Don’t listen to what Central Banks say, watch what they do!

The local market started slightly positive before market-level global buying popped it up on another low turnover day. We are on the sixth consecutive week without a single double-digit billion-dollar turnover day. It was a weird day as things were moving non-correlated to macro moves. The US market was patchy as bond yields moved ahead of the US Fed update tonight.

 Rise in bond yields should be positive for banks and negative for property but both these sectors were the best performers today. 

Miners were the only red sector as the market was selling on worries about the risk of a US dollar bounce hitting commodities. The gold sector was down on this it will recover on the reality of negative real yield becoming more negative. Central Banks will be forced to debase the US dollar further for yield control and that will help the long term Gold uptrend.

US Fed update is the main game

Expect the US Fed to maintain the growth recovery but inflation will likely be transient while ramping QE for yield control. They have no plan B and macro data from economics to commodities suggest that inflation is going to outpace growth in the medium-to-long-term. The US Fed knows that and also knows the bond and currency markets don’t believe their fairytales. It would not be surprising to see them jam QE buying tonight to cover for bond market moves. Don’t listen to what Central Banks say, watch what they do. If inflation is transient, then yield control is not needed.

The rise in property prices and the equity being taken out of mortgages are in dangerous territory. The property bubble is a global problem and the US is no different. What makes this scenario even scarier is that the property market is even bigger than pre-GFC and we are seeing similar issues of more equity being withdrawn to support lack of wages and returns. The problem with any leverage is that it works till it doesn’t. Central Banks have no choice but to talk down inflation, engage in yield control and watch USD debase. There is no plan B. It is just repeating plan A…again and again and again…and hope it doesn’t blow up.

The S&P CoreLogic Case-Shiller 20-city home price index in the US jumped 11.9% year-on-year in February of 2021, following 11.1% growth in January and slightly above expectations of 11.7%. It is the biggest increase since March of 2014, with Phoenix (17.4%), San Diego (17%), and Seattle (15.4%) continuing to report the highest gains. Considering the whole 9 US census divisions, house prices increased 12%, a fresh high since February of 2006. 

"These data remain consistent with the hypothesis that COVID-19 has encouraged potential buyers to move from urban apartments to suburban homes. This demand may represent buyers who accelerated purchases that would have happened anyway over the next several years. Alternatively, there may have been a secular change in preferences, leading to a permanent shift in the demand curve for housing", says Craig Lazzara, Managing Director and at S&P DJI.

Aussie inflation data today was removed from reality: both real and core. 

We all know the core number left reality more than a decade ago, but even real inflation has been fudged for so long that it barely resembles the real economy. Even Stevie Wonder can see that Australian inflation wasn’t below 2%. The train tickets in NSW increase 4-5% per annum. But even in this RBA fantasy world, real inflation is rising. The reality is that it makes no difference. The RBA was never going to raise rates but banks will raise rates out of cycle due to their cost of borrowing from global markets going up. Australia is a price taker and RBA is still trying to fake it till they make it. Aussie inflation was unlikely to shoot the lights out due to debasing US dollar pushing up AUD-USD and commodities. But even in that scenario, core and trimmed inflation just hit all-time lows. That is not a sign of a healthy economy in any terms.

The annual inflation rate in Australia rose to 1.1% in Q1 2021 from 0.9% in Q4, compared with a market consensus of 1.4%. This was the highest reading since Q1 2020, amid a rise in tobacco excise; resetting of the Medicare and Pharmaceutical Benefits Scheme; the introduction, continuation, and conclusion of a number of government schemes; and home building grants. Prices increased for food (0.7% vs 2.3% in Q4), alcohol & tobacco (7.9% vs 9.3%), furnishings (2.7% vs 3.6%), health (3% vs 2.6%), transport (0.4% vs -4.6%), recreation (1.5% vs flat reading), and insurance & financial services (0.6% vs 1.2%). In contrast, cost fell further for housing (-1.1% vs -0.9%), education (-0.1% vs 2.1%), and communication (-1.9% vs -2.7%). On a quarterly basis, consumer prices went up 0.6%, the least in three quarters and below forecasts of 0.9%. The RBA's Trimmed Mean CPI rose 1.1% year-on-year in Q1, the least on record, after a 1.2% rise in Q4. Quarter-on-quarter, the index rose 0.3% after gaining 0.4% in Q4. Core consumer prices in Australia increased 1.10% in March of 2021 over the same month in the previous year.

Comments on US market last close

US market was mainly flat despite solid result updates. The market has already priced in big beats during result season while worries about the US Fed update, inflation and pandemic are rising. 

RUSSELL +0.14%, DOW +0.01%, S&P -0.02% and NASDAQ -0.34%. 

Bond yields moved higher to 1.63% with the US dollar ticking higher. Gold was mainly flat while copper and oil are moving on inflation. Resources and financials were up while utilities and healthcare were down. We are in US Fed update, US tech reporting, reflation picking up and pandemic waves for the last week of the month. The world suddenly cares about India because of the global outsourcing culture and wealthy Indians running out of the country and spreading the problem. Expect more supply-side issues to turn with India like what we saw with China. The trend is clear that the US Fed will keep talking down inflation and pumping up its balance sheet for yield control. Rampant QE in the biggest stimulus-driven recovery rarely ends well. US 30-year yield is below the last inflation number and it is going to rise when the next data point comes out in a few weeks. Inflation or not, when was the last time you saw soft and hard commodities on fire with China taking the foot off the stimulus pedal? Copper hits decade high and corn hits a 7-year high.

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

(VIEW LINK)