Winter is coming…Sep/Oct federal election to clear the way for opening the borders and budget austerity

Local market delivered a slight positive day while the size dynamics flipped from recent days. Large Caps were negative while Mid, Small and Micro Caps all had a solid day. Global investors were selling while local investors were buying the dip in growth/small stocks. Markets are looking at the sliding yield and feeling confident that the US Fed has their back. Tech and Retail were the best green sectors while Energy and Miners were the worst red sectors. After twelve consecutive weeks with weekly turnover below $40b, we have finally delivered a solid turnover week despite it being a short week. You could argue that part of the rise in turnover this week is due to the option expiry and part of it is US Fed turning hawkish but it has been so long that I am happy to take any reason for decent turnover. Once again the moves today were not correlated to each other or macro news due to the boosted turnover linked with option expiry in the last few days in multiple countries.

The main macro signals to look at are the currency and bond markets. It is clear that US Fed is using QE and Treasury Cash Balance for yield control. They have also squeezed bond supply to keep yields lower. But these are all short term fudges that will end up creating a substantial yield move higher as they run out of firepower to hold back the cycle. The growth stocks are rebounding on the view that US Fed can hold yield back forever in a reflation cycle. US Fed is making medium to long term inflation worse in order to deliver the short term yield control. The next one is the currency market. USD Index has broken above 50, 100 and 200 day moving averages. It made a break higher in March and US Fed intervened and we are back at that level again. Interestingly the US market is also back near that level. If the USD Index breaks higher on risk off, it may start the domino effect. The skew premium suggests the damage risk from a black swan event is at all time peak. What could go wrong?

We are starting to get weaker than expected retail and employment data from major economies as inflation bites. It should not be a real surprise as that is the normal part of the cycle. As emergency stimulus starts to wind back at state, federal and central bank level, it is normal that economy will slow down and the dead wood will be cleaned out. The bad businesses (i.e. zombie businesses) will fall by the side and the good businesses will take their market share and grow. They will then hire more people at higher salaries and drive economic growth. If all we are going to do is bail out the bad businesses, then the good businesses will not grow and hire new people. Too much stimulus for too long will drive a lazy economy. Australia is suffering from that problem. We are in a red hot economy with property and commodity bubbles while RBA is on emergency QE. Basically, we have no buffer left to drive recovery for the next crisis. We are facing a trillion dollar debt and a rate hike cycle with a RBA in denial of reality. RBA can’t say things are good while we need emergency stimulus and yet take no responsibility when the bubbles leave a trail of damage in years to come.

Just as US Fed has started to respond to reality of the economic cycle, RBA has to change it’s tune or it leave the Australian economy open to substantial economic risk due to the lack of reform. Australian economy is firing on every cylinder and yet we have GFC type RBA stimulus. There is a clear a contradiction. The view of the markets and the government is contradictory to the view of the RBA. Can the RBA allow the economy to play out the cycle or will it create another slow moving train crash with asset bubbles and historic high debt? Time will tell.

It is becoming clear that the hotel quarantine is not working. To be frank, most people knew that 12 months ago but we are still trying to set up a process. It is a bit like the plan for the most vulnerable groups in aged care and disability care. Vaccine rollout has been a failure at multiple stages. You know you got it wrong when US and UK (i.e. covid disaster nations in the first wave) are talking about opening their economy up for vaccinated travellers. Australia has one of the best health systems in the world and yet we have fallen behind. Federal Government is in no rush to open the borders as it gives a fake perception that the job market is solid. The government also has in an ideological war with universities and lack of overseas students are way for them attacking back. The federal government needs to call the election in Sep/Oct cycle as that will allow them to open the borders and RBA will cut QE by Dec. Set the clock…we already have tax payer funded advertising in play by the government and they can only do that till they call the election. They have to open the borders by Dec or the job market will tighten up and we may actually get wages growth. No one wants that…definitely not corporates, governments or RBA!!!

The states have done a very good job handling the pandemic. Not to say they haven’t made mistakes but it is hard to handle a globalized economy in lockdown when the federal government is running blind. The fact that we still don’t have preferred vaccine production in Australia nor do we have a proper quarantine facility just shows how lucky we have been. Victoria has been hit hard with more clusters than most but NSW has been very lucky. NSW keeps making mistakes and the healthcare workers get it sorted. We have had a new cluster somewhere on the week before every long weekend and every school holiday period since the pandemic. We just started a new cluster in NSW. Let’s hope we get lucky again. Because it looks clearly that number of people have dropped the ball and now hoping that the health care workers can bail us out again!!!

Federal and State government budgets are toast. They need to raise taxes and cut services. They need to have the election so that they can open the borders and move on austerity. They have no choice but to get travel and tourism back up and running. We remain positive on travel and tourism sector on the government self interest while media sector will get a prolonged boost from taxpayer funded pollical advertising campaign ahead of the election.

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

The number of Americans filing new claims for unemployment benefits unexpectedly rose to 412 thousand last week, the first increase in more than a month. Still, the total number of claimants remained close to last week's pandemic low and is expected to decrease further in the coming weeks, due to broader economic re-opening and the benefits phase-out. This week's report reflected the last survey period during which full federal unemployment benefit programs were in place across all US states, with Alaska, Iowa, Missouri and Mississippi becoming the first states to reduce federal support ahead of the official September expiration date. Large and small businesses have been complaining about the difficulty to hire, citing ongoing labor shortages due to enhanced benefits, concerns about contracting COVID-19 and finding childcare. Meanwhile, unadjusted claims rose to 402 thousand last week, with the largest increases being recorded in Pennsylvania, California and Kentucky.

Continuing jobless claims in the US, which measure unemployed people who have been receiving unemployment benefits for a while, edged up to 3.518 million in the week ending June 5th, from a revised 3.517 million a week before and above market expectations of 3.430 million.

Japan's consumer prices declined by 0.1% year-on-year in May 2021, after a 0.4% drop in the prior month. This was the eighth straight month of fall in consumer prices but the least in the sequence, amid ongoing COVID-19 disruptions. Cost eased for transportation & communication (-1.5% vs -2.3% in April), fuel, light and water charges (-0.3% vs -2.8%), and medical care (-0.1% vs -0.3%). Also, food prices fell 0.9%, slowing from a 1.2% decline in April. In contrast, prices went up further for housing (0.6% vs 0.6%), furniture and household utensils (2.1% vs 2.5%), recreation (0.6% vs 1.1%), education (1.3% vs 0.8%), and miscellaneous (1.4% vs 1.6%). Core consumer prices, which exclude fresh food, rose 0.1% yoy, the first rise in 14 months, after a 0.1% fall in April and matching market consensus. On a monthly basis, consumer prices went up 0.3%, following a 0.4% drop in April.

Producer Prices in Germany increased 7.20% in May of 2021 over the same month in the previous year.

Retail sales in the United Kingdom declined by 1.4% from a month earlier in May 2021, following a 9.2% increase in April when retail coronavirus-induced restrictions were eased and missing market expectations of a 1.6% advance. Food stores were the main drivers of the monthly fall (-5.7%), as the easing of hospitality restrictions had had an impact on sales as people returned to eating and drinking at locations such as restaurants and bars.

Comments on US market last close…

US market was mainly down but option expiry made moves more confusing than it already was...if that is possible. RUSSELL -1.18%, DOW -0.62%, S&P -0.04% and NASDAQ +0.87%. VIX slide back below 18 on market mayhem. The US Fed flagging rate rise and taper sooner than expected and China moving to bash commodities were the medium to long term drivers of the market but overnight option expiry and afternoon pump makes for strange bedfellows. NASDAQ up on yields coming back. Yields came back on inflation worry risk off trade. Expect markets to move towards opening up and inflation trades for outperformance. We have been playing that through the media, travel, insurance, supermarkets etc. The clear move overnight was the bounce in USD. It smashed all the other currencies and commodities. Energy, Miners and Banks were the most hit while Tech and Health Care were the best as seen by NASDAQ performance. Mortgage rates popped in the US with jobless unexpectedly jumping higher. We maybe coming off monetary stimulus but weak economy with rising prices into a mid term election points to more fiscal stimulus coming. Inflation is going to be higher for longer and so will supply side issues. The market dynamics has changed and new sectors/stocks are going to drive outperformance for the next few years.

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