Expecting the Fed to be late to the cycle

The local market had another positive day where size did matter. Large Caps were up over 1%, mid-caps gained more than 0.4% while small caps were down 0.1% and micro caps dipped 1.7%. 

Local markets were playing catch from the long weekend. No negative sector is a clear indicator that global investors were the big players in the market and they were buying the top 20. S&P 20 lead all size categories with over 1.2% up on the day. Small-cap fundies were trying to lock in their profits ahead of the US Fed update on Thursday morning. It is rare that the market is up nearly 1% and micro caps are down nearly 2%. The power of a crowded trade can raise the risk of volatility. Healthcare and tech were the leading sectors while utilities and energy were the laggards. We have started the 13th consecutive week with a daily turnover below $9 billion, excluding the index change day.

The main show is the inflation cycle and the update from the US Fed meeting. First, let’s clarify the global scene. Japan is a bonified Ponzi scheme. EU is an early stage Ponzi scheme that is in the middle of a double-dip recession due to more pandemic waves. 

Emerging Markets Ex China are a pandemic-boosted economic mess. The US is the main game in setting the global standard as the main economy and global currency. The US was heading for recession pre-pandemic and is now still dealing with substantial economic structural problems. It is easy to blame the pandemic but the reality is that the structural problems in the Western economies are substantial. It is no surprise that the G7 has become a "blame China" event. Where do these leaders get their strategy from? Not even high school standard!

Western economies benefited from outsourcing to China and expected them to remain weak forever. As with any normal cycle, China has taken advantage of the laziness in the West and built a dependency that we can’t easily walk away from. There is no point in taking them on without having a potential substitute. We are years away from that. The biggest inflation threat is coming from China. After years of exporting weaker and weaker inflation, China started to export higher inflation in 2021 and that has turned the global stimulus cycle on its head. The latest pandemic related issues in southern China is threatening to be another logistical problem that may raise supply-side issues and more inflation. China continues to strengthen their Yuan to protect their consumers from inflation and that is driving the rest of the world to have higher inflation. Taking on China in the current macro is a recipe for more mess.

Central Banks are dealing in alternative facts. They are selling the point that inflation is transitory and stimulus to be maintained till wages growth kicks into substantial level. Inflation is always transitory. Inflation comes and costs go up faster. Corporations can pass on the costs and driven up consumer inflation or absorb the costs and reduce workers to keep the margins and revenue. Either option has the result of slowing growth and hence demand and eventually inflation. It is the economy stupid. If you can’t work out the effect of pandemic and inflation, just drive around your local CBD and see how many “for lease” signs are out there. That used to be a small business location before it went bust. Government bailed out the big business while the small business is crumbling all around the economy.

The main issue is all about how high inflation gets to and how long it stays above trend. That determines the damage done to the economy. Prices only come down in a recession or crash. To counter this rise in costs, it is logical for Central Banks to target wages growth. The problem with that theory is that wages growth is another cost increase for production and hence more inflation. That means we are caught in a Mexican standoff between Central Banks and Inflation. Even the most optimistic forecasts do not see real wages growth at a solid level for three to four years…if ever. The price for keeping rates at all-time lows and stimulus at all-time highs is inflation. We will not be able to keep emergency global stimulus going at the current level for even 12 months at the current inflation cycle without a recession. If US Fed starts to taper and Australia remains on emergency stimulus, expect AUDUSD to start to collapse and create inflation. But there is no threat of that as RBA will flip on a dime and follow US Fed into tapering. AUDUSD is likely to go past 80 cents and even higher as the reflation cycle plays out.

Below are comments from a couple of guys that are far above my pay grade. Not that they are the smartest guys in town but there are very few that are more connected to the vested interest groups that have a substantial pull with Central Banks.

Billionaire hedge fund manager Paul Tudor Jones told CNBC on Monday he’s paying close attention to this week’s Federal Reserve policy meeting in light of recent economic data showing higher consumer prices. “If they treat these numbers — which were material events, they were very material — if they treat them with nonchalance, I think it’s just a green light to bet heavily on every inflation trade,” Jones said on “Squawk Box.” “If they say, ‘We’re on path, things are good,’ then I would just go all in on the inflation trades. I’d probably buy commodities, buy crypto, buy gold,” added Jones, who called the stock market crash in 1987 and is founder and chief investment officer of Tudor Investment. On the other hand, Jones predicted that markets would be unsettled if the Fed comes out with a different tone Wednesday. “If they course correct, if they say, ‘We’ve got incoming data, we’ve accomplished our mission or we’re on the way very rapidly to accomplishing our mission on employment,’ then you’re going to get a taper tantrum,” Jones said. “You’re going to get a sell-off in fixed income. You’re going to get a correction in stocks. That doesn’t necessarily mean it’s over.”

Jamie Dimon believes cash is king – at least for the time being. JPMorgan Chase has been “effectively stockpiling” cash rather than using it to buy Treasuries or other investments because of the possibility that higher inflation will force the Federal Reserve to boost interest rates, Dimon said Monday during a conference. The biggest U.S. bank by assets has positioned itself to benefit from rising interest rates, which will let it buy higher-yielding assets, he said. “We have a lot of cash and capability and we’re going to be very patient because I think you have a very good chance inflation will be more than transitory,” said Dimon, longtime JPMorgan CEO. “If you look at our balance sheet, we have $500 billion in cash, we’ve actually been effectively stockpiling more and more cash waiting for opportunities to invest at higher rates,” Dimon said. “I do expect to see higher rates and more inflation, and we’re prepared for that.”

It is clear that they seem to indicate that US Fed is likely to do nothing and let inflation keep running. US Fed is hoping that the world suddenly recovers from the structural and pandemic problems. Hope has a lot of friends but failure has none. Even China knows that the Western Central Banks are losing control and the debt bubble will not allow them to move on stimulus or rates. China is moving to curb commodity prices as they know US Fed won’t do the hard yards. China moves on commodities suggests that they expect USD to go lower with inaction and higher inflation. Get ready to go all in on the inflation trades. Is it suddenly Gold in here or is it just me!!!

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

The University of Michigan's consumer sentiment for the US increased to 86.4 in June of 2021 from 82.9 in May, beating market forecasts of 84, preliminary estimates showed. Expectations soared (83.8 vs 78.8) and the current conditions gauge also edged up (90.6 vs 89.4). Meanwhile, inflation expectations for the year ahead fell to 4% from 4.6% and the 5-year outlook declined to 2.8% from 3%. 'Stronger growth in the national economy was anticipated, with an all-time record number of consumers anticipating a net decline in unemployment. Rising inflation remained a top concern of consumers, although the expected rate of inflation declined in early June', according to Surveys of Consumers chief economist, Richard Curtin.

Industrial production in Japan rose by 2.9% month-over-month in April 2021, compared with the preliminary reading of a 2.5% gain and after a final 1.7% rise a month earlier. This was the second straight month of increase in industrial output, as the economy recovered further from the coronavirus pandemic. Industries that mainly contributed to the increase were general-purpose and business-oriented machinery (15.7% vs -4.9% in March), electrical machinery, and information and communication electronics equipment, and production machinery (10.4% vs -4.2%), and production machinery (7.7% vs -2.8%). On a yearly basis, industrial output jumped by 15.8% in April, accelerating sharply from a 3.4% growth in March.

Capacity Utilization in Japan increased to 99.30 points in April from 98.20 points in March of 2021.

The annual consumer inflation rate in India increased to 6.3% in May of 2021, the highest in 6 months, from a downwardly revised 4.23% in April. Figures came well above market forecasts of 5.3%, as higher global commodity prices including crude, edible oils and gold weighed. Food inflation jumped to 5.01%, with oils and fats (30.84%), non-alcoholic beverages (15.1%), fruits (11.98%) and pulses (9.39%) recording the biggest increases. Additional upward pressure came from the cost of fuel and light (11.58%); pan, tobacco and intoxicants (10%); miscellaneous (7.52%); clothing and footwear (5.32%); and housing (3.86%). The Reserve Bank of India estimates an average inflation rate of 5.1% for the current financial year.

The house price index in Australia rose by 5.4% quarter-on-quarter in the three months to March of 2021, faster than a 3.0% growth in the prior period and compared with market consensus of 5.5%. This was the steepest pace of increase in residential property prices since the fourth quarter of 2019, as the economy reopened further from the COVID-19 crisis. All capital cities recorded higher prices: Sydney (6.1% vs 3.0% in Q4) and Melbourne (5.1% vs 3.4%), Perth (5.2% vs 2.9%), Brisbane (4.0% vs 2.7%), Adelaide (4.0% vs 2.6%), Canberra (5.6% vs 3.4%), Hobart (6.1% vs 3.1%), and Darwin (4.7% vs 2.2%). Through the year to the first quarter, house prices grew by 7.5%.

Comments on the US market last close

US market was negative all day before the pump in the last hour pulled it back to choppy. It was exactly the same on Friday. The pump was mainly targeting NASDAQ growth and DOW opening up stocks. RUSSELL -0.41%, DOW -0.25%, S&P +0.18% and NASDAQ +0.74%. VIX keeps moving higher.... +4.73% to 16.39 now. Yields bounced back and yet NASDAQ went up... non-correlated moves are fake and a worry. USD ticked lower but dragged Gold and Copper lower while Oil is in a different cycle altogether. Again...more non-correlated moves. Tech and Property lead the sectors while Banks and Resources were the laggards. Jamie Diamond said JPM is hoarding cash as there is a good chance inflation is here to stay. Hedge fundie Paul Tudor Jones is saying go all in for inflation if the US Fed ignores it. US Fed meeting update coming Thursday morning our time. They talk taper, the market pulls back. If they ignore, inflation, trade goes hyper. Time to cover both options as the US Fed is trapped. The elevated market risk this week as the US Fed takes centre stage! Elon Musk pumps bitcoin ahead of quarterly.

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