Iron Ore running into China flu

Local market had the bounce back day after bashing like the US market. Local market keeps moving on weak to low turnover as sentiment remains weak on up and down days. We have finished 8 consecutive weeks without a single day’s turnover above $8b. It was another day where global traders boosted the market at the open and then it faded lower through the volatile day. 

China regulations hitting Steel and Iron Ore markets have been rattling markets in recent days and today was no different. Miners were the only negative sector with big Iron Ore miners hitting the sector. Iron Ore weakness from elevated levels remains a big risk of tanking AUDUSD. 

Energy and Utilities were the best sectors while Banks did the heavy lifting today. We have rolled over into a negative month so far. We haven’t had a negative month since Sep 2020 and this could be the second negative month since the pandemic crash. We are going to get a deluge of US economic data tonight with Retail Sales leading the importance. Everyone is aware that Central Banks are stuck to transient inflation while economic data may show point to prolonged transient inflation risk.

Let’s run through the main data points released overnight…

The number of Americans filing new claims for unemployment benefits dropped by 34k to 473k in the week ending May 8th, the lowest level since the pandemic first hit the US labor market in March 2020 and below market expectations of 490 thousand. The country continued its reopening efforts helped by the rapid pace of COVID-19 vaccinations, while the government's massive stimulus package boosted demand. Also, unadjusted claims dropped to 487k last week from 514k the week before, with the largest declines being recorded in Michigan, New York, Vermont and Florida. On the other hand, the states of Georgia, Washington and Illinois posted the biggest increases in the number of new claims. Job market continues to improve and add to the recovery fuel boosting inflation.

Producer Prices in the United States increased 6.20% in April of 2021 over the same month in the previous year, above market forecasts of 5.90%. Producer prices for final demand in the US rose 0.6% from a month earlier in April of 2021, following a 1% jump in March and above market expectations of a 0.3% advance. About two-thirds of the increase are due to a 0.6% rise in services prices, namely portfolio management; airline passenger services; food retailing; fuels and lubricants retailing; physician care; and hardware, building materials, and supplies retailing. The index for final demand goods also moved up 0.6%, namely steel mill products; beef and veal; pork; residential natural gas; plastic resins and materials; and dairy products. Year-on-year, producer prices jumped 6.2%, the largest advance since 12-month data were first calculated in November 2010. Producer Prices are important because that is the input costs for US producers. It confirms the inflationary worries and raises the risk of cost blowout and earnings downgrade. The corporates will have to either absorb the costs and cut margins and profits or pass that on and driven inflation higher. Higher inflation is on the way!

The whole concept that it is transient is basic lie perpetuated by Central Banks. Similar to inflation, producer prices have mainly risen since WWII. Apart from crash/recession cycles, the only time it came back was when USD hit peak through 2015 and 2016. The current cycle is showing USD in decline and expected to remain in decline for years. The only way cost of US producers are coming back is in a recession. Transient or not, costs are at all time high and rising. Even if it rose by less in the future, it is not coming lower. Like it or not, inflation rate may be lower in 9-12 months than it is for the next 3-6 months, but that still means costs are going to keep rising and not come back.

It is going to take an extremely tricky dance between fiscal and monetary policy to not move a hot inflation cycle into hyperinflation cycle. Fiscal policy needs to keep printing to keep majority of the economy funded while monetary policy needs to absorb the excess bond supply. This all needs to happen without triggering substantial USD debasement and market panic. We may be at the end of the “Central Bank Put” cycle as the US Fed may not want to risk hyperinflation hitting the economy to save the markets. Aussie Gold Miners are offering inflation hedge with currency and sovereign protection from relative value territory.

Comments on US market last close

US market had the short covering bounce after the bash day as hedge funds locked in the profits. It popped in the open and then traded sideways. RUSSELL +1.68%, DOW +1.29%, S&P +1.22% and NASDAQ +0.72%. Producer Price Index was another massive beat for inflation with annual growth hitting pre GFC pop while actual level hitting all time high. Jobless data also hits post pandemic low. China has been cutting credit into bubbles and now taking direct action to curb commodities bubble. Iron ore and coal in direct target line...funny how both are major Aussie exports. Still in a risk off trade as bond yields were lower with commodities while USD ticked higher. We are heading into US option expiry week and market tends to be after that. Vaccine rollout and opening up economy is the positive trend while inflation is the mega negative trend. Take any bounce to rotate out of big growth into value cyclicals, yield beneficiaries and gold before it starts to unwind. Disney result after market was solid but subscribers weak on streaming hitting share price.

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

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