Socialism for big business may drive small business into bankruptcy

Local market started positive and faded through the day to deliver a slight positive day on the back of banks and miners. It has been that case for the past week. Local market has moved 1.2% in 6 positive days as global macro worries and local recession worries pile up. The market is betting that no matter what happens, the government and central banks will print more money and drive asset prices high. Even if that blows up the economy. And it is hard to argue with that logic when US Fed is buying mortgage backed securities while house prices at all time high and local banks are delivering buyback and dividends when the economy is going to recession risk. 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 Mid Caps were the worst. Utilities and Energy were the best sectors while Telecom and Tech were the worst.

CBA result was the big news of the day and it was mainly as expected. CBA followed the rest of the banks in delivering solid yield and buybacks as the economy, business confidence and consumer confidence tank. You would think the banks would be worried but quite the contrary. They are upgrading profits by cutting bad debt provisions. They don’t have to worry as they will be bailed out by the government and RBA. Capitalism only exists for the bottom end of town. Top end of town benefits from too big to fail and stimulus driven Socialism. We don’t talk about the royal commission or the regulatory breaches in 2021. That is so 2020!!!

China flagged lower growth and markets are ignoring it. China continues to move on sectors for reform. Private schools and alcohol sector were the latest reform targets according to media articles. China is willing to give up growth to deflate asset bubbles, curb inflation and drive reform. It does not look like they are in a rush or they are finished. Expect more to come in China volatility!

US inflation update tonight is the big show and it’s expected to show that last month was the peak. The overly analyzed one offs like used car prices keep rising. US input costs are highly linked to China PPI and transport costs. Both of them are higher this month than last. The risk is that US nominal and core inflation neat expectations and go even higher. Given that US inflation surprise index moved higher again, it makes sense for investors to worry that inflation might get hotter. The solid non farm payrolls set the tapering argument for markets. US Fed drove a global central bank strategy to moving from inflation to a vague job market strength argument to start tapering. The problem for US is that they are getting both. Despite a hot inflation data tonight, we do not thing US Fed will taper. They might talk about that but without a time table, talk is cheap. 

US Fed knows that QE is top end socialism. The conflict of interest in the system will not allow them to act on taper but flag it and wait for inflation to kill growth and then burn itself out. Then inflation and job market will be weaker and no need to taper but start talking about adding more QE. It is blatantly obvious that all asset bubbles are only being held up by Central Bank manipulation. If you remove that, they all burst. They will allow the economy to fade into stagflation in order to keep QE going. It may be different this time!

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…

The NAB business confidence index in Australia plunged to -8 in July 2021 from 11 in June and below average, dragged down by widespread impacts of lockdowns, particularly in New South Wales. Confidence weakened the most in transport & utilities, manufacturing and finance, and property; while wholesale, retail, and recreation & personal services were back in negative territory. Business conditions also saw a sharp fall, as trading (12 vs 32), profitability (6 vs 25), and employment (10 vs 18) all declined. The forward-looking indicators also softened, with forward orders now back in negative territory (-6 vs 15) and capacity utilization back around average (81.2 vs 83.8), suggesting little improvement in conditions in the near term. "The hope is that the economy again rebounds strongly, and we see a little pullback in the very positive investment and hiring intentions we have seen by business in recent months," said Alan Oster, NAB group chief economist.

The seasonally adjusted estimate for total dwellings approved in Australia declined by 6.7% month-over-month to 18,911 units in June 2021, unrevised from the preliminary figure and after a final 7.6% drop in the prior month, pointing to the third straight month of fall. Private sector houses fell 11.8%, following a 10.3% fall in May and after reaching a record high of 20.9% jump in April. In contrast, private sector dwellings excluding houses went up 0.8% after gaining 1.2% in May. Among states and territories, building permits fell in Western Australia (-30.5%), Queensland (-18.4%), Tasmania (-14.9%), and New South Wales (-12.7%); while rose in both Victoria (12.8%) and South Australia (8.6%).

The ZEW Indicator of Economic Sentiment for the Euro Area fell by 18.5 points to 48.7 in August of 2021. It was the lowest reading since last November, amid concerns over the Covid-19 resurgence in Europe and fears of slowing recovery. In August, 10.1 percent of the surveyed analysts expected deterioration in economic activity, 37.1 percent expected no changes while 52.8 percent predicted an improvement. Meanwhile, the indicator for the current economic situation in the Eurozone rose by 8.6 points to 14.6, while inflation expectations fell by 27.4 points to 42.2.

Unit labor costs in the US nonfarm business sector increased an annualized 1% in the second quarter of 2021, following a revised 2.8% drop in the previous period and compared with market expectations of a 1.1% rise, a preliminary estimate showed. Hourly compensation rose 3.3% (vs 1.4% in Q1) and productivity advanced 2.3% (vs 4.3%). Unit labor costs increased 0.1% over the last four quarters, as hourly compensation increased 2% and productivity increased 1.9%.

Productivity in the United States increased to 112.70 points in the second quarter of 2021 from 112.10 points in the first quarter of 2021.

The Westpac-Melbourne Institute Index of Consumer Sentiment for Australia fell by 4.4% mom to the lowest in a year of 104.1 in August 2021, as three major cities in the country were in lockdowns. All index components declined: the economic conditions in the next 12 months (-8.3 percent to 100.4), the family finances economic conditions in the next 12 months (-2.7 percent to 107.0), the family finances vs a year ago (-1.9 percent to 91.9), the economic conditions in the next 5 years (-1.2 percent to 109.2), and time to buy a major household item (-7.2 percent to 112.0). At the same time, unemployment expectations jumped sharply (13.7 percent to 124.6). “This is a significant further loss of confidence but better than might have been expected given virus developments," said Westpac chief economist Bill Evans. Despite the deteriorating situation, sentiment has remained in positive territory, even in parts of the country facing the biggest virus challenges.

Inflation Rate in Germany increased to 3.80 percent in July from 2.30 percent in June of 2021.

Comments on US market last close…

US market ticked higher and reversed Monday's move on infrastructure bill passing ahead of inflation update. NASDAQ -0.49%, S&P +0.10%, RUSSELL +0.20% and DOW +0.46%. VIX ticked higher and remains below 17. Yields keep climbing while USD was flat. Commodities recovered some of the losses from the day before but Iron Ore keeps falling. Fed talker are out again and tapering still looks too far away as there is no solid job market benchmark to weigh against. Central banks are keeping that vague to not move on tapering while talking about the potential. Wages and productivity update in the US were weaker than expected while tomorrow's inflation update is expected to show a tick lower but still elevated. Energy and Banks were the best sectors while Property and Tech were the worst.

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