads surged almost 129%.

The Caixin China General Services PMI fell to a 14-month low of 50.3 in June 2021 from 55.1 in the prior month, amid an outbreak of a more infectious Delta variant of COVID-19 in Guangdong and the subsequent imposition of anti-virus measures.. New orders grew the least since April 2020, while employment shrank for the first time in four months. Meantime, the gauge of new export business rose into positive territory, though the rate of expansion was marginal. Prices data showed inflationary pressure eased, with input cost inflation rising the least since September 2020 while output charges dropping for the first time in nearly a year. Looking ahead, sentiment remained strongly upbeat, though the degree of positive sentiment slipped to a nine-month low, amid concerns over the epidemic situation at home and abroad.

The IHS Markit India Services PMI declined to 41.2 in June of 2021 from 46.4 in the previous month, and far below market expectations of 48. The reading pointed to the second straight month of contraction in the sector and the fastest pace of contraction since July 2020, amid a resurgence of COVID-19 cases. Both output and new orders fell at the fastest pace since July 2020, due to the reintroduction of restrictions to contain the spread of the coronavirus. External demand continued to worsen, with the new exports orders falling for the sixteenth consecutive month, with the pace of contraction remained sharp, despite easing from May. At the same time, employment declined for the seventh straight month and the fastest over this period. On the price front, input cost inflation eased to five-month low. As a result, selling prices continued to rise. Looking ahead, business sentiment weakened to the lowest since last August, due to the escalation of the pandemic.

Comments on US market last close…

US market had a positive day ahead of July 4th long weekend. The main news was the solid beat in nonfarm payrolls while unemployment and wages growth were strong as expected. RUSSELL -1.01%, DOW +0.44%. S&P +0.75% and NASDAQ +0.81%. VIX slides back to 15.07 to finish a seven consecutive positive days on low turnover. Best streak in 10 months. US market has only had one negative day in the past two weeks. We may have seen the potential blow off top has been set up to shake the trees. Yields moved 4-5bps lower and that just isn’t normal. The data continues to show US Fed is in ramped up QE since start of June to bring yields lower. It’s making the data give the wrong impression about bond market take on inflation. USD slide back and gave a boost to metals. Oil ticked lower as OPEC+ struggled to get the deal over the line. Tech and Health Care lead the sectors while Energy and Banks were the worst. Gold subset outperformed all major sectors. European markets mainly flat like Asian but Chinese markets were down nearly 2%. China tech crackdown and worries of stimulus reduction after 100 year celebrations...esp cuts to property market.

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