Markets betting on Central Bank fairy tales... May the 4th be with you!

The local market started positive and faded to flat, before global buying after lunch in the large caps drove the market into a positive low turnover day. 

We continue the record of seven weeks in a row without a double-digit turnover day. Miners, energy and supermarkets were the best performing sectors and the global investor favourites for the reflation trade after banks moved into relative expensive territory. 

Tech and healthcare were the worst performers in a day when most were green. The RBA delivered more fairy tales about growth improvement, weak inflation, employment growth, more QE and rates staying low for years.

Global central banks have given up on capitalism and are planning on endless stimulus as the path for years to come. Markets are pricing in the belief they have it all under control, but history suggests otherwise.

The IHS Markit Eurozone Manufacturing PMI (i.e. chart in hyperlink) stood at 62.9 in April 2021, little changed from a preliminary estimate of 63.3 and above March's final figure of 62.5. 

The latest reading signalled the fastest pace of expansion in the manufacturing sector since data collection began in June 1997, remaining above the 50 no-change mark for the 10th successive month. Growth rates for both manufacturing output and new orders remained close to March’s survey records, as restrictions related to COVID-19 were relaxed. In addition, backlogs of work rose at a survey record pace and employment increased the most since February 2018, while average lead times for the delivery of inputs deteriorated to a degree unsurpassed in the survey’s history. 

On the price front, input cost inflation was the second-highest on record, while companies raised their own charges to the strongest degree in over 18 years of data availability. Looking ahead, manufacturers were at their most optimistic in nearly nine years.

The ISM Manufacturing PMI (i.e. chart in hyperlink) fell to 60.7 in April 2021, from 64.7 in March, well below market forecasts of 65 as shortages of inputs likely constrained production. Still, the latest reading pointed to expansion in the manufacturing sector for the 11th month. A slowdown was seen in production (62.5 vs 68.1), new orders (64.3 vs 68) and employment (55.1 vs 59.6) while inventories contracted (46.5 vs 50.8). On the other hand, new export orders increased faster (54.9 vs 54.5). 

All of the six biggest manufacturing industries expanded, in the following order: 

1. Fabricated Metal Products; 
2. Chemical Products; 
3. Food, Beverage & Tobacco Products; 
4. Computer & Electronic Products; 
5. Transportation Equipment; and 
6. Petroleum & Coal Products. 

The ISM Manufacturing Prices Index was 89.6 from 85.6 when expectations were 86.1 level. Still not seeing inflation in the US picking up more than expected? Time will tell.

The IHS Markit US Manufacturing PMI was revised slightly lower to 60.5 in April of 2021 from a preliminary of 60.6 and compared to 59.1 in March. Still, the reading indicated a robust improvement in the health of the US manufacturing sector, and the steepest since data collection began in May 2007. 

Overall, growth was supported by quicker expansions in output and new orders, with the latter rising at the sharpest pace since April 2010. The headline index was also pushed higher by unprecedented supplier delivery delays (ordinarily a sign of improvement in operating conditions). Raw material shortages also led to the fastest rise in cost burdens since July 2008, with firms seeking to pass on supplier price hikes through marked upticks in output charges. Meanwhile, business confidence moderated, amid concerns regarding supply chain disruptions and strains on future production capacity.

Given the recent data points from manufacturing cycles in China, EU and US, we may have seen the peak or near the peak in the current manufacturing recovery cycle. China saw this coming and has already moved to reduce exuberance in the system while US and EU are adding to the bubbles.

Inflation is cropping up in Buffett's businesses

“We are seeing very substantial inflation,” the Berkshire chairman and CEO said at the conglomerate’s annual shareholder meeting on Saturday. “It’s very interesting. We are raising prices. People are raising prices to us and it’s being accepted.
“We’ve got nine homebuilders in addition to our manufacture housing and operation, which is the largest in the country. So we really do a lot of housing. The costs are just up, up, up. Steel costs, you know, just every day they’re going up,” the legendary investor added. 

Berkshire Hathaway owns one of the nation’s largest homebuilders Clayton Homes, along with companies such as Benjamin Moore paints and Shaw flooring. Still not seeing inflation in the US picking up more than expected? Time will tell.

Comments on US market last close

The US market was positive, as its move from growth to opening up and the reflation cycle picks up steam. 

Manufacturing PMI data was solid but weaker than expected in the EU and US. The market is surprised but China data showed where this was headed. 

We have seen a peak in growth from manufacturing. DOW +0.70%, RUSSELL +0.49%, S&P +0.27 and NASDAQ -0.48%. Bonds and Gold were higher, while a weaker US dollar drove all commodities higher ahead of the China holidays. 

Addressing the Richmond Federal Reserve President, Warren Buffet was talking up inflation. The simple logic for this is the combination of massive stimulus and the reopening economy with weak currency and supply-side issues, leading to higher prices. 

Ignoring facts is not a good strategy. Energy and Healthcare were the best sectors, while Retail and Tech were the worst. Gold stocks were shining bright, the sub-sector up nearly 4%. We are in the usual trend: end the month weak, start the first week strong, then allow US conomic set the trend over the next few weeks. Investors should expect inflation to take over as the reopening picks up.

The Full SUNSET STRIP report with the end of day market stats are on the following link (VIEW LINK)

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