Market pricing in V shape recovery but US economy is moving to W shape recovery as inflation bites

Local market started positive on US lead before fading on profit taking to finish a slightly positive day. We have officially finished seven weeks of trading without a single double digit (i.e. over $10bill) turnover day. We are clearly in reflation trade as miners and energy sectors were the best while Tech, Utilities and Health Care were the worst. China and Australia geopolitics added another potential supply side disruption to the commodity cycle.

Chinese Yuan keeps rising against the USD to help local producers to keep rising input costs in check but that means China will continue to export higher inflation to the world. Since China is the input manufacturer, US will then add to the inflationary pressures with weak USD and export more inflation to the world. Still not seeing inflation? Even in lockdown restrictions, Europe is beating inflation expectations. 

Higher then normal inflation rate means costs are rising faster than expected. Even if it is transient like the Central Bank fairy tales, costs have risen faster than expected but then they will rise slower. Costs are not going to fall…just rise slower. Consumers are not going to see real wages growth for number of years. Basic maths suggests disposable income will keep declining. Expect government handouts are going to be around for years to come. There is a reason most business are not adding capex but evolving to benefit from government handouts. Western economies are creating a generations of zombie businesses with tax cuts and handouts in almost all sectors. Markets have priced in the V shape recovery but the economy moving towards W shape recovery as inflation bites. Markets are waking up to the inflation risk and Gold is making new multi month high. Time to manage risk!

US market finished positive on an afternoon pump while Aussie market faded into the close. There was more sentiment between fund managers in the city on where to go for lunch to avoid covid than actually trading any stock. Fund managers have benefited from rising market on macro trade and remain on the sidelines without doing anything. Inaction has proven to be the winning strategy in recent months and fund managers are creatures of habit. They are not going move till the market gets scared. It is clear from the pandemic and economic data that China is doing well. Europe and Emerging Markets ex China is not doing well. US is overheating and US inflation is the biggest threat to global asset bubbles.

The number of Americans filing new claims for unemployment benefits dropped to 498 thousand in the week ending May 1st, the lowest level since March 2020, when the pandemic first hit the US economy. The pace of the labor market's recovery gained further momentum in the spring, as the acceleration in the pace of COVID-19 vaccinations allowed the country to gradually reopen and as the government's $1.9 trillion relief package boosted domestic demand. Continuing jobless claims in the US, which measure unemployed people who have been receiving unemployment benefits for a while, rose to 3.69 million in the week ending April 24th, from a revised 3.65 million a week before, above market expectations of 3.62 million. This was the second straight month of increase in continuing claims. Despite the rise in continuing jobless claim, initial jobless hit a post pandemic low. The economy is still weak but recovering. Not sure about the V shape recovery but a recovery none the less.

The markets will be looking at non farm payrolls for April to be released tonight to get a confirmation of the stimulus driven economic recovery cycle. The US economy added 916K jobs in March of 2021, the most in 7 months, following an upwardly revised 468K in February. It compares with market expectations of 647K, amid easing business restrictions, falling coronavirus infection rates, a fast vaccine rollout and continued support from the government. The largest job gains occurred in leisure and hospitality (280K), public and private education (190K), and construction (110K). Employment also increased in professional and business services (66K), manufacturing (53K) and transportation and warehousing (48K). Still, that leaves the economy about 8.4 million jobs short of the peak in February of 2020, as the job market still has a long way to go before fully recovering from the pandemic shock. Fed Chair Powell recently said there's a good reason to expect job creation to pick up in the coming months although it will take some time to get back to maximum employment.

The Caixin China General Services PMI increased to a four-month high of 56.3 in April 2021 from 54.3 in the prior month, amid the successful containment of COVID-19 and a further improvement in demand. New orders expanded at the fastest rate since last November on the back of a renewed upturn in export work; while employment rose further, with the rate of growth the fastest in five months. Prices gauges remained at a high level and inflationary pressure heightened, as input cost rose faster due to increased staff and raw materials costs. Meantime, output charged also went up, though to a lesser extent than that seen for input costs. Looking ahead, confidence remained historically sharp, despite the level of positive sentiment slipped slightly from March's eight-year record.

China's trade surplus was at USD 42.8 billion in April 2021, easily beating market consensus of USD 28.1 billion and compared with a surplus of USD USD 45.0 billion in the same month a year earlier, amid an improving global demand and higher commodity prices. Exports jumped 32.3 percent and imports soared 43.1 percent. The country's trade surplus with the US increased to USD 28.11 billion in April from USD 21.37 billion in March. Considering the first four months of the year, the trade surplus widened sharply to USD 157.91 billion, from USD 55.65 billion in the same period of 2020, as exports jumped 44 percent year-on-year to USD 973.7 billion, while imports soared 31.9 percent to USD 815.79 billion.

Comments on US market last close… US market was slightly positive before a pump in the last hour delivering a green day. Even NASDAQ and RUSSELL moved from negative to positive on the last hour pump. It was all about more positive economic data balanced against pick up in inflation. DOW +0.93%, S&P +0.82%, NASDAQ +0.37% and RUSSELL +0.00%. Everything went up...bonds, metals and even insiders selling. Oil and USD were down. Banks and Staples lead the pump with all sectors in the green but Gold was massive outperformer as Spot Gold hits 4 month high. Inflation update coming next week and Gold sector getting ready to rip. BOE is starting to fracture on maintaining current QE. Expect QE tapering to start in Q4 around the world as yields move higher. Use the last few pump days to reduce market exposure and buy some inflation hedge in gold and market hedge in shorts. You may need that in the next few weeks. Time to get off the fence or risk falling off!

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

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