Election spin hides economic reality post stimulus binge

Local market was running up all day as option expiry day trades boosted the market to recover part of the bashing from yesterday. We are going through the 9th consecutive week without a single day’s turnover above $8b. Market moves are being exaggerated by below average turnover. Option expiry is generally associated with a turnover boost but even that did not do much today to break out above the trend. US option expiry is Friday (i.e. tomorrow night). Almost every sector was in the green today with Tech and Property leading while Mining and Energy were the laggards. Tax loss selling and rising volatility added to the erratic nature of today’s moves.

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

Employment in Australia unexpectedly declined by 30,600 people, or 0.2%, to 13.040 million in April 2021, missing market expectations of a 15,000 gain, as people took leave around the public and school holidays. I always look forward to the monthly employment data update as it rarely linked to reality. Let us look through the lost hours worked to do some reality check. We lost 13m hours in a month with 22 working days at 8 hours a day. That equates to approx. 74k full time jobs that were lost. The ABS data suggests that we created 34k full time jobs while losing 64k part time jobs. There is obviously April school holidays in play, but it is a lot higher than what the numbers are showing. Normal cycle data suggest 2-3 part time jobs should be 1 full time job hours. If we lost 34k full time and gained 64k part time, we should be looking at much lower lost hours of work.

Let us look at the employment data on relative basis. Just for context, US creates 200k job per month on a normalized peak cycle. US has approx. 14 times the population of Australia. Adjust for that, Australia should be hitting 14-15k jobs at normalized peak cycle and hence why economist forecast job growth around 15-20k per month in normal hot cycle. When you see job creation at double, triple or quadruple that, you have to wonder why we needed JobKeeper? May be more political spin than reality…let’s leave that for now.

Supposedly unemployment rate went down despite JobKeeper finishing…insert sarcasm. That sounds great except for the fact that it is not reality. We lost just over 30k jobs over the month but we seem to have lost just over 33k unemployed people in the same time. Given the border restrictions, I can’t imagine 33k jobless people left the country. The simple logic would suggest that the standard to be classified as unemployed has been made so much harder that 63k just gave up and fell out of the sample. If you wanted to calculate a normalized unemployment rate, take March unemployed and then add 30k lost jobs and that will deliver 5.9% unemployment rate…and not 5.5% being touted.

Border restrictions have forced a lot of businesses that hire overseas workers to hire local workers that may be less qualified and cost more. Federal government will not be in a hurry to open the economy before the election but that will change soon after the election in Sep/Oct. The reality is that the unemployment rate is rising and we haven’t seen the bad small businesses shutting shops yet. Real employment data is going to keep deteriorating for months to come. Australia is looking at weakening employment market, negative real wages growth outlook, multiple asset bubbles, historic debt and RBA out of bullets. We better not get another global slowdown or geopolitics with China in the next few years!!!

Annual inflation rate in the UK increased to 1.5% in April of 2021 from 0.7% in March, and compared to market forecasts of 1.4%. It is the highest reading since March of 2020, as the economy started to reopen after a nationwide coronavirus lockdown in the beginning of the year and as the cap on energy bills was lifted. From April 1st the price cap returned to pre-pandemic levels (up by £96 to £1,138), principally as a result of changes in wholesale energy prices. Rising household utility (2.4% vs -7.3% in March), clothing (0.5% vs -3.5%), and motor fuel prices (13.6% vs 3.5%) made the largest upward contributions which were partially offset by a large downward contribution from recreation and culture (0.7% vs 2.3%). Also, the temporary 5% VAT on hospitality, which will last until the end of September, helped to keep costs low. If taxes were at their normal levels, inflation would have risen to 3.2%, the highest rate for nine years. UK inflation is ramping up as they start to open up.

The consumer price inflation rate in the Euro Area was confirmed at 1.6% year-on-year in April of 2021, the highest since April of 2019, driven mainly by higher cost for energy (10.4% vs 4.3% in March) and non-energy industrial goods (0.4% vs 0.3%). On the other hand, prices rose at a softer pace for food, alcohol & tobacco (0.6% vs 1.1%) and services (0.9% vs 1.3%). The ECB has said already it is expecting a spike in headline inflation on the back of base effects and temporary factors, warning that it may even exceed the central bank's target by the end of the year. Meanwhile, the annual core inflation, which excludes volatile prices of energy, food, alcohol & tobacco eased to 0.7% from 0.9% in March. On a monthly basis, consumer prices went up 0.6% in April. EU is struggling with rising inflation in lockdown restrictions.

The annual inflation rate in Canada surged to 3.4% in April of 2021 from 2.2% in March and higher than forecasts of 3.2%. It is the strongest reading since May of 2011, with a significant proportion of increase attributable to a steep decline in prices in April 2020 when the coronavirus pandemic hit demand and prices hard. Prices rose in every major component on a year-over-year basis. Transportation prices were up 9.4%, mainly because of a record 62.5% surge in gasoline prices and shelter cost continued to increase (3.2%). The homeowners' replacement cost index continued to trend upwards, increasing 9.1%, the most since April 1989 as higher building costs and demand for single-family homes contributed to a surge in the cost of newly built homes. Other upward pressure came from clothing and footwear (1.8%) while food inflation slowed (0.9%). On a monthly basis, consumer prices were up 0.5%, the same as in March. Canada has always been the best comparable country to Australia and their economy is weaker and seeing inflation ramping up.

Governments are ignoring the inflation but consumers are being affected by higher cost of living. Central Banks are ignoring inflation but corporates are warning rising costs. We can create fake core inflation measures that have no link to reality and justify low rates but we live in the real world and prices are going higher. The best argument is that it will rise slower later….not come back…just slower later…but rates are going higher later…and that is happening sooner than later. Inflation in low wages growth economy is like an anaconda. It slowly grinds the economy into stagflation.

Comments on US market last close…

US market started weak and then recovered partially. NASDAQ -0.03%, S&P -0.29%, DOW -0.48% and RUSSELL -0.78%. US Fed minutes took it lower in the middle of the day before another bounce in growth stocks on the dip. US Fed minutes showed that they were expect tapering talk in the next meeting or two. We were expecting tapering in H2 to lead to rate rise in 2022....not what the market was expecting. The clock is ticking for taper tantrum. ECB warns of insolvencies as pandemic measures are lifted in EU while it continues to expand balance sheet like a Japanese economic ponzi scheme. Bond yields moved higher after US Fed minutes and dragged USD higher on risk off trade. Commodities were mainly down and that dragged AUDUSD lower. Gold keeps holding and weaker currency puts Aussie gold miners in a sweet spot in market volatility. On a day of red, Tech was the only green sector and that is against the grain. Looks more like a pump to change sentiment than by the numbers. By the dips still playing despite volatility killing investors in cryptocurrency to lumber to China steel. China moves are hitting steel, iron ore and coal... key Aussie commodities... no geopolitics here... insert sarcasm. Both US and Aussie volatility indices have bounced back to 100 day MA.

Deep Data Analytics offers tailored solutions (i.e. Macro investment signals to DIY investment models) to a variety of investors (i.e. fund managers, financial planners, financial advisers, accountants, SMSF and retail investors). If you are interested to find out more, feel free to contact via the website ((VIEW LINK).

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

(VIEW LINK)