The bond rally drags gold higher as equities drown in stimulus

Mathan Somasundaram

Deep Data Analytics

The local market started positive and then faded through the day, with slowing China data and Melbourne lockdown adding to the negative sentiment. 

  • Mid-caps were the best of the size categories while microcaps were the worst. 
  • Miners and utilities were the best sectors while healthcare and tech were the worst. 

The Market was still dealing with the rush of takeover bids for Australian Pharmaceutical Industries (ASX: API), Sydney Airport (ASX: SYD) and Spark Infrastructure (ASX: SKI). It seems like market is waiting for a new dancing partner to turn up to the Wesfarmers (ASX: WES) bid for API while SYD and SKI are playing hard to get. All of these will have to jump over the regulatory hurdle and that can get messy in these sectors. 

The mega super funds are telling the equities market that the safe single digit returns from infrastructure assets are better in the next decade than what you may get in the markets. History suggests mega super funds are better at risk managed returns over the long term than the market. It may be different this time!

The main show overnight was the US Fed chair basically saying that he is not planning to reduce stimulus anytime soon. Not data dependent with any benchmark, the Fed now refers to "airy-fairy" arbitrary inequality and job market targets. It is the same argument from the European Central Bank, the Bank of England and the Reserve Bank of Australia. And funnily enough, we've seen similar arguments from the Bank of Japan for three decades. They have all learnt from the politicians. If you keep moving the target as you get near it, you will never reach it. If only life was that simple. 

The US Fed is on track to hurt the very people it claims to help. Inflation may be boosted by some one-off segments but there are a lot of staple segments that are only starting to run hot. The middle to low income that suffer from inequality are going to be belted the most by rising costs. 

The Fed is basically relying on the inflation to burn itself out by reducing the middle to low income consumer spending. This will limit the damage to asset prices and the top end of town. Unfortunately, the problem for them is the new waves of pandemic are likely to make the supply side issues even worse and keep inflation elevated in economic slowdown. The risk-weighted outcome is pointing at a weak US Fed delivering stagflation. Stagflation is not a good result when the economy is sitting on bubble everything. It may be different this time!

Market pundits have been jumping on the CPI data from the US to point out how some major boosters may not last and hence the transitory theory makes sense. But they all ignored the same analysis on PPI. Given the fudged corporate forecast beats of 90-100% in the US market is already in the price, the 20 year high multiple can’t adjust for any cost blow out. If that is the case, then we are assuming that US corporations are going to pass on the cost rises and that means current PPI growth is a leading indicator of future CPI growth. If that is the case, bubble everything has problems. It may be different this time!

China data dump today proves the economy is moderating and the government is trying to manufacturer a soft landing for their economy. We are in the early part of seasonal weakness in China demand and commodity cycle. It may be different this time!

Global bond markets are on the rise and Aussie bond yields broke below 200 day moving average for the first time in 2021. The classic death cross play when 50 day MA cuts below 100 day MA when both are above 200 day MA has played out. We are in a bond run where yields are delivering massive negative real yields. What does that say about equities? Historical trends are not positive for equities but they are positive for Gold!!!

We are in the back end of the option/futures expiry week in Australia and US. History suggests the market outperforms into expiry and underperform after. NSW mockdown/lockdown has now been extended till the end of July and we have triggered a VIC lockdown. Sorry…we have a government taking advice from corporates. VIC may go into lockdown and come out before NSW does. Historical trend suggest the NSW base case is likely go into mid August. Time will tell.  

The main data points released of the last 24 hours

Wholesale prices in India rose by 12.07 percent year-on-year in June 2021, below market consensus of a 12.23 percent rise, and easing from a near 22 ½-year high of 12.94 percent gain a month earlier. Biggest increase came from cost of fuel and power (32.83 percent vs 37.61 percent in May), followed by manufactured products (10.88 percent vs 10.83 percent), namely vegetables and animal oils and fat (44.28 percent); and primary articles (7.74 percent vs 9.61 percent), namely food (3.09 percent vs 4.31 percent), of which onion (64.32 percent) and pulses (11.49).

Industrial Production In the Euro Area increased 20.50% in May of 2021 over the same month in the previous year. Figures were below market forecasts of a 22.2% rise. Industrial production in the Euro Area fell 1% mom in May of 2021, the first drop in 3 months and much worse than market forecasts of a 0.2% decline. Decreases were seen in production of non-durable consumer goods (-2.3%), energy (-1.9%), capital goods (-1.6%) and intermediate goods (-0.2%). In contrast, output rose 1.6% for durable consumer goods. Among the bloc's largest economies, industrial production declined in Germany (-0.6%), France (-0.3%), Italy (-1.5%) and Spain (-0.8%).

Mortgage applications in the US jumped 16% in the week ended July 9th, the first increase in 3 weeks and the strongest gain in six months, data from MBA showed. Applications to refinance a home loan surged 20.4% and those to purchase a home increased 8.3%. The average fixed 30-year mortgage rate fell 6 bps to 3.09%, the lowest since February. "We continue to see ebbs and flows as housing demand remains strong but for sale inventory remains low. However, lower rates may be helping some homebuyers close on their purchases, especially first-time homebuyers” said Joel Kan, MBA’s associate vice president of economic and industry forecasting.

Producer Prices in Canada increased 16.20% in June of 2021 over the same month in the previous year. The industrial product price index in Canada edged down 0.4% month over month in June 2021, following an upwardly revised 3.1% rise in the prior month, a preliminary estimate showed. Excluding energy and petroleum products, the IPPI went down 0.5%. It was the first monthly drop in producer prices since last November, mainly weighed down by prices of lumber and other wood products (-6.9%), in particular softwood lumber (-12.8%), following a record monthly growth in May. To a lesser extent, downward pressure also came from chemicals & chemical products (-1.4%), on lower petrochemical prices (-13.9%); fruits, vegetables, feed & other foot products (-1.4%), dragged down by grain and oilseed products (-8.5%); and non-ferrous metals (-0.8%). On an annual basis, the IPPI hiked 16.2%, the eleventh straight month of increases.

Producer Prices in the United States increased 7.30% in June of 2021 over the same month in the previous year. It is the highest annual rate since the current series began in November 2010. Producer prices for final demand in the US jumped 1% mom in June of 2021, higher than market forecasts of 0.6%, and following a 0.8% rise in May. Nearly 60% of the PPI rise is due to a 0.8% increase in services cost, namely margins for automobiles and automobile parts retailing. Cost of goods increased 1.2%, mainly industrial chemicals, gasoline, meats, electric power, processed poultry, and motor vehicles. Year-on-year, producer prices increased 7.3%, the largest advance since the current series began in November 2010.

Export Prices in South Korea increased to 107.12 points in June from 106.39 points in May of 2021. Producer prices for final demand in the US excluding foods and energy increased 1% from a month earlier in June of 2021, accelerating from a 0.7% rise in May and beating market expectations of a 0.5% advance. Year-on-year, core producer prices jumped 5.6% in June.

Employment in Australia increased by 29,100 to 13.15 million in June 2021, compared with market forecasts of a 30,000 gain, amid COVID-19 restrictions in several states and an acceleration in coronavirus vaccinations. Full-time employment expanded 51,600, while part-time employment fell 22,500. Over the year to June, employment went up 777,900 people or 6.3%.

Australia's seasonally adjusted unemployment rate dropped to 4.9% in June 2021 from 5.1% in May and compared with market consensus of 5%. This was the eighth straight month of fall in the jobless rate and the lowest reading since June 2011, as the economy recovered further from the COVID-19 hit. The number of unemployed declined 22,000 to 679.1 thousand, as people looking for full-time work decreased 31,400 to 460,100, and those looking for only part-time added 9,400 to 219,000. Meantime, employment grew 29,100 to 13.15 million, compared with forecasts of a 30,000 gain, with full-time employment rising 51,600 while part-time employment falling 22,200. The participation rate was unchanged at 66.2 percent, below estimates of 66.3%. The underemployment rate rose 0.5 points to 7.9%, and the underutilization rate gained 0.3 points to 12.8%. Monthly hours worked in all jobs went down 33 million, or 1.8%, to 1,781 million hours.

Industrial production in China increased 8.3% year-on-year in June of 2021, the lowest rate in 6 months, but above market forecasts of a 7.8% rise. Production fell for textiles (-1.3% vs -3% in May) and slowed for ferrous metals (4.1% vs 7.7%); transport equipment (6.8% vs 7.5%); and machinery (6.8% vs 18.7%). Meanwhile, production continued to increased for chemicals (9.8% vs 8.6%); non-metal minerals (8.7% vs 7.6%); general equipment (13.9% vs 13.8%). By products, falls were seen in production of cement (-2.9% vs -3.2%) and motor vehicles (-4.3% vs -4%) and slower output was recorded for electric power steel (3.0% vs 7.9%). For the first half of the year, the industrial production grew 15.9% year-on-year.

China's retail trade rose by 12.1% year-on-year in June 2021, after a 12.4% gain in the previous month and compared with market expectations of 11%. This was the weakest rise in retail sales since December 2020, as consumption moderated during the latest COVID-19 outbreaks in some provinces. Sales rose at a slower pace for cosmetics (13.5% vs 14.6% in May), jewelry (26% vs 31.5%), automobiles 4.5% vs 6.3%), and building materials (19.1% vs 20.3%). Meantime, sales growth accelerated for garments (12.8% vs 12.3%), personal care (14% vs 13%), telecoms (15.9% vs 8.8%), home appliances (8.9% vs 3.1%), and furniture (13.4% vs 12.6%). In the first half of the year, retail sales jumped 23% compared to the same period of 2020.

The Chinese economy grew by a seasonally adjusted 1.3% on quarter in the three months to June 2021,compared with market estimates of a 1.2% expansion and following a downwardly revised 0.4% advance in the previous quarter.

China's fixed-asset investment increased 12.6% year-on-year to CNY 25.59 trillion in the first half of 2021, slowing from a 15.4% surge in the January-May period but beating market consensus of a 12.1% growth, as the economy continued to recover from the pandemic crisis. Public investment grew 9.6% (vs 11.8 pct in January-May) and private investment advanced by 15.4% (vs 18.1 pct). Investment in the primary industry expanded 21.3% (vs 28.7 pct), and that in the tertiary industry advanced 10.7% (vs 13.8 pct) boosted by transport, storage & postal industry; water conservancy, environment and public facilities management industry; education; health and social work; and culture, sports and entertainment industry. Also, investment in the secondary industry rose 16.3% (vs 18.1 pct).

Comments on the US market's last close

US market was mainly flat after expected earnings beats, PPI big beat and US Fed keeping stimulus going longer. US Fed basically confirmed that they will keep pumping stimulus while ignoring bubbles and inflation. RUSSELL -1.63%, NASDAQ -0.22%, S&P +0.12% and DOW +0.13%. VIX falls to 16.33 after jumping above 17 yesterday. Yields down 6-7 bps while USD weakened. Copper down and Gold moving again as inflation fears rise. Oil pulled back on news that new OPEC+ deal increased UAE production. Staples and Utilities lead while Energy and Banks fell the most. Option and futures expiry will play havoc with market over the next few days and then it tends to be weak.

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Mathan Somasundaram
Founder & CEO
Deep Data Analytics

Over 25 years’ experience in the finance/tech industry. Mathan has worked extensively in all parts of the finance sector (i.e. County NatWest, Citi, LIM, Southern Cross, Bell Potter, Baillieu Holst and Blue Ocean Equities). Currently Founder and...

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