Aussie dollar v US dollar is looking like a dead man walking

The local market had a choppy flat day where weakness in miners was covered by the strength in financials. It was about the commodity weakness and yield bounce. The relatively low turnover continued, marking the ninth consecutive week without a double-digit turnover day. Size mattered as large caps were the best, while mid-caps were the worst. Banks and utilities were the best sectors while miners and industrials were the worst.

China flagged lower growth ahead and brokers are jumping over themselves to downgrade. China inflation data beat expectations at CPI and Producer Price Index (PPI) level despite the government's aggressive move to reduce business and consumer costs. Iron ore keeps sliding and regulatory changes continue to pop up. China is willing to give up growth to deflate asset bubbles, curb inflation and drive reform, and is either in no rush with these initiatives or is finished. Expect more to come in China volatility!

US non-farm payrolls was a beat as was the wages growth update. It drove the US dollar higher as expected but the move in yield was more pronounced than expected. Gold was hit hard on this, but the effect was worsened by the flash crash in Asian markets, which soon recovered. 

The underlying data was clearly inflationary. Nearly two-thirds of the jobs created were in hospitality and government. These are low paying jobs where consumers spend what they earn. The White House also extended the US's rent protection and student loan payment freeze measures. Again, this is mainly helping the low-income consumers that will spend the excess money. Adding the hot China PPI, inflation the US outlook is likely to beat the mainly unchanged expectations from the month before. Time will tell.

On Australian shores, the balance of probability is that the local Bondi cluster, which spread around the nation, should be controlled enough to allow most states out of lockdown in August, while NSW will be going into September. Given that NSW school holidays start on 20 September, the lockdown of Australia's biggest state is likely to extend into this period. Time will tell, as the current uncertainty sees policies change every day.

The Australian dollar vs US dollar is starting to look like the dead man walking. The market is beginning to worry about pandemic lockdowns, the weak economy, falling iron ore prices, US dollar strength and local governments that continue to borrow money like drunken sailors on the Titanic. We may be testing the 70 cents support level sooner than later!

We continue to look at sectors that will benefit from the eventual equilibrium from the conflicting macro signals. Markets are buying the transitory argument from Central Banks for now. When that becomes more persistent and drives downgrades, markets may not be able to ignore inflation. We continue to favour Gold, Supermarkets, Insurance and Food/Farming/Agriculture exposures to be eventual beneficiaries from the cycle clarity.

Seasonal cycles suggest the US market peaks this week as the US reporting season deluge hands over control to macro uncertainty. It may be different this time!

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

House prices in the UK increased 7.6% year-on-year in July of 2021, the least since March mainly due to the strength of price inflation seen last summer, as the market began its recovery from the first lockdown, and with activity supported by the start of the stamp duty holiday. On a monthly basis, prices were up 0.4%, rebounding from an upwardly revised 0.6% drop in June. “Recent months have been characterised by historically high volumes of buyer activity, with June the busiest month for mortgage completions since 2008. This has been fueled both by the ‘race for space’ and the time-limited stamp duty break. With the latter now entering its final stages (the zero% rate only applies to the first £250,000 of the purchase price, before reverting back to standard rates from October), buyer activity should continue to ease over the coming months, and a steadier period for the market may lie ahead.", Russell Galley, Managing Director, Halifax, said.

The unemployment rate in Canada fell to 7.5% in July of 2021 from 7.8% in June, slightly higher than forecasts of 7.4%. It was the lowest jobless rate since March. Between the June and July reference weeks, many jurisdictions substantially eased public health restrictions affecting indoor and outdoor dining, recreation and cultural activities, retail shopping, and personal care services. The total number of unemployed fell by 70,000, the number of people in the labour force increased by 24,000 and the labour force participation rate was unchanged at 65.2%. Employment rose by 94,000, missing market estimates of 177,500, with job gains concentrated in full-time work (+83,000; +0.5%); the first increase since March 2021. Unemployment among youth aged 15 to 24 fell by 54,000.

The US economy added 943K jobs in July 2021, the most in eleven months and above market expectations of 870K, as the rapid pace of COVID-19 vaccinations allowed the country to continue its re-opening efforts and prompted businesses to hire more workers to respond to growing demand. Notable job gains occurred in leisure and hospitality, in local government education, and in professional and business services. Also, the May number was revised up by 31K to 614K and the change for June was revised up by 88K to 938K. The labor market recovery is expected to continue in the coming months, even as COVID-19 cases rise and firms continue to complain about a shortage of available workers. Nonfarm payroll employment in July was up by 16.7 million since April 2020 but it is still down by 5.7 million compared to its pre-pandemic level in February 2020.

Average hourly earnings for all employees on US private nonfarm payrolls increased by 11 cents to $30.54 in July of 2021, following increases in the prior 3 months. Average hourly earnings for private-sector production and nonsupervisory employees also rose by 11 cents in July to $25.83. The data for recent months suggest that the rising demand for labor associated with the recovery from the pandemic may have put upward pressure on wages. However, because average hourly earnings vary widely across industries, the large employment fluctuations since February 2020 complicate the analysis of recent trends in average hourly earnings. Year-on-year, average hourly earnings have increased by 4%, above market expectations of 3.8%.

Exports from China rose 19.3% year-on-year to US$282.66 billion in July 2021, below market estimates of 20.8% and slowing from a 32.2% jump in June. Still, this was the 13th straight month of growth in outbound shipments, amid easing foreign demand due to the rapid spread of the Delta variant of COVID-19 in some countries, higher raw materials, extreme weather, and persistent logistic bottlenecks. Exports grew from the US (13.4%), the EU (17.23%), the ASEAN countries (14.52%), and Australia (9.32%).

Imports to China increased by 28.1% year-on-year to 226.08 billion in July 2021, less than market expectations of 33% and after a 32.2% growth a month earlier. Still, this marked the tenth straight month of expansion in inbound shipments, amid moderation in domestic demand following the latest COVID-19 outbreak in some regions, rising commodity prices, and slowing manufacturing. Purchases grew for refined products (31.9%), natural gas (27.1%), copper ores & concentrates (5.1%), steel products (649.03%), and coal (169.74%). In contrast, arrivals fell for crude oil (-19.6%), unwrought copper (-44.3%), iron ore (-12.06%), soybeans (-14.1%), edible oil (-13.6%), rubber (-22.5%), and meat (-15%). Imports rose from the US (25.63%), the EU (19.79%), the ASEAN countries (27.68%), and Australia (41.19%).

China's annual inflation rate edged down to 1.0% in July 2021 from 1.1% a month earlier and compared with market consensus of 0.8%. This was the lowest reading since April, amid a steeper decline in cost of food (-3.7% vs -1.3% in June), with pork prices dropping faster. Meantime, prices of non-food goods went up 2.1%, after a 1.7% rise in June, as main upward pressure came from transportation & communication 6.9% vs (5.8%); clothing (0.4% vs 0.4%); rent, fuel & utilities (1.1% vs 0.9%); health (0.4% vs 0.2%); household goods and services (0.3% vs 0.3%); and education, culture (2.7% vs 1.5%). On a monthly basis, consumer prices rose 0.3% in July, the first gain in five months, after a 0.4% drop in June, and compared with forecasts of a 0.2% increase.

China's producer prices were up 9.0% year-on-year in July 2021, compared with market expectations and June's figure of an 8.8% gain. This was the seventh straight month of increase in factory gate prices, amid rising commodity prices and extreme weather. Prices of means of production rose slightly faster (12% vs 11.8% in June), led by extraction (38.7% vs 35.1%), raw materials (17.9 % vs 18%), and processing (7.5% vs 7.4%). At the same time, prices of consumer goods were stable (at 0.3%), as inflation was unchanged for daily use goods (at 0.5%), with food production continuing to rise(1% vs 1.4%) while both clothing (-0.4% vs -0.6%) and consumer durables (-0.3% vs -0.6%) falling further. On a monthly basis, producer prices went up 0.9%.

Comments on US market last close…

US market had a slightly positive day after Nonfarm Payrolls beat expectations. NASDAQ -0.40%, S&P +0.17%, DOW +0.41% and RUSSELL +0.53%. VIX pulled back to low 16. The market was all over the place on expectations ahead of the nonfarm payrolls and it’s still all over the place after. Key trends were that yield bounced hard to above 1.30% and dragged USD higher. That hit all commodities and currencies. Whitehouse extended payment pause for student loans into next year like the rent protection. Nearly 2/3 of the job creation was in hospitality and government...these are low paid workers that spend all they earn. Rent and student loan payment protection will get even more spending in the bottom 50% of the economy. The argument for tapering is solid but nothing will happen as US Fed will say that good improvement but more to do to reach target. Delta is rising and curbing activity while inflation data is likely to be getting even hotter next week. Banks basically kept the market in positive territory on yield bounce. Banks and Energy were the better sectors while Retail and Property were the worst.

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