Inflation is the new economic pandemic and ignoring it won’t make it go away

The local market started aimless with confusing US lead before global investors buying helped the market to finish positive despite some late selling from local investors. Health care and miners were the best sectors while tech and retail were the worst. We are continuing the record of seven weeks in a row without a double digit turnover day. US market was spooked after Janet Yellen (i.e. US Treasury Secretary) said interest rates may need to be raised to control a hot economy. She did later backtrack and talk down the need for a rate rise and inflation worries. She also talked up outlook for moving the world away from race to the bottom in corporate tax rate. She is very pro higher regulation and higher taxes. She said what was needed to be said and what the data has been showing for months. She has made it easier for US Fed to start talking about tapering QE in H2 as inflation takes off. As an ex-US Fed chair, she understands the pressure they are under and talking about and back tracking is a good way to put that view in the market and yet claim US Fed’s independence. 

Markets ignore facts till it slaps them across the face. US inflation data update next week…buckle up for 3-4%!!!

The trade deficit in the US (see Chart 1 below) widened to a new record of US$74.4 billion in March 2021, from a revised US$70.5 billion in the previous month and compared with market expectations of a US$74.5 billion gap. Imports jumped 6.3% to an all-time high as the domestic demand consolidated its recovery amid re-opening efforts. Purchases rose for consumer goods, industrial supplies and materials, capital goods and vehicles, while tourism-related services also saw a solid increase. At the same time, exports rose 6.6% to a 13-month high, boosted by sales of industrial supplies and materials, capital and consumer goods. Exports of services such as travel and transport were also up. Still don’t think rising inflation in China and falling USD will not drive rising US inflation higher? Time will tell.

Chart 1: Trade deficit in the US

The value of new loans granted for owner-occupied homes in Australia (see Chart 2, below) rose by 3.3% from the previous month to a record high of AU$22.41 billion in March 2021, after a 1.8% drop in February. The rebound was driven by increased loan commitments to investors for existing dwellings. Compared to the same month a year earlier, the value of these loan commitments jumped 55.6%. Nothing to see here. That just looks like the normal cycle when lending standard fall to the floor for a group of banks that had a royal commission find countless problems. RBA and APRA are running away from the property mess. Banks have escaped from the RC with almost nothing take from them. Banks are playing the obvious game…too big to fail. Sadly, even if you are too big to fail, someone has to pay for the mess and it will be the public. 

Chart 2: Owner-occupier home loans, Australia 

Global bond yields are rising and that means borrowing costs for banks are rising. It is a matter of time before mortgage rates rise despite RBA’s delusional rate. Like it or not, Banks are already pushing up fixed rates. It is just a matter of time.

Comments on US market last close… 

The US market was down from the open and then dipped lower after Yellen comments about rates before recovering in the afternoon to finish negative. Yellen said rates may have to rise somewhat to keep the economy from overheating with stimulus. NASDAQ -1.88%, RUSSELL -1.28%, S&P -0.67% and DOW +0.06%. US is trade deficits blew out with stimulus spending. European markets were red as well. Risk off trade pushed investors into bonds and USD. Oil keeps rising despite more supply and lockdown restrictions. Banks and Miners did the best while Tech and Retail were the worst. US is the key economy for equities and jobs data later this week and inflation next week will confirm Yellen’s comments. Nothing earth shattering but has been ignored by markets. China and Japan closed today as well.

Full SUNSET STRIP report with end of day market stats are on the attached link.

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