Low volatility may be transitory

Mathan Somasundaram

Deep Data Analytics

The local market had a negative day on weak turnover. We have started the 12th consecutive week with aggregate weekly turnover below $40 billion. The market was trying to balance the inflationary pressures on a global basis against the opening up recovery on vaccine rollout. Locally the Victorian cluster remains active risk for domestic recovery while global recovery seems to be driven by US and EU vaccine programs. Tech and property were the best green sectors again while banks and retail were the worst red sectors. The tech sector was boosted by take over bids for ALU and HSN. Timing is always interesting due to the proximity to the end of financial year end boost for the shareholders.

U.S. Treasury Secretary Janet Yellen said that President Joe Biden’s $4 trillion spending proposal would be positive for the country, even if it leads to a rise in interest rates. During an interview with Bloomberg News, the former Federal Reserve chair said the President’s plans would total about $400 billion each year — a level of spending she argued was not enough to create an inflation over-run. 

“If we ended up with a slightly higher interest rate environment it would actually be a plus for society’s point of view and the Fed’s point of view,” Yellen told Bloomberg. “We’ve been fighting inflation that’s too low and interest rates that are too low now for a decade,” she said. She added that if the packages help at all to “alleviate things then that’s not a bad thing — that’s a good thing.”

It is interesting comments from the US Treasury Secretary with a few days to go before the next inflation update from China and US. No need to worry … the central banks have got this. They will parade more talkers that will confirm it is transitory but my last longer and higher than expected. They will also use more QE bond buying to keep yields controlled as markets have started to lose faith in them. The big problem for the markets is not that yields are going to rise but reporting season is coming. Central banks are clearly planning to keep repeating the same failed yield control policy that is currently creating USD debasement and higher inflation. Despite the nonfarm payrolls not beating expectations, it is clearly shows that employment recovery is strong and delivering higher wages. 

US reporting season is starting to look very risky when you add high input costs, high freight costs and high wages costs to management outlook statements. Low volatility may be transitory!!!

US is chasing global minimum corporate tax and no one is arguing against it. US is already planning to raise US corporate taxes to pay for all the spending. The rest of the world will eventually follow after their election cycles like in Australia. Australia is already trying to follow the US lead into economic mess by undermining the higher education, Super, NDIS and Medicare systems that have delivered decades of stability. Time will tell how that works out.

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

The IHS Markit/CIPS UK Construction PMI rose to 64.2 in May 2021, easily beating market expectations of 62.3 and signalling the strongest rate of output growth since September 2014. House building was the best-performing category of construction activity in May, followed by commercial work , which grew at the steepest rate since August 2007. Civil engineering activity also increased sharply, although the pace of expansion eased slightly since the previous month. Overall new order volumes increased the most since the survey began just over 24 years ago and the rate of job creation was the fastest since July 2014. On the price front, input cost inflation hit an all-time high. Finally, construction companies remained highly upbeat about their growth prospects for the next 12 months.

Eurozone retail sales jumped 23.9% from a year earlier in April 2021, following an upwardly revised 13.1% growth in the previous period but missing market expectations of a 25.5% rise. Eurozone retail sales were down 3.1% from a month earlier in April 2021, following an upwardly revised 3.3% growth in March and compared with market expectations of a 1.2% decline. Sales of non-food products dropped 5.1% (vs 5.5% in March), with on-line trade falling 2.9% (vs 2.0% in March). In addition, food sales decreased 2.0% (vs 1.4% in March), while fuel trade edged 0.4% higher (vs -1.9% in March). Among the bloc's largest economies, France reported the largest monthly decline, with sales contracting 6.0%, after the government imposed new lockdown measures. Sales in Germany also declined sharply (-5.5%), followed by Spain (-0.9%). On a yearly basis, retail sales jumped 23.9% in April, the most on record due to the low base effect, but below consensus of 25.5%.

The US economy added 559,000 jobs in May of 2021, above an upwardly revised 278,000 in April but below market forecasts of 650,000. That leaves employment about 7.6 million jobs below its peak in February 2020. Notable job gains occurred in leisure and hospitality (292,000), in public (103,000) and private education (41,000), and in health care and social assistance (46,000). Still, supply constraints, rising inflation and labor shortages are weighing on capacity production as many workers mostly women, remain at home and government subsidies may discourage some workers to find a job. As such, businesses have been struggling to rehire workers to cope with surging demand, prompting them to raise wages in a bid to attract new employees. Yet, hourly earnings surged 0.5%, above forecasts of 0.2%.

Average hourly earnings for all employees on private nonfarm payrolls increased by 15 cents, or 0.5% to $30.33 in May of 2021, following a 0.7% increase in April and beating market estimates of a 0.2% gain. Average hourly earnings of private-sector production and nonsupervisory employees rose by 14 cents to $25.60 in May, following an increase of 19 cents in April. Year-on-year, average hourly earnings have increased by 2%, following an upwardly revised 0.4% rise and above market consensus of a 1.6% increase. The data for the last two months suggest that the rising demand for labor associated with the recovery from the pandemic may have put upward pressure on wages.

Job advertisements in Australia jumped 7.9% month-over-month to the highest since 2008 at 213,894 in May 2021, after a 4.7% increase a month earlier. This was the 12th straight month of gains in job ads, suggesting strong demand for labor could withstand both the COVID-19 lockdown and the removal of some government emergency support programs. 

"The Victorian lockdown is unlikely to derail the state's labor market recovery," said ANZ senior economist, Catherine Birch. 

"Even if we see some employment losses in June, as long as restrictions start easing from June 11th as currently planned, workers should be reinstated or find new jobs quite quickly, given the underlying strength in the labor market." 

"What is still uncertain is the strength of the transition from lower underutilization to higher wages growth, and then to inflation," Birch added. On an annual bases, job ads surged almost 220%.

China's trade surplus was at USD 45.5 billion in May 2021, below market consensus of US$50.5 billion and compared with a surplus of US$61.9 billion in the same month a year earlier, amid an improving global demand and higher commodity prices. Exports jumped 27.9 percent while imports soared at a faster 51.1 percent. The country's trade surplus with the US increased to US$31.78 billion in May from US$28.11 billion in April. Considering the first five months of the year, China's trade surplus widened sharply to US$203.45 billion, from US$117.55 billion in the same period of 2020, as exports jumped 29% year-on-year to US$1.24 trillion, while imports soared 40% to US$1.03 trillion.

Exports from China grew by 27.9% YoY to US$263.92 billion in May 2021, easing from a 32.2% surge in April and compared with the market consensus of 32.1%. This marked the eleventh straight month of increase in outbound shipments, as more countries reopened their economies although higher raw material costs, global chip shortage, logistics bottlenecks and lower capacity in Guangdong due to the coronavirus outbreak weighed on sales. Exports increased for unwrought aluminium and products (15.6%), steel products (19.8%) and rare earths (45.6%) but fell for grains (-34.3%) and auto processing products and parts (-4%). Considering the first five months of the year, exports jumped 40.2%.

Imports to China jumped 51.1% year-on-year to US$218.38 billion in May 2021, compared with market consensus of 51.5% surge, and after a 43.1% rise a month earlier. This was the steepest increase in inbound shipments since January 2011, amid strengthening domestic demand, surging commodity prices and a low base effect from last year. Purchases rose for natural gas (31.67%), unwrought copper (1.3%), copper ores & concentrates (15.09%), iron ore (3.17%), soybeans (2.42%), edible oil (47.59%), and rubber (5.67%). In contrast, purchases fell for crude oil (-14.6%), refined products (-40.43%), coal (-4.62%), steel products (-5.78%), and meat (-3.31%). Considering the first five months of the year, imports were up 35.6%.

Comments on US market last close…

US market reversed the falls from Thursday and popped higher on short squeeze after nonfarm payrolls were weaker than expected. The jobless data and ADP data showed the job market is strong but the nonfarm miss the last two months show that companies will have to pay more to get workers. Nonfarm data for the two previous months were also upgraded. So the miss this month wasn’t as big as it looks. NASDAQ +1.47%, S&P +0.88%, DOW +0.52% and RUSSELL +0.31%. Everything reversed after market shorted hard after massive job data beats on Thursday. Yields, USD and VIX retreated while commodities and AUDUSD recovered. Tech and Retail lead the green sectors on short covering while Utilities and Property were the laggards despite falling yields. Gold sub sector bounced back hard. Market will remain on tender hooks into next week with more data deluge coming. US and China inflation will be key. China is working hard to curb it. They are smashing down demand for everything they can...even pork! Latest property data shows the bubble has gone global and now everyone is scared to act. Inflation is here and rising.

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Mathan Somasundaram
Founder & CEO
Deep Data Analytics

Over 25 years’ experience in the finance/tech industry. Mathan has worked extensively in all parts of the finance sector (i.e. County NatWest, Citi, LIM, Southern Cross, Bell Potter, Baillieu Holst and Blue Ocean Equities). Currently Founder and...

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