Tapering worries moving from Rabbit Hole to Jackson Hole

Local market started the new week with a positive day after five consecutive negative days last week. Last week was the first 5 consecutive negative days since Feb 2020 (i.e. pandemic crash). The moves today were carbon copy of the US moves on Friday on option/futures expiry volume pump. Relatively low turnover continued through to the Tenth week in a row without a double-digit turnover day. Size mattered as Micro Caps were the best while Large Caps were the worst. Tech and Property were the best sectors while Staples and Energy were the worst.

Global markets are going to be fixated on Jackson Hole virtual symposium. If you were looking for an omen, delta wave forced it to be a virtual symposium. It is likely to set the trend for the symposium. Janet Yellen is backing Jerome Powell to keep his job as US Fed chair. Everyone wants a money printer. Better to go with the devil you know. US Fed has conflicting macro to deal with but tapering was always the last choice. US Fed got itself trapped by moving from inflation to job market as a guide to tapering. The result of manipulated markets, we have an economy with fading growth but with a tight employment market and high inflation. US Fed has to walk a fine line to sound like tapering but not actually tapering. They can’t blatantly say that they will not taper as USD will debase dramatically and create even more inflation. They can’t taper as the global debt bubble is based on USD and tapering will raise USD and hurt global growth. US Fed will chose to save the asset bubbles and the top end of town over main street. Markets will soon catch on and USD will debase and drive inflation even higher.

Downgrades are coming and asset bubbles will need to support higher multiples. Central Bank and government self interest test suggest to taper your tapering expectations!

China has been moving on reform and lower commodities for this reason. They realize that US lead global economy is debt hungry and will chase more stimulus. Eventual USD debasement will drive more Emerging Markets to add more debt and buy commodities and create inflation for China. China has moved hard to counter this move by bashing down commodities and that may not be over yet. Their reform agenda is all about breaking dominant players in the industry using the capitalistic strategies to keep pushing up prices beyond the average Chinese consumer. China want to have a socially regulated capitalism and the rest of the world is going to find out how that will work soon enough.

Australian economy is going into negative Q3 with a real risk of negative Q4. Federal government and NSW government are completely moving away from suppression to vaccination plan. It is clear that NSW has mainly lost control of the delta cluster. NSW cluster is now growing in VIC and NZ. The rest of the states and territories are unlikely to open up to the two main states with high case numbers. Even when the magical vaccination targets are reached, the Doherty report assumes low cases and ignores kids. We do not have a pathway to vaccinate young kids. We are yet to cover the key risk groups. NSW is rushing to vaccinate the easy candidates that are motivated by work to boost numbers. Global trend suggest that vaccination rates start to slow after 50%. Doherty report vaccination targets were based on adult population while we are finding kids are being affected. If we are to learn from Israel, the pathway forward as more question than answers after the mistakes done at federal and state levels. It may be different this time!

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

Germany's producer prices surged by 10.4% from a year earlier in July 2021, accelerating from an 8.5% rise in the previous month and beating market expectations of 9.2%. It was the largest increase in producer costs since first oil crises in January 1975, reflecting a low base effect from last year due to the coronavirus-induced restrictions and the ongoing economic recovery. Main upward pressure came from intermediate products (15.6%) and energy (20.4%), followed by durable consumer goods (2.2%), non-durable consumer goods (1.8%) and capital goods (1.8%). On monthly basis, producer prices advanced by 1.9% in July, also above forecasts of 0.8%.

Retail sales volumes in the UK rose by 2.4% from a year earlier in July 2021, the least since February and missing market expectations of a 6.0% increase. Retail sales volumes in the UK dropped by 2.5% from a month earlier in July 2021, the most since January and missing market expectations of a 0.4% increase as rising COVID-19 cases, Euro 2020 soccer tournament, and bad weather forced people to stay at home. Food store trade fell by 1.5%, partly in response to high volumes in the previous month due to the start of the Euro 2020 football championship and partly as a result of the full reopening of the hospitality sector on July 19th. Non-food store sales slumped by 4.4%, driven by other stores (-10.1%), such as second-hand goods and computer and telecoms equipment stores. Sales also fell in clothing and household goods stores. In addition, automotive fuel sales decreased by 2.9%, its first monthly fall since February, with heavy rainfall in early July impacting road traffic volumes. Online retail was the only one improving, with sales proportion at 27.9% vs 27.1% in June.

Prices of new homes in Canada increased by 0.4% from the previous month in July of 2021, the slowest growth since December 2020 and easing for a third straight month. New house prices were up in 19 of the 27 census metropolitan areas surveyed, led by Oshawa (+4.3%). However, prices in Toronto (+0.2%) and Vancouver (+0.3%), Canada's most expensive cities, grew at a slower pace than the national average. On an annual basis, new house prices jumped 11.9% in July, one of the steepest increases on record, continuing an upward trend that began in December of 2020.

Retail Sales in Canada increased 6.20% in June of 2021 over the same month in the previous year. Retail sales in Canada likely contracted 1.7% mom in July of 2021, preliminary estimates showed, after a big jump in the previous month. Considering June, retail sales jumped 4.2%, the first increase in 3 months, after public health restrictions, which limited non-essential retail activities, were eased in many regions across the country. Leading retail sales in June, sales at clothing and clothing accessories stores increased 49.1% following two months of declines. Also, sales at motor vehicle and parts dealers were up 2.7% and those at gasoline stations rose 6%. 5.2% of retailers were closed at some point in June compared with 5.6% of retailers being closed one month prior. The average length of the shutdown was one day in both May and June.

The IHS Markit Australia Composite PMI fell to 43.5 in August 2021 from a final 45.2 a month earlier, a flash estimate showed. This was the second straight month of contraction in the private sector and the steepest pace in 15 months, reflecting the continued toll that the Delta COVID-19 wave is taking on Australia’s private sector economy. Manufacturing sector output notably fell for the first time since June 2020, joining the service sector in contraction. New orders, both domestic and foreign, continued to decline while employment conditions worsened. At the same time, the rate of input price inflation remained historically elevated, while output charges rose at a faster pace in August. Looking ahead, sentiment improved, supported by vaccination progress and the eventual decline of infections.

Comments on US market last close…

US market finished positive on options/futures expiry day volume pump to end a negative week. Historical trend trend suggest market run higher into expiry and lower after it. Market dealing with fading growth, delta waves and tapering news next week from Jackson Hole symposium. RUSSELL +1.65%, NASDAQ +1.19%, S&P +0.81% and DOW +0.65%. VIX fell just below 19. USD ticked lower and yields ticked higher. Copper moved higher, Gold flat and Oil was lower. Tech and Utilities lead the sectors while Staples and Industrial were the laggards. You expect some uncorrelated moves on decent volume in expiry day. US growth slow down and delta wave should remove tapering risk but inflation and job market strength will keep market on edge.

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