US Fed to deliver alternative facts at Jackson Hole

Local market was negative and choppy all day before finishing near the lows of the day. We have now into an up and down week after last week delivering the first 5 consecutive negative days since Feb 2020 (i.e. pandemic crash). We broke the relatively low turnover on the tenth week in a row and delivered a double-digit turnover day. Size continues to matter as Micro Caps were the best while Mid Caps were the worst. Telecom and Retail were the best sectors while Miners and Tech were the worst.

The week is all about Jackson Hole symposium while South Korea and China are putting the spot light on US Fed inaction. Given the inflation data and historic nature of fiscal stimulus, US Fed should have moved by now. China has realized that they won’t move and hence they moved to curb commodity prices before that kills their manufacturing and consumer cycles. South Korea moved to raise rates today to further push the capital wars in play. Japan and Korea are in the midst of delta wave restrictions and Korea moving on rate shows the sire state of the global economy.

Getting back to Jackson Hole symposium, US Fed chair hasn’t got a unanimous mandate and their full employment target is opaque enough that he can avoid making a move. Jerome Powell is expected to get confirmed for another term as US Fed chair. On a pure self interest path, it makes no sense to rock the boat at this part of the cycle. When you are pumping every asset class with QE, another month is not going to make much difference. We suspect the Fed chair will talk about improving economy but alas it has more to do on jobs. That will keep the market guessing that tapering news in Sep but not now. US Fed chair should move on tapering while he can. It will become almost impossible to do once the economy starts to pick up negative momentum. If he spooks the market about not tapering, then USD may go into a substantial slide again and that will drive up inflation. He would be well aware that the new monthly data coming next few weeks will flag stagflation. It is a fine line to talk a lot and do very little.

The markets in recent days are taking different views on the cycle. Equities are expecting no tapering while Bonds, Currencies and Commodities are flagging tapering. China is flagging no tapering. The most effective indicator in 2021 has been the Chinese. It may be different this time!

Australian economy is going into negative Q3 with negative Q4 most likely without pre election handout and QE expansion. After pushing the suppression plan at the start of the NSW Bondi cluster, Federal and State government have completely flipped to race to vaccination plan. It is almost a classic marketing pitch after the original plan backfired. After more than 2 months of lockdown, we still have rising cases to all time highs. NSW has mainly lost control of the delta cluster and it’s spreading. NSW cluster is now growing in VIC and NZ. NSW today announced carrot for vaccinated. We do not have a pathway to vaccinate under 12 kids. We are yet to cover the key risk groups like aged care, disability, first nation, health care workers etc. Global trend suggest that vaccination rates start to slow after 50%. If we are to learn from Israel, the pathway forward has more question than answers after the mistakes done as multiple levels of government. It may be different this time!

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

Wholesale sales in Canada likely fell 2% mom in July of 2021, a second consecutive decline, reflecting lower sales in the building material and supplies subsector, preliminary estimates showed.

New orders for US manufactured durable goods fell 0.1% mom in July of 2021, after rising 0.8% in the previous month and less than forecasts of a 0.3% drop. Still, it is the first decline in 3 months, dragged down by a 2.2% contraction in orders for transport equipment, a 0.4% fall in orders for computers and electronics and a 5% slump in capital goods. Excluding transportation, new orders increased 0.7%, led by machinery (2.9%), fabricated metal products (0.3%) and primary metals (2.7%). Meanwhile, orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, were unchanged last month, after a 1% increase in June.

Total new capital expenditure in Australia rose by 4.4% quarter-on-quarter in the three months to June 2021, well above market consensus of a 2% growth and after a downwardly revised 6.0% gain in the previous period, which was the largest increase in private capital spending in almost a decade. Expenditure of equipment, plant, and machinery grew much softer (4.3% vs 8.8%). Meantime, spending on building and structures accelerated (4.6% vs 3.5%). Through the year to the second quarter, private capital expenditure jumped by 11.5%.

The GfK Consumer Climate Indicator in Germany decreased to -1.2 heading into September 2021, from a revised -0.4 in the previous month and below market expectations of -0.7. It was the lowest level in three months, amid growing inflationary pressure and rising COVID-19 cases. The gauge for willingness to buy declined 4.5 points to 10.3, while the business cycle expectations sub-index fell 13.8 points to 40.8. Meanwhile, the income expectations sub-index was 1.5 points higher at 30.5.

Comments on US market last close…

US market moved up for the first few hours before sliding the rest of the day to finish slightly positive as everyone waits for Jackson Hole non event. US major index hit 51st new high for 2021. DOW +0.11%, NASDAQ +0.15%, S&P +0.22% and RUSSELL +0.37%. VIX slide below 17. Yields were climbing hard with 10 year near 1.35%. USD ticked lower with Gold while Oil ticked higher and Copper mainly flat. The closer we get to Jackson Hole update, equities and bonds are moving towards no tapering now while commodities are moving for tapering. US Fed has to keep tapering potential in play to stop USD debasing but very little probability of Fed chair rocking the boat before his second term is confirmed. More likely to get some solid guidance next month after stagflation looks much higher possibility. Banks and Energy lead the sectors while Health Care and Property were the laggards. Plenty of Fed talkers out on the media over the next few days to muddy any message. We know it’s not conceded tapering view and that means do nothing and just flag into the future.

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