Stimulus supercycle has a date with transient inflation soon

The local market followed the US-market lead into a stronger than expected positive day with global investors dominating the trade. We are now into the eighth consecutive week of trading without a single double digit (i.e. over $10 billion) turnover day. We are clearly in reflation trade as miners and energy sectors leading the green day. Utilities and health care were the laggards while the tech sector had a bounce, but not very convincing one. 

Markets are still being pushed up by global equity inflows against a low turnover state. The inflow effects are fading and the market is starting to look at the upcoming inflation update in the US. Not long to wait…inflation update from the US on Wednesday morning Sydney-time. US market had a dummy spit when Janet Yellen mentioned that rates may have to raise to cool a hot economy. Investors may start to worry soon that strong inflation may confirm rate rise cycle.

We are in the middle of the “Stimulus Super Cycle”. Governments and Central Banks are stuck adding more stimulus while doing very little reform. 

Economies are carrying zombie businesses and in extreme cases, we have zombie sectors. The election cycle means governments are even less likely to follow through on tax hikes to pay for all the debt. Central banks, in the meantime, are expanding balance sheets like the country is at war, but in reality the economies are booming on cheap credit. If we are running full throttle stimulus at decade high growth and inflation, when do we stop stimulus? The reality is that we will never stop and there is no such thing as a free lunch. Corporates and big donors are loading up their balance sheet with tax payer funded cheap debt. All the credit will have to be paid one way or another. 

The global asset bubbles in equites, bonds and property will eventually come crumbling down as the underlying economies are not delivering what the numbers are showing. It is all padded with government debt. If you remove the debt added in the last 12 months of each economy from their GDP, almost all economies are still in recession. Globally we are all doing “Buy Now, Pay Later” and that is driving up inflation like never before.

Weak economic fundamentals in election cycle will keep stimulus stronger for longer. And that will keep currency in debasement cycle and inflation moving towards hyper mode. We are seeing this play out in the US with patchy economic data, currency debasement, yield control and rising inflation. Commodity super cycles are usually demand driven recovery cycle over several years. What we have is a classic reflation commodity flash boom driven by currency debasement meeting supply side shocks. The addiction to stimulus is gone too long. The Central Banks and Governments are too weak to make the tough choices. The US dollar is the global currency and inflation in the US will hit everyone. US inflation is the asset bubble buster that was created by excessive stimulus to save the majority of the US population from deep recession. Greed and weak leadership got us to this inflexion point. China has turned from exporting lower inflation to exporting higher inflation at a time when US is struggling to manage their inflation worries. Time will tell how this plays out. Not long to go now!

The US economy added 266,000 jobs in April of 2021, following a downwardly revised 770,000 rise in March and well below market expectations of 978,000, as employers face worker shortage. Notable job gains in leisure and hospitality (331,000), other services (44,000), and local government education (31,000) were partially offset by losses in temporary help services (negative 111,000) and in couriers and messengers (negative 77,000). Jobs also fell in manufacturing (negative 18,000) and retail trade (negative 15,000) and were unchanged in construction. In April, non-farm employment is down by 8.2 million, or 5.4%, from its pre-pandemic level in February 2020. Shortages of skilled workers and the supply of parts and materials could hurt factory employment in the short-run. Some analysts also consider that enhanced unemployment benefits are keeping people at home and not taking jobs.

The US unemployment rate rose to 6.1% in April 2021, from 6.0% in the previous month and defying market expectations of 5.8%, as more workers began looking for work and re-entered the labour market. The number of unemployed people increased by 102,000 to 9.81 million and the number of employed was up by 328,000 to 151.2 million, while the activity rate rose to 61.7% from 61.5% in March. Unemployment levels were down considerably from their recent highs in April 2020 but remained well above their levels prior to the coronavirus pandemic.

Average hourly earnings for all employees on US private non-farm payrolls went up by 21 cents, or 0.7% over the month to $31.17 in April of 2021, after a 0.1% decrease in March and compared with market expectations of a flat reading. Average hourly earnings for private-sector production and nonsupervisory employees rose by 20 cents to $25.45. Year-on-year, average hourly earnings have increased by 0.3%, following a 4.2% rise and against market consensus of a 0.4% drop.

Comments on US market last close… 

US market up despite massive miss in nonfarm payrolls. Unemployment rose to 6.1%. RUSSELL is up 1.36%, NASDAQ  up 0.88%, S&P up 0.74% and DOW up 0.66%. Bond yields fell below 1.50% before recovering to 1.58%. US dollar is sliding lower as more money printing looks inevitable. Commodities were all running hard. Inflation is going to be hot for longer as the economy moves to a W-shape recovery. Taxes and regulations will go up to justify stimulus spending. All sectors rose with energy and property leading while utilities and banks lagging. Gold sub sector was flying again as market look forward to inflation data next week. We are heading into another inflexion point next week. Economic recovery is patchy in excessive stimulus and rising inflation. Markets continue to remain positive on stimulus hope despite economic and pandemic woes globally. Bond market may diverge on inflation data. Time to reduce exposure and get some protection.

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

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