False economy to be tested by cost inflation cycle

Local market started positive and faded through the day to negative before a big pump at the close delivered a flat day. Market continues to struggle with weaker growth outlook and rising inflation. Local market has moved around 1.2% in 7 consecutive positive days. Relatively low turnover continued into the eighth week in a row without a double-digit turnover day. Size mattered as Micro Caps were the best while Large Caps were the worst. Telecom and Retail were the best sectors while Utilities and Tech were the worst. Deep Data Analytics favorites like IAG, TLS and QBE had result updates in recent days and are all moving higher with better sector thematics in telecom and insurance.

Reporting season started to turn out a few big caps today and few of our favorites were the big cap big movers today. The question everyone seems to be asking is that RBA stealing from savers and retirees and bailing out banks that do not need to be bailed out. Banks are doing so well that they are swimming in dividends and buybacks. It is a false economy but after all it is the same case with the real economy as well. Aussie economy was heading into recession before the pandemic and since then we have burnt over a trillion in debt and yet we are in no better shape. 

Pandemic loaded the economy with debt while not solving the structural problems. All the handouts barely kept the small business and the bottom 50% of main street above water. The top end of town were the main beneficiary and they have built a substantial buffer. The banks are good at flagging what the RBA is going to do. They have been putting up fixed rates gradually to milk better margins as the economy slides into double dip recession risk. The banks have loaded the Aussie economy with unsustainable debt using the property bubble. Now they are pushing unregulated debt via shadow lending like BNPL models. Banks are telling you that that the next RBA move is adding QE. It may be different this time!

US inflation story is a never ending story for markets. Inflation data stayed at decade high while core inflation ticked slightly below multi decade high level. It did not go hyper as rising prices are hitting consumer demand and burning itself out. But there are other segments of the asset bubbles that are yet to deliver inflation boost like property rental boom. Due to multi year under supply, historical high property prices and elevated building costs are going to keep rents rising well into 2022. That effect hasn’t started to flow through into the numbers yet…but that will over time. We are seeing more and more supply side disruptions driven by delta variant. All inbound & outbound container services at Meishan terminal in Ningbo-Zhoushan port have been halted.

We have the latest Producer Price Index (PPI) update tonight in the US. It will tell the market the pressure on input costs. We have already seen PPI shooting high in China, Japan and EU. US corporates are forced to either give up margin by absorbing cost rise or put up prices and hit the consumer spending. You can absorb cost up to certain level before the pressure builds too much. US PPI and Core PPI are expected to remain flat. Time will tell.

Seasonal cycles suggest the US market peaks this week as the US reporting season deluge hands over control to macro uncertainty. USD and Bond Yields are bouncing back. Central Banks are starting to lose the market trust that they can keep it all under control. Will the Central Banks fade the economy into stagflation to keep stimulus going? Time will tell!

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

China's banks extended CNY 1.08 trillion in new yuan loans in July 2021, their lowest level since October 2020 and below market expectations of CNY 1.20 trillion. The country's central bank is expected to announce additional measures to stimulate activity amid signs that economic growth is slowing in the world's second-largest economy. Last month, the PBOC cut the reserve requirement ratio (RRR) for banks, releasing around CNY 1 trillion in long-term liquidity, and analysts expect another RRR cut this year. Broad M2 money supply increased 8.3% from a year earlier, below June's 8.6% growth and estimates of 8.7%. Outstanding yuan loans advanced 12.3% in July from a year earlier, in line with expectations, and unchanged from June. Growth of outstanding total social financing (TSF), a broad measure of credit and liquidity in the economy, slowed to 10.7%, the weakest reading since February 2020.

China's outstanding yuan loans grew 12.3% from a year earlier in July 2021, the same pace as in the previous month and in line with market expectations. In May, outstanding yuan loans rose 12.2%, the least since February 2020.

China's total social financing (TSF), a broad measure of credit and liquidity in the economy, went down to CNY 1.06 trillion in July 2021, from CNY 3.67 trillion in the previous month and below market expectations of CNY 1.70 trillion. Outstanding total social financing was CNY 302.49 trillion at the end of July, up 10.7% from a year earlier. TSF includes off-balance-sheet forms of financing that exist outside the conventional bank lending system, such as initial public offerings, loans from trust companies and bond sales.

Money Supply M2 in China decreased to 230220 CNY Billion in July from 231778.84 CNY Billion in June of 2021.

Mortgage applications in the US climbed 2.8% in the week ending August 6th, after a 1.7% drop in the previous week, data from the Mortgage Bankers Association showed. Applications to refinance a home loan rose 3.2% and purchases increased 1.8%. The average fixed 30-year mortgage rate went up by 2bps to 2.99%, hovering below 3% for a second straight week. "Homeowners continue to respond to lower rates, with refinance activity climbing to the highest level since February 2021," Joel Kan, MBA’s associate vice president of economic and industry forecasting, said in a statement. "With low for-sale inventory keeping home-price appreciation in many markets at record highs, the jump in FHA purchase applications is potentially a sign that more first-time buyers are finding purchase options despite the high prices," Kan said.

The US consumer price inflation rate stood at 5.4% in July 2021, unchanged from the previous month's 13-year high and slightly above market expectations of 5.3%, reflecting the low base effect caused by the coronavirus crisis, the re-opening of the economy and continued supply constraints. Main upward pressure came from food (3.4% vs 2.4%), led by sharp increases in food at home (2.6% vs 0.9%) and food away from home (4.6% vs 4.2%); new vehicles (6.4% vs 5.3%); and shelter (2.8% vs 2.6%). Meanwhile, inflation moderated for energy (23.8% vs 24.5%); used cars and trucks (41.7% vs 45.2%); apparel (4.2% vs 4.9%); transportation services (6.4% vs 10.4%); and medical care services (0.8% vs 1.0%). On a monthly basis, consumer prices rose 0.5% in July, the least since February's 0.4% gain.

The annual core inflation rate in the US, which excludes food and energy, rose to 4.3% in July of 2021 from 4.5% in June and in line with market expectations. The index for used cars and trucks increased 41.7% from a year earlier and the index for new vehicles rose 6.4%, the largest 12-month increase since the period ending January 1982. The shelter index increased 2.8% over the last 12 months, and the medical care index rose only 0.3%. Few major component indexes declined over the past 12 months.

Producer Prices in Japan increased 5.60% in July of 2021 over the same month in the previous year. Producer prices in Japan rose by 5.6% yoy in July 2021, beating market consensus and June's figure of a 5% gain. This was the fifth straight month of producer price inflation and the highest reading since September 2008, amid surging commodity prices. Cost increased further for beverages & foods (2% vs 1.8% in June), chemicals (10.9% vs 10.1%), petroleum & coal products (38.8% vs 42%), iron & steel (11.8% vs 9.6%), metal products (1% vs 0.2%), non-ferrous metals (32.3% vs 37.6%), production machinery (0.7% vs 0.2%), other manufacturing industry products (0.3% vs 0.3%) and electronic components (0.6% vs 0.3%). In addition, prices of transportation equipment was flat after falling 0.1% in June. At the same time, there were falls in cost of electrical machinery & equipment (-0.2% vs -0.7%), general machinery (-0.4% vs flat reading), and information (-1.6% vs -2.1%). On a monthly basis, producer prices went up 1.1%, after a 0.6% rise in June.

Comments on US market last close…

US market delivered a mainly positive day on the back of short covering as inflation data came in hot as expected. Inflation stayed flat at 5.4% (i.e. decade high) while est was 5.3%. Core inflation was 4.3% as expected and that is multi decade second highest level. Market ran short into the update on inflation pop risk and covered it for the positive day. NASDAQ -0.16%, S&P +0.25%, RUSSELL +0.49% and DOW +0.62%. VIX fell to 16. USD rolled over and that boosted commodities with Gold leading the bounce. Yields ran up for bond auction and then it faded back a bit to finish 10 year at 1.34%. Bond traders sold it down to the auction and made money buying it back cheap. Easy to play a market where the main player is loosing trillions every year. Miners and Banks were the best sectors while Health Care and Staples were the worst. China data dump overnight showed weakness in total social financing, M1/M2 is supply and new loans. More sectors under reform threat in China. Delta waves are affecting most part of the world and supply side issues are going to get worse.

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