Well, the US Non-Farm Payrolls finally pulled itself out of a rut on Friday, printing well above forecasts at 531,000 jobs added while adding an upward 235,000 revision to the back months. The high-frequency NFIB survey showed a high proportion of small businesses intend to raise worker compensation. Workforce participation held steady at 61.60%, once again suggesting that the post-pandemic workforce in the US is now quite a bit smaller than it was pre-pandemic. Finally, the US House of Representatives passed the US infrastructure bill unlocking USD 1.2 trillion of new spending.
Stock markets head higher
So, there are plenty of reasons to be a little nervous about the Fed’s transitory inflation narrative. Maybe lighten up on some equities, sell a few bonds and buy some US dollars. Wrong! With the employment gains broadly based across sectors, equities rose as economic recovery sentiment won out. Another day, another record close for Wall Street. US yields edged lower, and the US dollar gave back a few of its recent gains. US capital markets only want to hear one story at the moment as that’s what suits its buy-everything narrative. That’s an economic recovery reinforced by total belief in Jerome Powell’s promises that post-the-Fed-taper interest rates hikes will not be on the horizon.
Another reason to be upbeat, and I should have been paying more attention to sooner, is logistics and freight costs, one of the main gremlins in the inflation story. The Baltic Exchange Dry Index has plunged 5,650 and 2,710 in the past six weeks, and it is not alone. China has also raised domestic coal production to multi-year highs, taking the heat (sic) of the energy crunch for now. Iron ore and copper have taken a beating since mid-October. Eventually, both may feed into easier inflation, although with international air travel ramping up, so will jet fuel demand. Over the weekend, Saudi Arabia hiked December crude prices to Asian customers, sending oil higher this morning.
Whichever way you cut the cake, my outlook for markets was completely wrong. I underestimated the myopic momentum to keep the asset price inflation party going. Although I’m confident the inflation piper will play, I’ve long ago learnt not to fight market sentiment. My favourite quote, known to long-time readers, is “markets can remain irrational longer than you can stay solvent.” I could probably add, “especially when central banks are idiotically QE’ing into an inflationary environment in their quest to make the world as economically unequal as possible to give the world even greater problems, but after they have retired on their final salary pension.” Sometimes a plan doesn’t come together, and that’s ok; the FOMO buy-everything gnomes will have another week in the sun this week.
Over the weekend, China’s October Trade Balance surged to an all-time high of USD 84.54 billion, as exports surged by 27.10% as it rushed to fill the western world’s Christmas orders, while Imports rose by only 20.60%, well below the 25.0% forecast. Logistical constraints appear to have hampered the import side of the equation, and with Covid-19 popping up more widely on the mainland, there are risks here, especially if it hits ports and factories in crucial areas. China’s energy crunch and subsequent limits on raw material processing may have impacted imports and demand reduction. The pre-holiday season peak may also mark the trade balance peak.
Reuter’s reports that some offshore bondholders have not received payments from Scenery Journey, a unit of Evergrande, due to make payments over the weekend. Evergrande has some grace period deadlines this week, and as a whole, China developers have over USD 1.0 billion of offshore payments due this week. Watch this space. The rise in oil prices this morning, China property-sector nerves, the four-day Communist Party Central Committee, which is likely to rubber-stamp President Xi’s president for life title, and any further shared prosperity policy initiatives from it, seem to be adding a cautious note to Asian markets today. Asia has a much higher sensitivity to US monetary policy than other parts of the world.
The regional calendar is dead today, with no data of note. The Bank of Japan Summary of Opinions was a cut/paste of the last 30 years. Rock bottom rates to support growth and until inflation appears. Europe is also a bare shelf. Post FOMC, we can expect plenty of Fed speakers this week, although their hawkish tone will likely ring hollow with markets, given actions have definitely not been louder than words of late. On Wednesday, China and US inflation data look to be the week’s highlights, and Thursday’s Australian Employment print is usually good for some intra-day vol. With a US holiday on Thursday, the back end of the week is likely to be quiet globally unless China springs some surprises from the Central Committee meeting. That probably means a noisy, but ultimately, range-trading week.
