Tapering growth to raise stagflation risk

The local market started negative and kept on sliding into the close for the second day in a row. Global growth worries and local recession worries continue to rise on a daily basis. Relatively low turnover continued into the nineth week in a row without a double-digit turnover day. Size mattered as mid-caps were the best, while micro-caps were the worst. Health care and telecom were the best sectors while Banks and Miners were the worst.

The main points affecting the global macro…

(1) Delta waves:

The low-vaccinated parts of developed markets, and all of emerging markets, are being affected by the Delta variant. The argument that we can get to herd immunity is being challenged. It is looking more and more like we will have some level of restriction and seasonal vaccination boosters. Governments are ignoring key risk groups (i.e. aged care, disability groups and first nation people) and concentrating on faster vaccination groups like young workers to boost vaccination rate for political reasons. Global trends suggests that rollouts run out of steam around 60-70%. Australia is likely to be delta affected well into Q4 while Emerging Markets will be affected well into 2022.

(2) Global Growth > Global activity and travel data clearly backs the slowing nature of the global growth after the Q2 peak. US and China data clearly shows the slowdown despite markets ignoring it. Middle East uncertainties are extra fodder for growth and inflation worries. The stimulus effects are starting to wear off while inflation is starting to bite. Markets have been ignoring all the leading indicators up to now.

(3) Capital Wars > Chase to attract capital in a world of low yield means Emerging Markets are starting to put up rates substantially. RBNZ is expected to follow that trend and raise rates in the short term to curb asset bubbles. Eventually that will drag the Developed Markets to raise rates as capital leaves. Capital leaving will debase the currency and raise inflation. Even if global major central banks fudge the game, Emerging Markets are turning the table on them!

(4) Currency Wars > Capital Wars a re delivering Currency Wars. USD is in decline as endless stimulus drives endless debt load. Slowing economy and rising inflation means more handouts are needed to keep 50-60% of the population above water. That will inevitably lead to more debt and currency debasement in the face of debt ceiling limits. Similarly, RBA may have to expand their yield control to currency control as a decent drop in AUDUSD will raise inflationary pressures. Once you go down the path of “fake it till you make it”, there is no coming back. AUDUSD has started to break down and now below 73 cents.

(5) Stimulus Worries > Investors are worried about taper tantrum. Central Banks are flagging tapering but there is no timeline. The reason that there is not timeline is the belief that fading growth and rising inflation will need more stimulus than less. The economies are carrying too much debt and have become too big to fail. Central Banks will not cut stimulus but keep adding more till the economy drowns in debt. We are near the end of the cycle as more QE is likely to be added with rising inflation. Locally we expect more government handouts and QE expansion in Nov/Dec ahead of Q1 election cycle.

Seasonal cycles suggest the US market peaks this week as macro risks become the main play. US retail sales update tonight will lead reporting updates from number of big US retailers. US and Australian markets are about to have the monthly option/futures expiry and historical trend suggest weakness follows.

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

Wholesale sales in Canada inched down 0.8% over a month to CAD 71.5 billion in June of 2021, ending three consecutive monthly increases and compared with market expectations of a 1.8% decline. Sales fell in 3 of 7 subsectors representing 56% of the sector, reflecting sharp declines in the building material and supplies (-5.4%) and the machinery, equipment and supplies (-3.5%) subsectors, as well as for food, beverages & tobacco (-1.2%). Most of the drop was offset by gains in the personal and household goods (4.3%), and motor vehicles and motor vehicle parts and accessories (3.1%) subsectors. Year-on-year, wholesale sales advanced 14.7%.

The New York Empire State Manufacturing Index fell to 18.3 in August of 2021 from a record high of 43 in July and well below market forecasts of 29, pointing to a slowdown in factory growth in the NY state. New orders increased modestly, and shipments grew slightly. Delivery times continued to lengthen substantially, and inventories were somewhat higher. Employment and the average workweek increased modestly. Input prices continued to rise sharply, and the pace of selling price increases set another record. Looking ahead, firms remained optimistic that conditions would improve over the next six months, with substantial increases in employment and prices expected.

The United States recorded a capital and financial account surplus of USD 31.5 billion in June of 2021, but below a downwardly revised USD 98.2 billion in the previous month. Foreign investors bought USD 10.9 billion in Treasuries in June, compared with an outflow of USD 93.4 billion in May. Meanwhile, foreigners bought USD 110.9 billion of long-term US securities.

Comments on US market last close…

US market started weak on China data, Afghanistan issues and Delta waves before recovering to finish slightly positive ahead of retail sales data. DOW started down 250 and finished up 110 on consistent machine like buying through the day. RUSSELL -0.89%, NASDAQ -0.20%, S&P +0.26% and DOW +0.31%. VIX up above 16. Yields fell below 1.27% while USD moved higher and hit all commodities except Gold. Fed talkers remain split between tapers and delayers. Food stamp program SNAP was increased by 15% after pandemic and that will be raised by 25% from pre pandemic level after September. This will provide more protection for the bottom 50% but will push up supermarket prices with supply side issues. Weakening macro is reducing tapering outlook by the day. Health Care and Staples were the best sectors while Energy and Materials were the worst. Retail sales update tomorrow and number of retailers reporting this week. Consumer spending is a massive part of the economy and recent updates raise real slowdown risk.

You can view the full Sunset Strip report, with charts and the end of day market stats, on the following link.

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