The only thing we'll be tapering in 2021 is the takeaway food bill in lockdown

The local market started negative and continued to slide into the close, as global growth worries and local recession concerns started to bite. Relatively low turnover continued into the ninth consecutive week without a double-digit turnover day. Size mattered as small caps were the best while microcaps were the worst. Staples and property were the best sectors while energy and banks were the worst. The Aussie dollar to US dollar conversion rate continues to hover near eight or nine-month lows and is starting to look very weak.

Key points affecting global macro

(1) Delta waves > Low vaccinated parts of the developed markets and pretty much all of the emerging markets are being affected by the delta variant. The data coming out of Israel is worrying, as it is experiencing rising cases and deaths despite having one of the highest vaccination rates in the world. 

China continues to move towards the suppression model and it is willing to lose growth to achieve that. Locally, Australia is facing lockdown extensions in NSW and VIC. Markets were pricing in a negative Q3 and a bounce back in Q4. We may have to taper the Q4 bounce outlook as NSW may still be under restrictions. Double-dip recession fears are becoming much more real as time passes.

(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.

(3) Capital Wars > The chase to attract capital in a world of low yield means emerging markets are starting to raise rates substantially. The Reserve Bank of New Zealand is expected to follow that trend and lift rates in the short term to curb asset bubbles. Eventually, that will drag the Developed Markets to raise rates as capital leaves. The flight of capital 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 > The Capital Wars are delivering Currency Wars. The US dollar is in decline as endless stimulus drives an endless debt load. A slowing economy and rising inflation mean 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, the RBA may have to expand its yield control to currency control as a decent drop in AUD-USD will raise inflationary pressures. Once you go down the path of “fake it till you make it”, there is no coming back. We are going to get the minutes of the US Fed and RBA this week and the only thing we will be tapering is the takeaway food bill in lockdown!

Seasonal cycles suggest the US market peaks this week as macro risks become the main play. 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!

The main data points released in the last 24 hours…

Producer Prices in Canada increased 16.20% in July of 2021 over the same month in the previous year. The industrial product price index in Canada went up 0.1% month over month in July 2021, following an upwardly revised 0.3% rise in the prior month, a preliminary estimate showed. The growth in the IPPI was led primarily by higher prices for energy and petroleum products (+5.1%) and chemicals and chemical products (+6.3%). Prices for primary ferrous metal products (+5.6%), such as basic and semi-finished iron or steel products (+5.7%), which have been increasing since September 2020, also supported the monthly gain in the IPPI. Motorized and recreational vehicles (+1.2%) posted a monthly increase in July, led mainly by motor vehicle engines and motor vehicle parts (+1.8%), and passenger cars and light trucks (+1.2%). These gains were largely moderated by lower prices for lumber and other wood products (-23.0%), namely softwood lumber (-37.7%), due to increased supply at sawmills. Year-over-year, the index advanced 16.2%, after an upwardly revised 17.4% jump in the previous month.

Prices for US exports rose 1.3% from a month earlier in July of 2021, accelerating from a 1.2% increase in June and above market expectations of 0.8%. It was the 14th straight monthly rise in export prices. Nonagricultural export charges climbed 1.6% from a month earlier, driven by industrial supplies and materials, capital goods, automotive vehicles, and nonagricultural foods. Meantime, the cost of agricultural products fell 1.7%, the first drop since August 2020 as lower prices for soybeans, fruit, and corn more than offset higher prices for dairy products, nuts, vegetables, and cotton. Year on year, export prices surged 17.2%, following an upwardly revised 16.9% advance in the previous month.

The price index for US imports advanced 0.3% from a month earlier in July 2021, following an upwardly revised 1.1% increase in the previous month and compared with market expectations of 0.6%. Cost for import fuel rose 2.9% (vs 5.5% in June), boosted by higher prices for both petroleum and natural gas. Meanwhile, nonfuel import prices were unchanged (vs 0.7% in June) as higher prices for capital goods; automotive vehicles; consumer goods; and foods, feeds, and beverages offset a drop in nonfuel industrial supplies and materials prices. Year on year, import prices rose 10.2% in July, following an 11.3% increase in June, led by higher prices for both nonfuel and fuel imports.

The University of Michigan's consumer sentiment for the US slumped to 70.2 in August 2021, from 81.2 in the previous month and well below market expectations of 81.2, a preliminary estimate showed. It was the lowest reading since December 2011, with widespread losses across income, age, and education subgroups and across all regions. Moreover, the declines covered all aspects of the economy, from personal finances to prospects for the economy, including inflation and unemployment. Consumers believe the economy's performance will be diminished over the next several months, but the extraordinary surge in negative economic assessments also reflects an emotional response, mainly from dashed hopes that the pandemic would soon end.

Average new home prices in China's 70 major cities rose by 4.6% year-on-year in July 2021, after a 4.7% gain a month earlier. This was the weakest rise in new home prices since March, as government cooling measures were enough to offset strong property demand. Among China's biggest cities, Guangzhou recorded the largest home price increase (10.9% vs 11.6% in June), followed by Chongqing (8.3% vs 8%), Shanghai (4.5% vs 4.6%), Beijing (5.4% vs 4.9%), Shenzhen (3.3% vs 3.5%), and Tianjin (4.3% vs 4.2%). On a monthly basis, new home prices went up by 0.3% in July, following a 0.5% rise in June.

China's fixed-asset investment grew by 10.3% yoy to CNY to CNY 30.25 trillion in January to July 2021, slowing from a 12.6% rise in the previous period and missing market forecasts of 11.3%. Investment eased in both public (7.1% vs 9.6% in January-June) and private sectors (13.4% vs 15.4%), amid the latest surge of COVID-19 cases in some regions. Among sub-industry, a slowdown in investment was seen for the primary sector (21.8% vs 21.3%) and secondary (14.4% vs 16.3%). Also, the tertiary industry rose 8.2 percent, following a 13.8% rise, mainly supported by water conservancy, public facilities, road transport, and railway.

Industrial production in China increased 6.4% year-on-year in July of 2021, the lowest rate in 11 months, and below market forecasts of a 7.8% rise. Production fell for textiles (-1.0% vs -1.3% in June), ferrous metals (-2.6% vs 4.1%); non-metal minerals (-2.6% vs 8.7%); and slowed for transport equipment (4.6% vs 6.8%); machinery (6.6% vs 6.8%), chemicals (6.6% vs 9.8%); general equipment (7.6% vs 13.9%). By products, falls were seen in production of cement (-6.6% vs -2.9%) and motor vehicles (-15.8% vs -4.3%). For the first seven months of the year, industrial production grew 14.4 percent year-on-year.

China's retail trade rose by 8.5% year-on-year in July 2021, easing from a 12.1% gain in the previous month and missing market expectations of 11.5%. This was the weakest rise in retail sales since December 2020, as consumption moderated during the latest COVID-19 outbreaks in some provinces. Sales rose at a slower pace for most categories: garments (7.5% vs 12.8% in June), cosmetics (2.8% vs 13.5%), personal care (13.1% vs 14%, jewelry (14.3% vs 26%), telecoms (0.1% vs 15.9%), home appliances (8.2% vs 8.9%), furniture (11% vs 13.4%) and building materials (11.6% vs 19.1%). Also, sales of automobiles fell (-1.8% vs 4.5%). In the January to July period, retail sales jumped 20.7% compared to the same period of 2020.

The wholesale price inflation rate in India eased to 11.16% year-on-year in July 2021, from 12.07% in the previous month and slightly below market expectations of 11.30%.

Comments on US market last close…

US market closed flat after starting positive on delta worries and decent pullback on consumer sentiment. Delta continues to run wild in low vaccinated states while vaccinated are becoming the perfect carriers. Inflation rate may fade but cost are going to remain elevated and consumers are being affected. US Fed's transitory inflation rhetoric doesn't pay the bills as costs keep rising. Consumer sentiment fell to pandemic lows. RUSSELL -0.93%, DOW +0.04%, NASDAQ +0.04% and S&P +0.16%. VIX slide to mid 15. Yields and USD pulled back hard. Yields finished down 9bps. Gold starting to move up hard while Copper was flat and Oil negative. Staples and Property were the best and Energy and Banks were the worst. Next week will be about US Fed tapering time table guesses from Fed minutes.

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