China thinks US Fed won’t taper

Local market started positive and then fading to nearly flat before a last hour pump finished it positive. We have now delivered 3 consecutive positive days after a full week delivering the first 5 consecutive negative days since Feb 2020 (i.e. pandemic crash). Relatively low turnover continued through to the tenth week in a row without a double-digit turnover day. Size continues to matter as Micro Caps were the best while Large Caps were the worst. Tech and Miners were the best sectors while Telecom and Utilities were the worst.

The market continues to be split on what the US Fed will deliver at Jackson Hole symposium. The view changes by the markets. Equities are betting on tapering being delayed. Bonds are undecided and on holding pattern with volatility coming later this week. Currencies and Commodities are trading like tapering is coming. It is inevitable that all markets can’t be correct. It is clear that US economy is slowing while inflation and delta waves are starting to bite. Historical trend suggest that US Fed is unlikely to move after delaying through extremely hot starts to 2021. US Fed chair is in line to get another term and not expected to rock the boat ahead of that. US Fed has been talk the fantasy full employment target and that will allow them to keep walking backwards with no clarity to tapering. US Fed will continue to talk tapering to support USD but unlikely to deliver a timeline as they do not aim to move on tapering in 2021.

What happens in the rest of the world is almost irrelevant. BOJ has stopped expanding balance sheet and markets do not care. It surpassed ponzi status a long time ago and it is taking a break. It is consensus view that BOJ will be back to more money printing before the year ends. ECB has followed the BOJ plan to irrelevance and will be printing well into 2022. US Fed matters as global debt is priced in USD. When and if, US follows the Japan/EU ponzi scheme, USD debasement will take another scale. It is purely a sentiment trade. When the market loses trust in US Fed, USD will debase substantially. Falling USD will make inflation even worse. That means, US Fed will be trying to walk a fine line of indefinite tapering delay while not spooking the market. It may be different this time!

China moving to curb commodities is an interesting situation when US Fed is flagging tapering. If you were to trust US Fed was going to taper, that will drive up USD and hit commodities. So why is China moving to curb commodities? China is telling you that US Fed is not going to taper in 2021. China is moving to curb commodities and reform sectors with extraordinary prices to reduce cost of living pressures for average Chinese citizens. It makes no sense for China to waste resources to curb commodity prices when US Fed was going to do it for them. It makes sense if China believes that US Fed is not going to taper. It may be different this time!

Federal government and NSW government have completely moved away from suppression to vaccination plan. It is a fact that when NSW started the lockdown a few months ago, both governments were purely targeting suppression. It is clear that NSW has lost control of the Bondi delta cluster and now vaccination is the only political option. We do not have a pathway to vaccinate young kids. We are yet to cover the key risk groups. We are likely to see approval for kids at or above 12 to get a vaccine. If you adjust the double vaccinated on eligible population, we are somewhere between 25-30%. This is still less than half the first threshold (70%) to move to the next phase. Global trend suggest that vaccination rates start to slow after 50%. If we keep the current extremely high rates, we will get there in Nov. If we assume slowdown, we are likely to get there near Dec. Then the 80% target for next phase gets pushed back further. 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…

New home sales in the US jumped 1% to a seasonally adjusted annual rate of 708K in July of 2021, in line with forecasts of 700K, and following a downwardly revised 2.6% drop in the previous month. It was the first rise in 4 months with sales jumping the most in the West (14.4% to 215K) followed by the South (1.3% to 400K). Meanwhile, the sales fell in both the Northeast (-24.1% to 22K) and the Midwest (-20.2% to 71K). The median sales price increased to $390,500 from $329,800 a year earlier. There were 367 thousand new homes available for sales on the market, higher than 348 thousand in June. Still, new home sales remain well below 972K in July of 2020 as high prices due to rising material costs continue to weigh on buyers' affordability.

The Manufacturing Activity Index in the US fifth district including the District of Columbia, Maryland, North Carolina, South Carolina, Virginia, and most of West Virginia slipped to 9 in August of 2021 from 27 in July and defying market expectations of 25. It was the lowest reading since July of 2020. Shipments, new orders, and employment decreased but remained positive. Survey contacts also noted that lead times continued to increase and inventories remained low. Survey results suggested that many firms increased employment and wages in August, as the wage index hit a record high, but they struggled to find workers with the necessary skills, a difficulty that manufacturers expected to continue in the coming months. Overall, respondents were optimistic that conditions would improve in the next six months.

The Business Survey Index (BSI) on business conditions in the manufacturing sector in South Korea went down 2 points to 95 in August of 2021 from 97 in the previous month. Meantime, the index measuring the outlook for September rose by 4 points to 96. In the non-manufacturing sector, the BSI on business conditions went up 2 points to 81 and that for the outlook for the following month also increased by 3 points to 81. The economic sentiment index, a composite of the Business Survey Index and the Consumer Survey Index climbed 1.4 points from the prior month to 105.3 in August.

Total construction work done in Australia rose by 0.8% quarter-on-quarter in the three months to June 2021, slowing from a 2.4% gain in the previous period and missing market consensus of a 2.5% increase. Growth was mainly driven by engineering construction (1.8%), non-residential (0.3%), and building work (0.1%). On the flip side, residential work done fell by 0.1%. Through the year to the second quarter, construction output gained 0.4%.

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 at 104.1 in June, unrevised from the preliminary estimate, and compared with a final 102.6 in the previous month. This was the highest reading since February 2014, as a recovery in the economy from the coronavirus pandemic gained momentum on the back of a ramped-up coronavirus vaccination program.

Comments on US market last close…

US market started positive on China tech bounce and opening up thematic and faded to close mainly flat and on the lows of the day. China flagged that they would not let growth fall too far and markets are assuming stimulus. It may be coming but they are unlikely to be in a hurry. The positive moves were mainly in opening up and tech growth stocks. DOW +0.09%, S&P +0.15%, NASDAQ +0.52% and RUSSELL +1.02%. VIX ticked up to mid 17. Yields were higher and USD ticked lower. Oil moved up 3% while the rest of the commodities were little changed. Energy and Retail were the best sectors while Staples and Property were the laggards. Jackson Hole virtual symposium is getting all the attention while delta wave is starting to flatten after saturation of the non vaccinated. US Fed still sticking to full employment target while talking about tapering. Market will panic if we get a timetable but that is looking less and less likely.

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