US on the path to “Making Inflation Great Again”

Local market was aimless and finished mainly flat on another low turnover day. The trend suggests that we are heading to four weeks of low turnover holiday season. Tech and Staples were the best sectors while Banks were doing the heavy lifting for the index. Utilities and Energy were the worst hit today while markets were in a risk off mode and such that higher USD weighed on commodities and AUDUSD.

Global markets are on standstill as US inflation data takes center stage tonight. Anything above or near 2.50% will start the markets on the path to inevitable taper tantrum pathway as a lead up to rate rise cycle. We are expecting inflation to keep rising over the next 3-6 months with growth and then both to settle. Growth is likely to settle lower than inflation but markets are not paying attention to that yet. US Fed has been on a media blitz to calm markets ahead of a decent pop coming. Historical trend of rolling 5 year cycles suggest that inevitable inflation rise over 2.50% in the next six months will trigger the chat of tapering QE ahead of rate rise in 2022. Market implied rate rise in 2022 is 90% while US Fed chair flipped his mantra of no rate rises in 2-3 years to “unlikely to see a rate rise this year”. China is tightening as their inflation starts to pick up. China has started to export inflation and currency devaluation in recent months and that has already pushed US producer price index to all time high. Unless US corporates are absorbing the costs, we should see inflation pick up. US corporates are ramping up buybacks over capex. My money is not on US corporates taking a hit to their margins to help the economy. Capitalize the gains and socialize the pains is the beauty of US corporates. Time will tell how it unfolds tonight but volatility will not remain this low for too long.

Shanghai composite is once again testing the 200 day moving average despite the world leading post pandemic recovery. China has a way of sending warning signals to the global markets but will they listen…time will tell.

China latest data point in trading came out today and exports were weaker than expected while imports were better than expected. Given the robust nature of the Chinese recovery, markets are expecting lower need for stimulus going forwards.

Comments from Trading Economics … “Exports from China rose by 30.6 percent year-on-year to USD 241.1 billion in March 2021, compared with market consensus of a 35.5 percent growth and a 60.6 percent jump in January-February combined, amid a further recovery in global demand and solid manufacturing activity globally in the wake of the COVID-19 pandemic. In February exports jumped 154.9 percent from a year earlier. Exports to the US surged 53.6 percent to USD 38.7 billion.”

Comments from Trading Economics … “Imports to China jumped 38.1% yoy to USD 227.3 billion in March 2021, after a 22.2% growth in January-February combined, and far above market estimates of a 23.3% rise. This was the sixth straight month of growth in inbound shipments and the strongest pace in four years, boosted by improving domestic demand in the wake of the COVID-19 crisis, continued fiscal stimulus, and higher commodity prices. Arrivals grew in terms of volume for crude oil (20.82%), natural gas (26.06%), unwrought copper (24.98%), copper ore & concentrates (22.03%), iron ore (18.85%), steel products (16.27%), soybeans (81.63%), edible oil (66.10%), rubber (18.11%), and meat (11.43%). In contrast, purchases of coal fell (-1.81%).”

Comments on US market last close… US market was slightly negative inline with global trend as everyone waits for US inflation data tonight and what that means. RUSSELL -0.4%, NASDAQ -0.4%, DOW -0.2% and S&P flat. Little movement in bonds or currency but commodities were moving a bit more. Oil up while Gold and Copper down. Tech and Energy sector were the drag on the indices while Retail and Property were the best sectors. US Fed called it a inflection point but it's more like the inflation point as the data comes out tonight. Shanghai composite is falling again and will test 200 day MA today. China leads and the rest follows... in markets, inflation and asset bubbles. WHO warns on exponential COVID case growth driven by variants and even US has a few states going out of control. India is blowing up and that's assuming they are counting better than China. CEO of Bitcoin exchange Kraken has warned regulatory crackdown on cryptocurrency is coming. There is a lot of moving parts and expect volatility to pick up in the next few days.

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

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