Low volatility amid reflation gives a false sense of security

The local market had a volatile day that finished slightly positive. We have finished the ninth consecutive week without a single day’s turnover above $9 billion. Markets usually run up into option expiry and fade after. We had our option expiry yesterday and the US will have it tonight. Healthcare and tech led the green sectors while energy and mining led the red sectors. 

The market is seeing tax loss selling and that brings bargain hunters and "buy the dip" traders. We are heading into the last week of the month and markets are facing a lot of macro risks. The US Fed is preparing the markets for tapering while the White House is preparing the market for higher taxes. Locally, Federal government is preparing for a snap election in Sep/Oct and borders opening up for December. Bond and Currency markets are preparing to take on the Central Banks as inflation starts to pick up steam globally. 

Expect volatility to pick up over the next few weeks. Low volatility in reflation cycle gives false sense of security. 

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

The number of Americans filing new claims for unemployment benefits dropped by 34 thousand to 444 thousand in the week ending May 15th, the lowest since mid-March 2020 and below market expectations of 450 thousand. The labor market continued to show signs of recovery, helped by the country's re-opening efforts, the ongoing government support and one of the world's most successful vaccination campaigns. Applications are likely to decrease further in the coming weeks as more than 20 states have recently announced plans to withdraw from federal unemployment benefit programs, with businesses saying they make it more difficult to hire as the unemployment benefits pay more than most minimum wage jobs. Meanwhile, the report also showed the number of continuing claims unexpectedly increased by 111 thousand to a seven-week high of 3.75 million. US employment market continues to improve to post pandemic best update while fiscal and monetary policy remains at peak emergency state. It is no wonder that US Fed has flagged that QE tapering chat will start from the next meeting. That will set scene for tapering in 2021H2 to prepare for rate rises in 2022. We have come a long way from no rate rises till 2023/24 in just over a month. Inflation in an economy filled with asset bubbles have a way of convincing Central Banks of the economic reality.

The Philadelphia Fed Manufacturing Index in the US fell to 31.5 in May of 2021 from 50.2 in April which was the strongest reading in nearly 50 years. Figures also came below forecasts of 43. Indicators for new orders (32.5 vs 36) and shipments (21 vs 25.3) declined from April’s readings but remained elevated. Additionally, employment increases were less widespread this month (19.3 vs 30.8), while both price indexes reached long-term highs. Prices paid increased to 76.8 from 69.1 and prices received to 41 from 34.5. Also, most future indexes moderated this month but continue to indicate that the firms expect growth over the next six months. All manufacturing measures point to US manufacturing is coming off the historic peak.

Producer prices in Russia soared 27.6% year-on-year in April of 2021, accelerating from a 16% jump in the previous month. It was the biggest increase in producer prices since January of 2010. On a monthly basis, producer prices advanced 2.7%, following a 3.6% gain in March. Russia is going through recovery cycle similar to GFC with massive input cost blowout. Russian recovery will struggle with such high cost to drag growth lower.

Producer Prices in South Korea increased 5.60% in April of 2021 over the same month in the previous year. Similar to other manufacturing global giants like China, India, Japan, South Korea is also experiencing substantial growth in input costs. US manufacturing outsourced to Asian manufacturing giants to reduce costs and made huge profits for decades. The easy margins come with a costs. That is coming in the form of higher costs. US inflation is not going away and the US Fed is moving to deal with it…albeit very slowly.

Japan's consumer prices declined by 0.4% year-on-year in April 2021, after a 0.2% drop in the prior month. This was the seventh straight month of fall in consumer prices, as a resurgence of COVID-19 cases weighed on household spending. Cost continued to drop for transportation & communication (-2.3% vs -0.4% in March), fuel, light and water charges (-2.8% vs -4.8%), and medical care (-0.3% vs -0.4%). Also, food prices fell 1.2%, the most in over two years. In contrast, prices went up for housing (0.6% vs 0.6%), furniture and household utensils (2.5% vs 2.9%), recreation (1.1% vs 0.4%), education (0.8% vs -2.2%), and miscellaneous (1.6% vs 1.4%). Core consumer prices, which exclude fresh food, dropped 0.1% yoy, the ninth straight month of fall, after a 0.1% fall in March and less than consensus of a 0.2% drop. On a monthly basis, consumer prices also fell 0.4%, the first drop in four months, following a 0.2% gain in March. More signs of global excess stimulus mess having substantial effects on the Japanese economic ponzi scheme.

Comments on US market last close…

US market started positive on improving jobless data and traded choppy but sideways for the rest of the day. NASDAQ +1.77%, S&P +1.06%, RUSSELL +0.64% and DOW +0.55%. There is a lot of macro moving around like crypto bashing to option expiry to US Fed tapering talk to Treasury pushing global corporate tax to China squeezing commodities that we are getting a lot of non correlated moves in the markets. Bond yields slid back with USD and yet dragged all commodities lower. Tech and Property lead the green day with Energy as the only red sector. Gold continues to shine as a sub sector. US market usually runs into expiry and fades after. Another positive day likely in the US tonight but time to lock in profits.

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