The fine line between expectations, economic reality

Mathan Somasundaram

Deep Data Analytics

The local market had another positive day on low turnover. The big turnover was at the open when the global investors pushed the market into solid positive territory before a bit of local investor volatility. Holiday-driven low turnover continues into the third week. Miners and telecom were the best sectors while miners and banks did the heavy lifting in a day when all sectors were green. Utilities and property were the laggards as bond yields started to climb up again. US Fed minutes and multiple Fed presidents confirmed the Fed will remain accommodative for a while as recovery will take time. Markets are moving to the view that the US will be relying heavily on continuous fiscal stimulus…well into 2022. Employment data in the US tonight should remain strong with handouts and put pressure on inflation.

Debt and more debt

The US 30-year mortgage rate has moved up hard in recent times. The recent bounce is equivalent to two rate rises. The rising building costs and rising rates are already weighing on demand for mortgages. We are early in the cycle and reflation is going to push this rate above 4% in the next 3-6 months. If mortgage rates are moving higher, it is logical to assume that business borrowing rates are moving as well. US corporate debt is the biggest risk to US markets and rising rates are going to test that. US Fed may stay on the sidelines but the cycle is leaving them behind.

Inflation update

Producer Price Index (PPI) is the next key inflation update and that will be out Friday night. The annual growth in PPI has moved from -1.50% to +2.80% over the last year. Markets are expecting this to rise even more on Friday. We expect this to keep rising over the next 3-6 months. How will the bond market react if the PPI pops by more than 4-5% in the next few months? Time will tell but the trend is clear…reflation cycle is in play. Market implied 2022 rate rise probability has reached 90% while US Fed keeps saying that they won’t raise rates for number of years.

Comments on US market last close… 

US market was mainly flat with RUSSELL taking a hit. US Fed minutes and numerous Fed President updates didn't move the needle much. S&P +0.15%, DOW +0.05%, NASDAQ -0.07% and RUSSELL -1.60%. Bond yields started to climb with USD. Oil ticked higher while most other commodities ticked lower. Tech and Banks were the better sectors while commodity sectors were the weakest in a lackluster day. COVID waves are starting to hit all parts of the world despite vaccine rollout. Japan and South Korea joining the new wave issues. New variants are hitting young people and they are ignoring all social restriction rules. Low holiday turnover trend continues on a global basis.

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

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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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