Bond yields slide ahead of US Fed minutes

Local market reversed the losses from yesterday with a positive day. It was out of synch with the rest of the market but that’s nothing new. European and US markets were down and most Asian markets were down but local market was up on relatively low turnover and mainly driven by global investors buying the overall index. Japan and Korea in pandemic issues while China tech crack down hitting their local markets. It looked like the global investors were jumping out of Asia and parking the money in Australia. Energy and Industrials were the red sectors while Tech and Staples were the best green sectors. NSW lockdown extension was inevitable and may need more extensions as vaccine supply is still 2-3 months away.

The big thematic in play is the collapse in the bond yields. The long yields are falling hard in a reflation cycle as Central Banks flag reducing stimulus. We are seeing the same trend in US bond yields as in Australia bond yields. Excess QE buying or market risk off trade…time will tell. We will get US Fed minutes tonight and that will ruffle a few feathers.

We may have already seen the peak growth cycle on the global basis. Global Manufacturing and Services PMIs have peaked in the current cycle as Central Banks start to flag peak stimulus cycle. We are coming off 40 years of falling cost of borrowing and falling global corporate tax rates. Debt fuelled government budgets need to raise taxes in an environment where supply side issues are expected to keep costs higher for longer. The longer the Central Banks leave the rate hike cycle, the higher the chance that we never see it. All things being equal, if RBA waits till 2024 to raise rates, we may have missed the rate hike cycle. In all probabilities, the economy is likely to slow down and RBA is likely to jam up QE again…bit like EU, Japan et al.

Central Banks may be stuck in negative real rates for years to come and that will have massive implications for investors. Investors need to understand that returns are going to be lower and more volatile while living costs are going to keeping growing. Central Banks have chosen asset bubbles over economic stability. It is going to get bumpy!

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

New orders for German manufactured goods slumped 3.7% mom in May of 2021, following an upwardly revised 1.2% rise in April and compared to market forecasts of a 1% jump. It is the biggest decline since a record fall in April last year, driven by a 6.7% decrease in foreign orders, namely Eurozone (-2.3%) and the rest of the world (-9.3%). Compared with February 2020, which was the month before restrictions were imposed due to the corona pandemic in Germany, new orders were 6.2% higher.

The IHS Markit Eurozone Construction PMI was unchanged at 50.3 in June 2021, indicating a marginal expansion in construction activity. House building remained the only monitored sub-sector to signal growth, with further declines recorded for both commercial and civil engineering work. New business received by eurozone construction companies rose for the second successive month, helped by new public sector work amid government support for construction. Meanwhile, average cost burdens faced by constructors rose at record pace, while disruptions to supply chains intensified, with a new record lengthening in supplier delivery times. Looking ahead, business confidence was the strongest since June 2019.

Retail Sales In the Euro Area increased 9% in May of 2021 over the same month in the previous year. Retail sales in the Euro Area surged 4.6% mom in May of 2021, following an upwardly revised 3.9% drop in the previous month and slightly higher than market forecasts of a 4.4% rise. It is the biggest increase since June amid the easing of coronavirus restrictions in many countries in May. A rebound was seen in sales of non-food (8.8% vs -6.1% in April) and auto fuel (8.1% vs -1.3%) while sales of food, drinks and tobacco edged down 0.2% (vs -1.7%). Among the biggest economies, sales improved in Germany (4.2% vs -6.8%) and France (9.9% vs -7.1%) but were flat in Spain (vs -0.9%).

The Logistics Manager’s Index increased to 75 in June of 2021 from 71.3 in May, the second-highest reading on record. Considering Q2, the reading was 73.6, suggesting the second fastest rate of growth in the five-year history of the LMI, mainly driven by Inventory Costs and Warehouse Prices, both of which read in at all-time index highs this month.

The ISM Non-Manufacturing PMI fell to 60.1 in June of 2021 from an all-time high of 64 in May and compared to market forecasts of 63.5. The reading still pointed to strong growth in the services sector although slower increases were seen for business activity (60.4 vs 66.2), new orders (62.1 vs 63.9) and new export orders (50.7 vs 60) while employment contracted (49.3 vs 55.3) and inventories were little changed (49.9 vs 51.5). Also, price pressure eased slightly (79.5 vs 80.6). "Challenges with materials shortages, inflation, logistics and employment resources continue to be an impediment to business conditions,” says Anthony Nieves, Chair of the ISM.

The IHS Markit US Services PMI was revised slightly lower to 64.6 in June 2021, from a preliminary estimate of 64.8 and compared with the previous month's all-time high of 70.4. Still, the latest reading pointed to the third-fastest expansion in the service sector since data collection began in October 2009, amid rising customer demand due to the relaxation of COVID-19 restrictions. Growth rates in both new business and export remained strong, while the rate of job creation softened amid challenges finding suitable candidates. On the price front, input costs increased at the second-fastest rate on record as supplier price hikes and greater wage bills pushed up cost burdens. Nonetheless, accommodative demand conditions allowed firms to partially pass on higher costs to clients. Finally, business optimism improved to the strongest since November 2020.

The Australian Industry Group Australian Performance of Services Index fell to 57.8 in June of 2021 from a near 3-year high of 61.2 in the previous month. The latest reading pointed to the weakest expansion in the services sector since last February, due to the impact of lockdowns in Victoria and other states, mostly observed in lower readings for new orders (56.6 from 68.3 in May), sales (66.1 from 68.6) and employment (54.2 from 56.6). On the price front, both input and output prices moderated from the previous month, while wage growth accelerated in June. Business activity continued to advance in all service sub-sectors, with the steepest expansion seen in business & property (62.1 from 59.6), as government stimulus supported demand for services that supply or support residential construction. Improvements were also seen in health & education (58.3 from 56.8) and logistics services (66.2 from 65.1), while activity in retail trade & hospitality eased (57.7 from 58.1).

The index of leading economic indicators in Japan, which is a gauge of the economy a few months ahead and is compiled using data such as job offers and consumer sentiment, was down to 102.6 in May 2021 from a final 103.8 a month earlier, which was the highest level since February 2014, preliminary data showed. The decline highlighted a weakening economic recovery from the coronavirus pandemic following a fresh wave of COVID-19 infections in several parts of the country.

Comments on US market last close…

US market down playing catch up after long weekend. Rising oil price, China crackdowns and Services PMIs sliding in line with Manufacturing PMIs were driving it. It is becoming clear that we have seen peak growth and peak stimulus. It’s going to get harder for markets at historical high multiples to keep moving higher as growth and stimulus fade. RUSSELL -1.36%, DOW -0.60%, S&P -0.20% and NASDAQ +0.17%. VIX up 9% to mid 16 again. Growth stocks were pumped into the close and that helped NASDAQ and S&P. European markets were negative and Asian markets were positive except for China. Yields fell 7-8 bps overnight and that is not normal. USD moved up and that hit all currencies and commodities except Gold. Spot gold in A$ is back near $2400 again. Property and Utilities lead the sectors on yield slide while Energy and Banks were hit hard. Gold sub sector had another good day. OPEC+ is looking less of a cartel than the our big 4 banks.

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