Microcap profit-taking points to weak market sentiment

The local market delivered a negative day after the US Fed flagged the peak of monetary stimulus cycle. It was another day where size mattered. 

Global buying supported the Large caps and they were mainly flat. Every other size category was down nearly 1% or more. Micro caps are now down over 4% in 3 days. There is a mix of profit-taking in stretched growth stocks and tax-loss selling playing out in the market. The smaller you go, the more volatility you are picking up. It is an expected risk in this part of the cycle but ignored by most investors. 

Tech and banks were the best green sectors while telecom, energy and miners were the worst red sectors. Technically we are still in the 13th consecutive week with daily turnover below $9 billion as today’s numbers were boosted by option expiries. The US will have that tonight and volumes will be larger than normal.

The moves today were not correlated to macro news due to the boosted turnover with option expiry. We are likely to get that tonight in the US before we get back to normality…whatever that means in current markets!

The main show did not disappoint overnight. US Fed flipped on a dime and flagged peak stimulus after claiming endless stimulus for years. Where did this sudden enlightenment come from? It wasn’t anything complicated. It was purely lack of choice. They did the bare minimum to keep the show on the road. If you look at the self interest of all the major parties involved, the decision process is relatively clear. US Fed is trying to do the bare minimum as usual. It may come back to bite them later.

Let’s run through the logic again: The Fed knows that we are in a bubble mess and it’s in all asset classes. They know they are trapped between stimulus and inflation. They also know that July reporting season will have a lot of outlook guidance pointing to input cost rising, weaker currency and margin pressure. If they hadn't flagged that they were aware last night, they would be blamed later. 

Markets are ignoring all the risks and assume that Central Bank put is in play. US Fed just flagged the game is up. We have reached a peak new monetary stimulus in the current cycle. It was another major inflexion point where Central Banks were forced to act in the best interest of the economy over markets. The window is still closing for US Fed to unwind the mess in an orderly way. It is a choice between a messy unwind or a really messy unwind. They have taken the first step in flagging tapering and rate hikes but now they will be double guessed at every data point for a target date. July and August US Fed meetings are active volcanoes for markets. The worry is that we are already seeing economic recovery and corporate cycle running into fading stimulus and rising costs. The longer US Fed takes to set the timetable, the higher the risk that they may miss the boat and the market may move ahead of them. If they lose control of the cycle, the unwind will create a bigger mess. July corporate season is such an event that could run a substantial reality check through markets. Time will tell!

Locally, we had employment data out today. As usual, the numbers are not linked to reality. Last month the unemployment rate improved when we lost jobs. This month we created more than half the peak cycle job creation in the US despite their population being fourteen times Australia. Economists have a track record of being great "backcasters" but even they can’t make this up. They had job creation at around 30,000. The US averages about 200,000 per month in a normal cycle and when you adjust for population it's around 15,000 for Australia. 

The question then becomes obvious. If we are creating nearly 100,000 jobs per month for a year after losing less than 1 million jobs in the pandemic cycle for two months before that, why do we have no wages growth? We have border restrictions to limit supply. We have $1 trillion dollars of debt to show for corporate and asset bubble handouts. Why do we have no wages growth? 

The unemployment rate is back near GFC lows. And yet RBA has emergency stimulus and no rate rise for years to come. Is the RBA flagging that the job market data has been turned into useless political spin material? There may be a reason the RBA talks about the job market for keeping stimulus and not economic growth or inflation or asset bubbles. Everything else seems to be transitory but not the job market. 

RBA and ABS can’t both be right. I suspect that there is a level of fake it till you make it on both sides. Time will tell!

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

The Westpac-Melbourne Institute Leading Economic Index in Australia edged down 0.06% month-over-month in May of 2021, after a 0.2% gain a month earlier, pointing to the first decline in four months. Meantime, the six-month annualized growth rate, which indicates the likely pace of economic activity relative to the trend of three to nine months, advanced 1.47%. Westpac said that given the improved pulse of the economic data in 2021, as signaled by the leading index, it seems unlikely that the Board would expect to have to wait until 2025 before it achieves the objectives necessary to justify the first cash rate increase since November 2010.

The consumer price inflation rate in the UK climbed to 2.1% year-on-year in May 2021, from 1.5% in the previous month and comfortably above market expectations of 1.8%. It was the highest rate since July 2019, reflecting the ongoing economic recovery and re-opening efforts, as well as the low base year. Main upward pressure came from clothing; motor fuel; recreational goods, particularly games and recording media; and meals and drinks consumed out. On the other hand, prices for food and non-alcoholic beverages fell for a seventh consecutive month, particularly for bread and cereals.

Factory gate prices of goods produced by the UK manufacturers advanced 4.6% year-on-year in May 2021, the most since January 2012 and beating market expectations of a 4.5% rise. Transport Equipment provided the largest upward contribution of 1.80%age points to the annual rate (prices up 0.3%). This was followed by:

• metal, machinery and equipment (5.1%), 
• petroleum (67.0%), 
• other manufactured products (2.4%),
• food products (3.1%), 
• tobacco and alcohol (0.9%), and 
• computers, electrical and optical (1.7%). 

Petroleum products had the highest annual growth rate of any component of output prices (67.0%), driven by a base effect as there was only a relatively small price movement of 3.3% on the month. In May 2020, prices for petroleum products dropped by 6.1% as there was a fall in demand in the market. On a monthly basis, producer prices grew 0.5% in May, above forecasts of a 0.4% gain.

The Retail Price Index in the United Kingdom increased to 3.30% year-on-year in May from 2.90% in April of 2021. Retail Price Index in the United Kingdom increased to 3.30% year-on-year in May from 2.90% in April of 2021.

Fixed-asset investment in China increased 15.4% year-on-year in the first five months of 2021, below forecasts of 16.9%. Slower increases were seen for both public (11.8% vs 18.6% in January-April) and private (18.1% vs 21%) and in all major economic sectors: primary (28.7% vs 35.5%), secondary (18.1% vs 21.7%) and tertiary (13.8% vs 18.7%).

Industrial production in China increased 8.8% year-on-year in May of 2021, the lowest rate in 5 months, amid softer export orders, rising commodity prices and factory costs and as a virus outbreak in southern China disrupted port services and delayed deliveries. Still, figures came below market forecasts of a 9% rise. Production fell for textiles (-3% vs 2.5% in April) and slowed for chemicals (8.6% vs 8.7%); non-metal minerals (7.6% vs 12.6%); ferrous metals (7.7% vs 10.9%); general equipment (13.8% vs 14.9%); transport equipment (7.5% vs 7.7%); and machinery (18.7% vs 22.6%). By products, falls were seen in production of cement (-3.2% vs 6.3%) and motor vehicles (-4% vs 6.8%) and slower output was recorded for electric power (7.9% vs 11%); steel (7.9% vs 12.5%) and crude oil (4.4% vs 7.5%) while coal output rebounded (0.6% vs -1.8%).

China's retail trade growth slowed to 12.4% year-on-year in May 2021, from 17.7% in the previous month and below market expectations of 13.6%. The latest figure continued to point to a solid improvement in domestic demand, but also indicated more pressure on the consumption recovery. Sales rose at a slower pace for garments (12.3% vs 31.2% in April); cosmetics (14.6% vs 17.8%); jewelry (31.5% vs 48.3%); personal care (13.0% vs 17.2%); telecoms (8.8% vs 14.2%); home appliances (3.1% vs 6.1%); furniture (12.6% vs 21.7%); automobiles (6.3% vs 16.1%); and building materials (20.3% vs 30.8%).

Canada’s annual inflation rate quickened to 3.6% in May of 2021 from 3.4% in April and was above market expectations of a 3.5% rise. It was the highest jump in consumer prices since May of 2011, with a significant proportion of increase attributable to low base year effects in some consumer goods, namely in gasoline. Thus, strong inflationary pressure was seen in transportation costs (+7.6%), on account of a 43.4% surge in gasoline prices. Additionally, prices climbed at the fastest pace since September of 2008 for shelters (+4.2%). The homeowners' replacement cost index resumed its trend upwards, jumping 11.3%, the most since 1987, as prices for new homes continued to be influenced by shifting consumer preferences and higher construction costs. On a monthly basis, consumer prices went up by 0.5%, the same as in the past three months and slightly above forecasts of a 0.4% rise.

Employment in Australia increased by 115,200 to 13.12 million in May 2021, easily beating market forecasts of a 30,000 gain, amid COVID-19 restrictions in several states and an acceleration in coronavirus vaccinations. Part-time employment rose 97,500 and full-time employment expanded 17,700. Over the year to May, employment went up 987,200 people, or 8.1 percent.

Australia's seasonally adjusted unemployment unexpectedly was at 5.1% in May 2021, compared with market consensus and April's figure of 5.5%. This was the seventh straight month of fall in the jobless rate and the lowest reading since February 2020, as the economy recovered further from the COVID-19 hit. The number of unemployed declined 53,000 to 701.1 thousand, as people looking for full-time work was down by 36,100 to 491,500 and those looking for only part-time work fell 18,900 to 209,600. Meantime, employment grew 115,200 to 13.12 million, easily beating forecasts of a 30,000 gain, with part-time employment rising 97,500 and full-time employment expanding 17,700. The participation rate rose 0.3 points to 66.2 percent to a six-month low of 65.9%, above forecasts of 66.1%. The underemployment rate fell 0.3 points to 7.4%, and the underutilization rate decreased 0.7 points to 12.5%. Monthly hours worked in all jobs went up 25 million, or 1.4%, to 1,814 million hours.

Average new home prices in China's 70 major cities rose by 4.9% year-on-year in May 2021, accelerating for a fifth straight month to the biggest annual gain since June 2020, as strong property demand was enough to offset government cooling measures. Among China's biggest cities, Guangzhou recorded the largest home price increase (11.2% vs 9.9% in April), followed by Chongqing (8% vs 6.7%), Shanghai (4.5% vs 4.9%), Beijing (4.3% vs 4.5%), Shenzhen (3.7% vs 3.9%), and Tianjin (3.9% vs 3.6%). On a monthly basis, new home prices went up by 0.6% in May, the same as in April and remaining the largest monthly gain since August 2020.

Comments on the US market last close

US market fell on US Fed update and then mini recovery on short-covering before sliding into the close. DOW -0.77%, S&P -0.54%, NASDAQ -0.24% and RUSSELL -0.23%. VIX keeps moving higher... now above 18. US Fed raised growth, inflation and rate hike cycle without giving details on tapering. They confirmed they were following the data and will change accordingly. It's the first downgrade in stimulus in the current cycle...lot more to come as data heats up. Inflation has moved from transitory to persistent. Yields fell back before the update and then ran up 12bps from the lows overnight. USD breaking higher...above 50 & 100 day MA....slightly below 200 days MA. Commodities and AUDUSD takes hits. China is moving to " stabilise" commodity prices in copper, aluminium and zinc in the latest move. Retail and Banks were the best sectors in a red day while Utilities and Staples were the worst. We must be at peak global stimulus.

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