Race to the bottom in real growth is driven by excessive stimulus

Local market started substantially negative and then recovered some losses to finish negative. Relatively low turnover continued into the nineth week in a row without a double-digit turnover day. Size mattered as Micro Caps were the best while Large Caps were the worst. Health Care and Retail were the best sectors while Miners and Energy were the worst.

Global growth is fading. It is becoming so blatantly obvious that global broking houses are downgrading growth outlook. Big brokers are downgrading US growth outlook but keeping inflation outlook elevated. It looks like US is facing stagflation risk as we expected. Markets are trading at historic high multiples and that depends on high growth outlook. It is inevitable that downgrade of the economic growth will weigh on corporate growth. Markets are not pricing that in. That may change soon enough!

US Fed tapering talk is ramping up after the minutes suggested there is substantial support for tapering in Q4. Markets are priced for perfection that requires stimulus to remain or rise. Tapering QE is not something the markets can absorb when stagflation risk starts to rise. We have nearly a month before the next US Fed meeting and the markets have plenty of time to have a taper tantrum to scare them away from tapering. It may be different this time!

China continues move on regulatory and reform changes. We have seen substantial moves in tech, education, retail and commodity sectors. China has been flagging these changes and they continue to say that there is more to come. Iron Ore is the poster child of the recent decline and it’s still falling. Trying to pick the bottom in China sentiment is fraught with danger.

Aussie macro is getting worse by the day. Delta wave from NSW has now moved into multiple states and even NZ. NSW lockdown will last into Sep and may be even longer. VIC has extended lockdown due to recent case data. It is consensus that Q3 is going to be negative growth and it starting to look like Q4 is going to be seriously affected. We are going toward double dip recession risk. Given that there is an election in Q1, it is logical to assume that there will be a handout in Nov/Dec to boost Christmas sales and avoid the negative Q4. Historic trend suggest RBA will back flip from tapering in Q4 to raising QE in Nov/Dec ahead of election cycle. It may be different this time!

Australian jobs data came out with decade best unemployment rate in a negative growth quarter with majority in lockdown. Ignore all the noise and sampling problems with ABS data for years, the simple data that gives clarity is the hours worked (i.e. chart above) and it clearly shows that we are in decline for months and it will get worse. We are already below pre pandemic peak and its consensus that job market will get weaker over the next few quarters. RBA started doing emergency QE pre delta waves. The economy is weak and will get weaker with very little new plans while geopolitics with major trading partner creating more risks.

Seasonal cycles suggest the US market peaks this week as macro risks become the main play. US and Australian markets are about to have the monthly option/futures expiry and historical trend suggest weakness follows.

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

Output prices in the UK were up 4.9% year-on-year in July of 2021, the biggest increase since December of 2011 and above market forecasts of a 4.4% rise. Despite showing negative annual growth (-2.3%), transport equipment provided the largest upward contribution because of the weight changes implemented as part of the move to annual chain-linking. Cost of metal, machinery and equipment increased 8.1%, petroleum 46.6%, food 2.2% and tobacco and alcohol 3.5%. On the month, the rate of input inflation was 0.8% in July, up from 0.5% in June.

The consumer price inflation rate in the Euro Area was confirmed at 2.2% year-on-year in July 2021, the highest since October 2018 and above the European Central Bank's target of 2.0%. The recent price increases reflected a low base year due to the coronavirus crisis, and have been supported by a pick up in demand and activity following the reopening of the bloc's economy. Main upward pressure came from energy (14.3% vs 12.6% in June), food, alcohol & tobacco (1.6% vs 0.5%), and services (0.9% vs 0.7%). Non-energy industrial goods inflation, however, slowed to 0.7% from 1.2%. Meanwhile, the annual core inflation, which excludes volatile prices of energy, food, alcohol & tobacco, eased to 0.7% in July, from 0.9% in June. On a monthly basis, consumer prices edged down 0.1%.

Mortgage applications in the US dropped 3.9% in the week ending August 13th, reversing from a 2.8% increase in the previous period, data from the Mortgage Bankers Association showed. It is the biggest fall in four weeks. Applications to refinance a home loan sank 5.3% while purchases edged up 0.8%. The average fixed 30-year mortgage rate surged by 7bps to 3.06%, the highest in four weeks. "Mortgage rates followed an overall increase in Treasury yields last week, which started higher from the strong July jobs report before slowing because of weaker consumer sentiment and concerns about rising Covid-19 cases. Despite a second-straight weekly decrease, average loan sizes remain close to record highs. This is a continuing sign that sales prices are still elevated, driven by stiff competition leading to accelerating home-price growth” said Joel Kan, the Mortgage Bankers Association’s associate vice president of economic and industry forecasting.

Housing starts in the US sank 7% to a seasonally adjusted annual rate of 1.543 million units in July of 2021, well below market forecasts of 1.6 million. It is the lowest reading in 3 months, hurt by rising construction costs and home prices. Single-family housing starts fell 4.5% to a rate of 1,111,000 and those of buildings with five units or more dropped 13.6% to 412,000. Starts declined the most in the Northeast (-49.3%), the West (-11.3%) and the Midwest (-6.9%) but rose 2.1% in the South.

Comments on US market last close…

US market pulled back for the second day in a row after US Fed minutes pointed to talk about tapering later this year. Global economy rolling over and delta waves are not a worry for markets but even the mention of stimulus reduction is panic mode. There is no timetable or even agreement. Like RBA, it is just talk to buy time till economy slows and then back to more stimulus. But inflation is going to remain high and growth is going lower...taper tantrum is likely to scare US Fed. DOW -1.08%, S&P -1.07%, NASDAQ -0.89% and RUSSELL -0.84%. VIX jumped 20% to above 21. Yields barely moved and USD ticked higher. AUDUSD and Commodities were weaker while Gold was flat. Retail was the only sector that was even slightly green while Energy and Health Care lead the falls. China moving to take over Middle East with economic deals as West exits. China moves on techs and other industries are only beginning. When you are willing to kill off a trillion dollars of market cap, you are going to make a lot more changes. TINA turners are all long and believing that Fed can stop inflation and drive growth. It may be different this time.

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