Category: GDP and Activity

Posted on

Nvidia leads the plunge

Stocks plunged after Nvidia (NVDA) fell by 9.5% on reports that the US Department of Justice subpoenaed the chipmaker over complaints that it is violating antitrust laws. (Quartz)

Weak US and China manufacturing activity has also been cited as a cause for market bearishness, but that seems unlikely.

Stocks

Selling in Nvidia [cerise] soon spread to other big-name stocks, with all seven mega-caps closing lower on Tuesday.

Top 7 Technology Stocks

The fall breached short-term support on the S&P 500 at 5550, signaling a correction to test 5400.

S&P 500

The equal-weighted index ($IQX) retraced to test support at 7000. Trend Index troughs above zero indicate longer-term buying pressure. Breach of support would offer a target of 6800, but respect is as likely to confirm our target of 7400.

S&P 500 Equal-Weighted Index

Small caps also weakened, with the Russell 2000 iShares ETF (IWM) breaching support at 215 to indicate another test of long-term support at 200. A Trend Index peak at zero warns of selling pressure.

Russell 2000 Small Cap ETF (IWM)

ISM Manufacturing

The ISM Manufacturing PMI edged up to 47.2% in August. Although the cyclical sector is a relatively small percentage of the overall economy, it has a disproportionate impact during recessions as it sheds a large number of jobs. This is the sixth consecutive month of contraction (below 50), but the uptick indicates the contraction is slowing.

ISM Manufacturing PMI

New Orders are also contracting, indicating further headwinds ahead.

ISM Manufacturing New Orders

Also, the Prices sub-index continues to expand, warning of persistent inflationary pressure.

ISM Manufacturing Prices

However, the bearish outlook for manufacturing is offset by solid growth in other cyclical sectors, with combined employment in manufacturing, construction, and transport & warehousing reaching 27.85 million.

Manufacturing, Construction, and Transport & Warehousing

Non-residential construction spending continues to strengthen even when adjusted for inflation, benefiting from government programs to re-shore critical supply chains.

Non-Residential Construction Spending adjusted for inflation

China Manufacturing Activity

The official National Bureau of Statistics manufacturing PMI for China fell to 49.1 in August, indicating contraction. However, the downturn is contradicted by a rise in the private sector Caixin PMI to 50.4%:

Caixin China Manufacturing PMI & NBS China Manufacturing PMI

Financial Markets

Credit markets still reflect easy financial conditions, with Moody’s Baa corporate bond spread at a low 1.69%. Spreads above 2.5% indicate tight credit.

Moody's Baa Corporate Bond Spreads

However, Bitcoin has respected resistance at $60K [red line], warning of shrinking liquidity.

Bitcoin (BTC)

Treasury Markets

Ten-year Treasury yields are again testing support at 3.8%. Trend Index peaks below zero warn of long-term selling pressure. Breach of support would indicate another attempt at 3.7%.
10-Year Treasury Yield

Low LT yields are bearish for the Dollar and bullish for gold.

Dollar & Gold

The recent rally in the Dollar Index is losing steam. Tuesday’s weak close suggests another test of support between 100 and 101.

Dollar Index

Gold is retracing to test support at $2,475 per ounce. Trend Index troughs high above zero indicate long-term buying pressure. Respect would indicate another advance to test $2,600. Breach is less likely but would warn of a correction.

Spot Gold

Silver is more bearish, and a breach of support at $27.50 per ounce would test the August low at $26.50.

Spot Silver

Energy

Brent crude broke support at $76 per barrel and is headed for a test of long-term support at $73.

Brent Crude

Nymex WTI crude similarly broke support at $72 per barrel, offering a target of $68. We expect the DOE to increase purchases to re-stock the Strategic Petroleum Reserve below $70, providing support for shale drillers whose margins are squeezed at these levels.

Nymex WTI Crude

Uranium

Uranium continues its downtrend, with the Sprott Physical Uranium Trust (SRUUF) headed for another test of support at 17.

Sprott Physical Uranium Trust (SRUUF)
However, we are bullish on the long-term prospects as resistance to the expansion of nuclear energy fades.

EU's New Pro-Nuclear Energy Chief

Base Metals

After its recent rally, copper is testing short-term support at $9,000 per tonne. Breach is likely and would warn of another decline as China’s economy slows.

Copper

Aluminum leads the way, breaking short-term support to warn of another test of the band of long-term support between $2,100 and $2,150 per tonne.

Aluminum

Iron & Steel

Iron ore recovered above $100 per tonne, but respect of the descending trend line would warn of another decline. Reversal below $100 would confirm our target of $80.

 

Iron Ore

Conclusion

Investors are jumpy as mega-cap stocks trade at inflated prices, boosted by passive investment inflows from index ETFs. We expect the S&P 500 to find support at 5400 and maintain our target of 6000 before the end of the year.

One factor that could upset the apple cart is tightening liquidity. However, the Fed and Treasury will likely support liquidity in financial markets, at least until after the November elections. If they withdraw support, then all bets are off.

Falling crude oil prices will likely ease inflationary pressure, while a slowing Chinese economy is expected to add deflationary pressure. Long-term interest rates are expected to remain low, weakening the Dollar. Gold will likely benefit, with another attempt at our target of $2,600 per ounce.

Acknowledgments

Posted on

Death of the Yen carry trade

Markets seem convinced that the recent stock sell-off in the US is due to growth concerns — after a weak labor report. We think they are mistaken. The real cause of the sell-off is the unwinding Yen carry trade.

Hedge funds have been making a killing on the Yen carry trade, but they just got killed. Borrowing cheaply in Yen and investing in stocks and Treasuries in the US, the trade benefited from ultra-low interest rates in Japan, far higher short-term rates in the US, massive appreciation in the top ten stocks on the S&P 500, and a rapidly weakening Yen against the Dollar.

But the Bank of Japan just pulled the rug from under them, raising interest rates and indicating that they plan to normalize monetary policy over time. The move caused a sharp rise in the Japanese Yen, with the US Dollar plunging below 150.

USD/Japanese Yen

Japanese stocks followed, possibly due to concerns over the impact of a strong Yen on export sales.

Nikkei 225 Index

The contagion soon spread to neighboring markets.

South Korea KOSPI 100 Index

Stocks

Unwinding carry trades caused a sell-off in US stocks as traders hastily closed their leveraged positions. The S&P 500 broke support at 5400, and the Trend Index crossed to below zero, warning of a correction to test 5200.

S&P 500

The equal-weighted index ($IQX) similarly broke support at 6800, offering a target of 6600. The long tail indicates strong buying pressure but this often fails, or takes several days, to reverse a sharp market fall.

S&P 500 Equal-Weighted Index

There was nowhere to hide, with the Russell 2000 Small Caps ETF (IWM) also breaking support and the Trend Index dipping below zero.

Russell 2000 Small Cap ETF (IWM)

Treasury Markets

The Fed left rates unchanged this week but indicated that rate cuts will likely commence in September. Treasury yields fell but the primary driver was the strong flight to safety from the stock sell-off, with the 10-year yield plunging to a low 3.8%. We expect retracement to test resistance at 4.0% but the Trend Index peak below zero warns of strong buying, with downward pressure on yields.

10-Year Treasury Yield

Financial Markets

Financial market liquidity remains steady. The Chicago Fed Financial Conditions Index declined to -0.58, indicating further monetary easing.

Chicago Fed Financial Conditions Index

Commercial bank reserves at the Fed edged lower for the third consecutive week but the changes were marginal.

Commercial Bank Reserves at the Fed

Bitcoin is retracing to test support at $60K but shows no sign of a significant liquidity contraction at this stage.

Bitcoin (BTC)

Dollar & Gold

Unwinding carry trades also caused a sharp fall on the Dollar, with the Dollar Index testing support at 103.

Dollar Index

Gold failed to get much of a lift from the flight to safety, with most of the flow going to Treasuries.

Spot Gold

Silver, likewise, failed to benefit.

Spot Silver

Energy

Ismail Haniyeh was assassinated in Tehran, presumably by Israel. Iran’s supreme leader, Ayatollah Ali Khamenei, vowed that Israel would pay a price for killing the Hamas leader on Iranian soil, raising fears of escalation.

However, concerns over Middle East supply failed to move crude prices, with markets dominated by record US production of 13.3 million barrels per day.

EIA Crude Field Production

Nymex WTI crude is headed for a test of support between $72 and $73 per barrel. Breach would offer a target of $68. The US Department of Energy will likely support prices at this level, refilling the strategic petroleum reserve (SPR), as many shale producers’ cash costs are around $60 per barrel. Lower prices risk a drop in production as producers shut marginal wells.

Nymex WTI Crude

Uranium

Sprott Physical Uranium Trust (SRUUF) retreated below support at 18.00, confirming a bear market for uranium. Trend Index peaks below zero warn of strong selling pressure.

Sprott Physical Uranium Trust (SRUUF)

Base Metals

China over-invested in manufacturing capacity in an attempt to compensate for falling investment in their troubled real estate and infrastructure sectors. They now face resistance from international trading partners, unwilling to accept the massive surge in Chinese exports of manufactured goods and surplus steel and base metals. The dispute will likely cause increased trade protection and a sharp decline in global trade.

The down-trend in copper and aluminum is expected to continue.

Copper & Aluminum

Labor Market

A weak July labor report reinforced the Fed’s stance on early rate cuts, with job growth slowing to 114 thousand in July.

Employment Growth

The normally reliable Sahm recession indicator broke above 0.50 to indicate a recession. But the unemployment rate is rising off an unusually low base, so this time could be different.

Sahm Recession Indicator signals the start of a recession when the three-month moving average of the national unemployment rate (U3) rises by 0.50 percentage points or more relative to the minimum of the three-month averages from the previous 12 months. (Claudia Sahm)

Sahm Rule & Unemployment

Layoffs fell to 1.5 million in June which is different from what one would expect when the unemployment rate rises.

Layoffs & Discharges

Average weekly hours fell to 34.2, however, usually a warning that economic activity is slowing.

Average Weekly Hours

Job openings of 8.2 million in June are still above unemployment, indicating a tight labor market.

Job Openings

Continued claims for unemployment remain below 2.0 million, also indicating a tight labor market. Above 3.0 million would warn of recession.

Continued Claims

Average Hourly Earnings

Average hourly earnings growth declined to an annualized 2.75%, indicating that inflationary pressures are easing.

Average Hourly Earnings

Economy

Aggregate hours worked are growing at 1.3% year-on-year, suggesting low but positive GDP growth in the third quarter.Real GDP & Total Hours Worked

Heavy truck sales also held up well in July, indicating sustained economic activity.

Heavy Truck Sales

Employment in cyclical sectors — Manufacturing, Construction, and Transport & Warehousing — also grew by 40 thousand jobs in July, showing no sign of a recession.

Employment in Cyclical Sectors: Manufacturing, Construction, and Transport & Warehousing

ISM Manufacturing

ISM manufacturing PMI declined to 46.8% but remained above the 42.5% threshold typically accompanying a recession.

ISM Manufacturing PMI

Though declining new orders indicate some slowing ahead.

ISM Manufacturing New Orders

Conclusion

Stocks are expected to undergo a correction, with the S&P 500 testing support at 5200. Sales are fueled by unwinding carry trades as the Japanese Yen sharply strengthened after the Bank of Japan raised interest rates and indicated that they plan to normalize monetary policy.

The sell-off in stocks fueled a flight to safety which mainly benefited Treasuries, causing a sharp fall in the 10-year yield to 3.8%.

Gold and silver were left on the sidelines but could still benefit from low long-term interest rates and a weakening Dollar.

Declining crude oil and base metal prices warn of weak industrial demand from China. China’s efforts to compensate by exporting excess production is likely to meet stiff resistance from trading partners. Increased trade barriers are expected to further slow Chinese manufacturing and commodity imports, impacting Australia and other resource-based economies.

The Sahm rule warns of a US recession but the unemployment rate is rising from an unusually low base and there are plenty of signs of continued robust economic activity in the US economy. Expectations of a recession are likely premature, with a slow-down more likely to occur in 2025.

The full impact of a hawkish Bank of Japan monetary policy on US Treasury and financial markets should not be underestimated. However, the change is likely to be gradual, with frequent consultation with the US Treasury to minimize disruption after the initial impact of unwinding carry trades.

Acknowledgements

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Stocks and precious metals headed for a correction

Stocks are retreating across the board after climbing to dizzy heights in recent weeks. They continue to enjoy support, however, from falling Treasury yields and robust financial market liquidity. Support from crude oil is less certain, with a potential up-trend that could delay interest rate cuts.

Gold and silver are also retreating after strong gains in recent weeks. The correction appears to be a secondary movement. Base metals copper and aluminum are also weakening but the sell-off appears far stronger.

Stocks

Three out of seven mega-caps in the S&P 500 (Nvidia, Tesla, and Meta Platforms) show gains on Thursday, while four declined.

Top 7 Technology Stocks

The S&P 500 as a whole declined steeply, headed for a test of support at 5500.

S&P 500

The equal-weighted index ($IQX) took a similar pounding, breaking support at 6900. Retracement that respects the new resistance level would confirm a target of 6600.

S&P 500 Equal-Weighted Index

The retreat is across the board, with the Russell 2000 Small Cap ETF (IWM) [pink] falling faster than Russell 1000 Large Caps ETF (IWB) [blue] after spectacular gains earlier in the week.

Russell 1000 Large Cap ETF (IWB) & Russell 2000 Small Cap ETF (IWM),

Treasuries

Ten-year Treasury yields are retracing to test resistance at 4.2%. Respect is likely and would confirm our short-term target of 4.0%. Declining Trend Index peaks below zero continue to warn of downward pressure on yields. The low inflation outlook is bullish for bonds.

10-Year Treasury Yield

Financial Markets

Commercial bank reserves at the Fed finished largely unchanged for the week ended Wednesday, July 17, suggesting stable liquidity levels.

Commercial Bank Reserves at the Fed

Bitcoin is retracing to test support at $60K; respect would signal rising liquidity in financial markets.

Bitcoin

Labor Market

Initial claims climbed to 243K for the week ended July 13. This still well below levels normally seen leading up to a recession.

Initial Claims

Continued unemployment below 2.0m indicate a tight labor market.

Continued Claims

The Conference Board Leading Economic Indicator shows signs of a recovery after initially warning of a recession with a fall below -5.0%.

Conference Board Leading Economic Indicator

Dollar & Gold

The Dollar index reversed its sharp fall from Wednesday. Penetration of the descending trendline would warn of another test of 105 but we think this is unlikely considering the fall in Treasury yields.

Dollar Index

Gold retreated below support at $2,450 per ounce, indicating another test of $2,400. Respect of $2,400 would signal another attempt at $2,500, while breach would warn of a correction to $2,300.

Spot Gold

Silver followed through below $30, headed for a test of primary support at $29.

Spot Silver

Declining Trend Index peaks warn of medium-term selling pressure. But respect of support at $29 per ounce would suggest a target of $35 per ounce.

Spot Silver

Crude Oil

Nymex WTI crude steadied at close to $83 per barrel. Respect of resistance at $84 would be a strong bear signal.

Nymex WTI Crude

Brent crude is similarly testing resistance at $86 per barrel. Breach of support at $84 would be a strong bear signal.

Brent Crude

Base Metals

Copper broke support at $9,400 per metric ton. Expect retracement to test the new resistance level but respect is likely and would confirm the long-term target of $8,000.

Copper

Copper and aluminum track each other closely. The down-trend below has a likely target of $2,200 and is bearish for copper.

Aluminum

Conclusion

Stocks and precious metals appear headed for a much-needed correction after climbing to dizzy heights in recent weeks.

Of the three pillars, falling Treasury yields and robust financial market liquidity continue to support stocks. But crude oil is less certain, with a potential up-trend that would threaten higher inflation and could delay interest rate cuts.

Gold and silver are also retreating, after strong gains in recent weeks, in what appears to be a secondary correction. Support would provide a base for further gains.

But weakness in copper and aluminum is more concerning, signaling slowing demand from China which could easily trigger a global recession.

Acknowledgements

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Australian job growth surprise

Australian jobs grew by a surprising 50.2K, compared to consensus estimates of 20K, with total employment reaching 14.4 million.

Australian Jobs

But employment per capita remains steady at 64% because of the huge swell in immigration.

Australian Jobs per capita

The unemployment rate ticked up to 4.1%, while trend remained steady at 4.0%, as the participation rate grew.

Unemployment Rate

Total hours worked increased to 1.97 billion, a 1.3% increase in the trend since June 2023.

Total Hours Worked

Average hours worked (trend) declined to 136.6 hours in June, from 138.6 hours 12 months ago, reflecting slowing demand growth.

Total Hours Worked

Conclusion

Westpac believe that the strong June labor report points to a soft landing ahead. We are more skeptical. Soft landings are often promised and seldom materialize.

China has reported deflation for the fifth quarter in a row. When your biggest trading partner suffers from deflation, it generally is bad news for you as well.

China Deflation

Acknowledgements

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S&P 500 storm in a teacup

Markets were spooked by “hawkish” comments in the latest FOMC minutes, where some participants indicated a willingness to tighten policy should such action become appropriate:

Participants discussed maintaining the current restrictive policy stance for longer should inflation not show signs of moving sustainably toward 2 percent or reducing policy restraint in the event of an unexpected weakening in labor market conditions. Various participants mentioned a willingness to tighten policy further should risks to inflation materialize in a way that such an action became appropriate. ~ Minutes of the Federal Open Market Committee: April 30–May 1, 2024

This is nothing new: all FOMC members should be prepared to hike rates if inflation spikes to the point where tighter policy is appropriate. What seems to have spooked markets is the fact that it was considered appropriate to discuss this out in the open.

10-year Treasury yields rallied to test 4.5%, ending the series of declining Trend Index peaks. Breakout above 4.5% would signal another test of 4.7% but breach of support remains likely and would signal a decline to test support between 4.0% and 4.1%.

10-year Treasury Yield

The large engulfing candle on the S&P 500 is a bearish sign. Expect a test of support at 5200 but respect is likely and would confirm our target of 5500.

S&P 500

The S&P 500 Equal-Weighted Index ($IQX) retreated sharply and is likely to test support at 6600.

S&P 500 Equal-Weighted Index ($IQX)

Financial Markets

Commercial bank reserves at the Fed climbed to $3.39 trillion on May 22, continuing the recovery of financial market liquidity after the sharp fall during April tax payment season.

Commercial Bank Reserves at the Fed

The inverted Chicago Fed Financial Conditions Index (black below) continues to climb, indicating easier monetary policy. The S&P 500 (blue) is expected to follow the FCI upwards.

S&P 500 Index & Chicago Fed Financial Conditions Index (inverted scale)

Wicksell Analysis

The chart below is based on the theory of interest and money published by Swedish economist Knut Wicksell in 1898. Monetary policy is restrictive when long-term interest rates are higher than nominal GDP growth (the marginal return on new investment) and stimulatory when LT rates are below nominal GDP growth.

We plot nominal GDP (silver) against 10-year Treasury yields (purple) below. Stimulatory monetary policy is evident in the 1960s and ’70s — with GDP growth (silver) above long-term rates (purple) — boosting growth and inflation. This followed by restrictive policies in the 1980s and ’90s before long-term rates were again suppressed to stimulate the economy in the last two decades.

10-year Treasury Yield & Nominal GDP Growth

Nominal GDP grew at an annualized rate of 5.5% in Q1 of 2024, while the 10-year yield is below 4.5%, indicating that monetary policy remains stimulatory. Further growth and inflation are likely.

Crude Oil

The counter-argument to the monetarist view is that crude oil prices are falling and likely to ease inflationary pressures in the economy.

Nymex light crude broke support at $78 per barrel, indicating a decline to test long-term support (red) at $68.

Nymex WTI Light Crude

Energy prices were the primary cause of the spike in CPI in 2021 and its subsequent fall in 2022-23.

Conclusion

Crude prices are likely to fall, easing inflationary pressures and leading to lower long-term interest rates.

We expect the Fed and US Treasury to maintain easy monetary conditions until after the November elections.

The current bull market in stocks is likely to continue until end of the year.

Ceteris paribus

The Latin phrase ceteris paribus means “all else being equal.”

If Vladimir Putin and Xi Jinping attempt to influence US elections by disrupting the global economy — through cyberattacks, damage to undersea communication cables, infrastructure, or transport bottlenecks — then all bets are off and we could be in for a wild ride.

Acknowledgements



Posted on

Australia: Resilience or recession, it depends where you look

The Judo Bank/S&P Global Composite PMI Index for May continues to signal expansion (above 50 on LHS), albeit at a slightly slower rate of 52.6 compared to 53.0 in April.

Judo Bank/S&P Global Composite PMI

The Manufacturing PMI continues to signal contraction (below 50) but the rate slowed to 49.6 in both April and May.

Judo Bank/S&P Global Manufacturing PMI

The Services PMI continues to flag expansion, however, but at a slower rate of 53.1 compared to 53.6 in April.

Judo Bank/S&P Global Services PMI

The May report was quite upbeat. Warren Hogan, Chief Economic Advisor at Judo Bank:

“The increase in the employment index to its highest level in more than six months suggests that private sector demand for labour remains strong, particularly in light of the weakness in consumer spending over the first three months of the year. The results are consistent with the official employment figures, which show an average monthly increase in total employment in Australia of around 40,000 in 2024, made up of both full-time and part-time jobs.

….The Flash PMI report points to resilience in Australia’s business sector despite ongoing cost pressures and skill shortages. Most impressive has been the ability for businesses to navigate this difficult operating environment as well as weak consumer spending. With the Government injecting more than $30bn into household finances in 2024/25 through cost-of-living relief and tax cuts, Australian businesses should be expecting to see some improvement in consumer spending.”

April unemployment rose to 4.1% in April despite the increase in hiring — the result of a workforce swollen by record-high immigration.

Unemployment

Real per capita income tells a more depressing tale for consumers, declining more than 5.0% p.a. in 2023.

Real Per Capita Disposable Income

Household mortgage arrears have climvbed to 0.70%, the highest rate in the last 8 quarters.

Mortgage Arrears

Source: Equifax

Insolvencies

All is not well in the business sector despite the composite PMI signaling expansion. Insolvencies (green) soared to a monthly high of 1,136 in March.
Insolvency Trends

Source: Equifax

Late payments are also rising, with the average days beyond terms rising to 6.5 days in Q1 of 2024, the highest since 2020.

Days Beyond Terms

Source: Equifax

Cyclical Sectors

The construction sector has been hard hit, with 2758 insolvencies, or 2.1% of all business entities, in Q1 of 2024.

Construction Insolvency

Source: Equifax

Accommodation and food services had a lower number of insolvencies, at 1484 in Q1, but is a higher 3.3% of all entities.

Insolvency Volumes by Sector

Source: Equifax

Trade payment data also flags financial stress in the construction sector, with average days beyond terms rising to 12.3 days in Q1 of 2024, from 10.2 days in the preceding quarter.

Trade Payments

Source: Equifax

Conclusion

Australia is already in a real recession, with real per capita GDP and real disposable income both falling. This is disguised by a massive surge in immigration which has kept aggregate GDP growth above zero.

Real GDP grew 0.2% in Q4 of 2023 but per capita GDP declined by 0.3%. Annual GDP growth of 1.5% for 2023 falls to -1.0% when measured per capita.

Real GDP per Capita

Construction and Accommodation & Food Services are the largest cyclical employers in the economy:

Employment by Sector

Household finances may receive a boost from the latest budget but unemployment is expected to rise as the number of small business failures increases.

Acknowledgements

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Silver stars as stocks retrace

Markets are retracing to test new support levels after a strong surge during the week on weaker than expected inflation data. Silver and Gold are the exception, making new highs, with demand fueled by lower long-term Treasury yields, a weaker Dollar, and strong buying from China.

Stocks

The S&P 500 is retracing to test support at 5200/5250. Higher Trend Index troughs indicate buying pressure. Respect of support is likely and would confirm our target of 5500.

S&P 500

In Australia, the ASX 200 retreated from resistance at 7900. Follow-through below 7700 would warn of another test of support at 7500/7550. Rising Trend Index troughs, however, warn that respect is more likely — that would mean another test of the all-time high.

ASX 200

Financial Markets

Ten-year Treasury yields retraced to test new resistance between 4.4% and 4.5%. Respect is likely and would signal a decline to test support between 4.1% and 4.2%.

10-Year Treasury Yield

Financial market liquidity is improving, with commercial bank reserves at the Fed recovering after a sharp fall during April tax payment season.

Commercial Bank Reserves at Fed

The Chicago Fed Financial Conditions Index is again falling, signaling easier monetary conditions.

Chicago Fed Financial Conditions Index

Bitcoin (BTC) recovered above the former $64K support level, confirming easier financial conditions. Retracement that respects the new support level would strengthen the signal.

Bitcoin (BTC)

Economic Activity

Real retail sales are edging lower but remain in line with their pre-pandemic trend (dotted line) — supported by full employment, lower inflation and government spending to secure critical supply chains.

Advance Real Retail Sales

Light vehicle sales remain below 2019 levels but sales above 15 million continue to reflect robust consumer sentiment.

Light Vehicle Sales

Heavy truck sales rebounded to 40.2K units, indicating reasonable business activity. Continuation of the recent down-trend, however, with a fall below 37.5K, would signal that the economy is slowing. Breach of 35K would warn that a recession is imminent.

Heavy Truck Sales

Precious Metals & the Dollar

The Dollar index is retracing to test new resistance at 105. Lower Trend Index peaks warn of selling pressure and respect of resistance is likely, offering a short-term target of 103.

Dollar Index

Silver is the star performer of the week, climbing steeply to close at $31.43 per ounce, following a brief pause on Thursday. Rising Trend Index troughs indicate strong buying pressure and our target of $32 is likely to be broken.

Spot Silver

Gold also displays buying pressure, although the Trend Index rise is not as steep as Silver. Expect retracement to test the new support level at $2400 per ounce, but respect is likely and would confirm our target of $2500.

Spot Gold

The chart below from Jan Nieuwenhuijs shows Gold as a percentage of global central bank reserves, from 1880 to today. There is plenty of potential for holdings to increase as central banks attempt to diversify away from a Dollar-based global reserve currency.

Gold as a percentage of International Reserves

China: Gold Demand

China sold a record amount of Treasury and US agency bonds in the first quarter as it diversifies away from US financial assets. Bloomberg:

Beijing offloaded a total of $53.3 billion of Treasuries and agency bonds combined in the first quarter, according to calculations based on the latest data from the US Department of the Treasury. Belgium, often seen as a custodian of China’s holdings, disposed of $22 billion of Treasuries during the period.

China: Reserves

At the same time, China is rapidly increasing its official Gold holdings.

China: Gold Holdings

China’s domestic Gold price consistently shows a strong premium over the international price, currently RMB 567 per gram (Au99.99) versus 558.8 for the iAu99.99 international contract on the Shanghai Gold Exchange. The cause of strong domestic Gold demand is not hard to find.

China: Home Prices

Chinese investors have in the past favored residential real estate as a store of wealth but growth in real estate prices ended in 2021. Investors are now switching their focus to Gold.

Crude Oil

Nymex light crude respected support at $79 per barrel. Penetration of the secondary (orange) trendline would suggest that a base is forming. Lower crude oil and gasoline prices are likely to ease inflationary pressure.

Nymex Light Crude

Conclusion

Silver is the star performer of the week, rising steeply to close at $31.43 per ounce. Gold also broke resistance — breakout above $2400 per ounce offering a target of $2500.

Stocks are bullish after weaker than expected CPI growth for April. The S&P 500 is likely to respect support at 5200/5250, confirming our target of 5500.

Ten-year Treasury yields are also softening on weaker inflation data. Respect of resistance at 4.4% to 4.5% would offer a target between 4.1% and 4.2%. Lower yields are likely to weaken the Dollar, further boosting Gold and Silver prices.

China continues to switch its official reserves from US Treasuries to Gold. Coupled with strong domestic demand from Chinese investors — disillusioned with real estate and the weakening Yuan — combined official and private investor demand from China is expected to maintain upward pressure on bullion prices.

Acknowledgements

Posted on

Made in Australia

The Australian labor market remains tight, even with unemployment rising to 4.1% in April. The trend (light blue) is at 4.0% — still well below its pre-pandemic low of 5.0%.

Unemployment

The economy is growing, with aggregate hours worked rising to 1,962m in April. The trend (light blue) still points upward.

Aggregate Monthly Hours Worked

Wage Rates

The wage price index (WPI) ticked lower, to 4.09% for the 12 months to March ’24, while quarterly growth fell to 0.8% (3.2% annualized), warning of further slowing ahead.

Wages Index

The chart below, from Shane Oliver, shows how inflation has eroded real wages (blue) over the last three years. Slowing nominal wage growth suggests that workers are going to struggle to restore real income to pre-pandemic levels.

Real Wages

Made in Australia

Treasurer Jim Chalmers revealed long-term plans to spend $22.7 billion on clean energy and strategic industries as part of Labor’s Future Made in Australia program. From the ABC (emphasis added):

Sydney-based SunDrive is one of the big winners of a budget that is investing major money into a “Future Made in Australia”.

The solar panel start-up has a new technology that replaces expensive silver with cheaper copper in a high-efficiency solar panel, developed from research done at UNSW.

But unlike previous Australian solar technology advances, which powered China’s dominance in producing panels, SunDrive’s founders want to manufacture at least some of their product onshore.

“Australia has led the world in solar innovation — today’s commercial solar cells were invented in Australia, Australia has held the world record efficiency for 30 of the last 40 years,” SunDrive CEO Vince Allen said.

“However, very little of the economic value that has been produced has been captured in Australia from its solar R&D efforts….”

Australia is unlikely to succeed in manufacturing any new technology at scale until it achieves structural reforms to boost the country’s international competitiveness. Costs of labor and energy are two of the largest impediments to establishing new industries here.

Australia enjoys similar median income to France, Germany, Canada and Japan — and similar electricity prices — but all of these countries are losing manufacturing industries to competitors with lower cost structures.

Electricity Prices in US$/kWh

The biggest impediment for many poorer countries is political stability and corruption. Countries, with lower cost structures, that can solve these two challenges are likely to attract new industry to their shores.

Conclusion

Real wages in Australia have been eroded by inflation over the last three years. Most major political parties seem to agree that the way to address inflation is to encourage immigration to drive down labor costs. That has backfired, with rising shelter costs contributing to stubbornly high CPI. Real GDP per capita instead is falling as a result of high immigration and high inflation.

The Australian economy is largely supported by mining, housing and service industries. The only way for government to re-establish a manufacturing base here, is to attract new investment by addressing structural issues that cause high manufacturing input costs. Offering incentives for a few high profile projects does not address the underlying structural issues and leaves them reliant on government handouts for their existence.

Acknowledgements

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US consumer incomes and credit card debt

Many market commentators talk about the struggling US consumer, with rising costs forcing them to take on expensive debt, but this is not borne out by the data.

Real disposable personal income per capita (blue below) reached $50.4K in March, compared to the pre-pandemic peak of $48K in Feb 2020. The subsequent spike in 2020-21 was caused by a massive rise in government transfers (red) which have now almost completely subsided.

Real Disposable Personal Income Per Capita & Government Transfers

Average per capita income could conceal a skewed distribution towards high income-earners but median incomes don’t show this. Real median personal income fell from $41K in 2019 to $40.4K in 2020, recovering to $40.5K in 2022. Unfortunately that is the latest available data, but there is no sign of a reversal in the long-term up-trend, with the recent dip minor relative to most past recessions.

Real Median Personal Income

Consumer loans for credit cards and other revolving debt have climbed steeply relative to disposable personal income, reaching 5.06% in March 2024 (blue below). But the sharp fall in 2020-21 was the result of a spike in government transfers (red) and the ratio is no higher than pre-pandemic levels of 5.08% to 5.15% in 2019.

Credit Card Debt/Disposable Personal Income & Government Transfers/Disposable Personal Income

Conclusion

Government stimulus helped to soften the fall in incomes during the pandemic and assisted the post-pandemic recovery. Real per capita disposable income is at an all-time high outside of the pandemic stimulus in 2020-21 and real median personal income displays a strong up-trend. Credit cards and revolving consumer debt are also no higher than pre-pandemic levels relative to disposable personal income.

We feel that many commentators are too focused on the negatives and fail to recognize the robust performance of the American consumer.

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Gold, Crude, Copper and the Elephant

Gold, crude and copper is where the action is, while stocks and Treasuries take a back seat for the present.

Markets are signalling a reluctance to take on risk, while long-term Treasury yields threaten to trend higher.

We also revisit rising Treasury debt — the elephant in the room — and examine the CBO’s budget projections in more detail.

Crude Oil

Brent crude respected resistance at $84 per barrel, signaling a decline to below $80.

Brent Crude

Nymex light crude breach of support at $78 per barrel would confirm the reversal. A decline in crude oil is likely and would ease inflationary pressures, with the expected fall in long-term yields bullish for stocks, bonds and precious metals.

Nymex Light Crude

Crude oil production remains steady at a massive 13.1 million barrels per day according to the EIA report for the week to May 3.

EIA: Crude Oil Production

Inventories (including SPR) recovered to above 1.6 trillion barrels, while market concerns eased over Iran-Israel tensions.

EIA: Total Crude Oil and Petroleum Products (Incl. SPR) Inventory

Copper

Copper is testing short-term resistance at $10K per metric ton. Breakout is likely and would test major resistance (green) at $10.5K.

Copper

The rise, however, is caused by a production halt at Cobre Panama. Production could be resumed if the mine-owner First Quantum can reach agreement with the new president-elect Jose Raul Mulino. From Reuters:

Mulino, a 64-year-old former security minister, won Panama’s election on Sunday [May 5] with 34% of the vote and said his government would be pro-investment and pro-business, adding that the Central American country would honor its debts, while he vowed to not forget the poor. He won with the help of popular former President Ricardo Martinelli who was barred from running due to a money laundering conviction. Mulino, who served as security minister during Martinelli’s administration from 2009 to 2014, had been Martinelli’s vice presidential candidate and took his place.

Gold & the Dollar

The Dollar Index continues to test support at 105. Respect remains likely, with Trend Index troughs above zero signaling buying pressure, unless Janet Yellen at Treasury intervenes to weaken the Dollar in support of the UST market.

Dollar Index

Gold broke resistance at $2350 per ounce, signaling another advance. But first expect retracement to test the new support level. Respect would confirm a target of $2500 per ounce.

Spot Gold

Shanghai Gold Exchange domestic contract Au99.99 is trading at 553 RMB/gram, equivalent to a USD price of $2380 per ounce at the current USDCNY exchange rate of 7.2268.

Stocks

The S&P closed above 5200 on Friday but a doji candlestick and lower Trend Index peaks indicate a lack of enthusiasm from buyers.

S&P 500

The Russell 2000 small caps ETF (IWM) reflects the lack of broad market support for the rally, with Trend Index peaks below zero warning of selling pressure. Another test of support at 200 is likely.

Russell 2000 Small Caps ETF (IWM)

Financial Markets

Ten-year Treasury yields continue to test the band of support between 4.4% and 4.5%. Recovery above 4.5% would signal another test of 4.7%.

10-Year Treasury Yield

Bitcoin is testing support at $61K. Follow-trough below say $60K would confirm the decline — initially signaled by breach of support at $64K — and warn that financial markets are moving to a risk-off position.

Bitcoin (BTC)

Commercial bank reserve balances at the Fed, however, grew by $78 billion in the week to May 8, indicating that financial market liquidity is improving.

Commercial Bank Reserves

Consumers

Consumer sentiment retreated to 67.4 in the University of Michigan survey for May 2024, but the up-trend continues.

University of Michigan: Consumer Sentiment

Five-year inflation expectations jumped to 3.1% but the three-month moving average, ranging between 2.9% and 3.0%, signals little change in the long-term outlook.

University of Michigan: 5-Year Inflation Expectations

The Elephant in the Room

Last week we published a note suggesting that investors were distracted by short-term noise and ignoring the elephant in the room — the precarious level of US federal debt. The bipartisan Congressional Budget Office (CBO) projects that Treasury debt will grow to a clearly unsustainable 172% of GDP by 2034.

CBO: Debt-to-GDP

The US fiscal deficit is projected to grow from $1.6 trillion in 2024 to $2.6 trillion by 2034. Remember: all projections are wrong, but some are useful.

CBO: Projected Deficits

Often the most useful part of a projection is the underlying assumptions.

Real GDP growth below is a modest 1.5% in 2024, reaching 2.2% by 2026 — nothing controversial there. But the inflation projection is Pollyannaish, assuming a steady CPI decline from 3.2% in 2023 to 2.2% by 2034 — totally unrealistic if the budget deficit is to remain at close to 6.0% of GDP.

CBO: Economic Projections

Assumed inflation (above) also impacts on projected nominal interest rates, with the projected fed funds rate declining to 2.9% by 2027 and 10-year Treasury yields to a low 3.8%. Every 1.0% overshoot in inflation would be likely to cause a similar increase in both long- and short-term interest rates.

The budget projection below is equally unrealistic. Defense spending, the CBO would have us believe, declines to 2.5% of GDP by 2034. Given rising geopolitical tensions with Russia-China-Iran, defense spending is likely to exceed the long-term average of 4.2%.

CBO: Budget Projections

Net interest is budgeted to grow from 2.4% of GDP to 3.9% of GDP by 2034 but is based on unrealistic interest rate projections.

CBO: Interest Rate Projections

Treasury debt is likely to grow a lot faster than projections — because of the likely understatement of both defense spending and interest costs. That means that debt held by the “public” will have to grow a lot higher than the $48.3 trillion projected by 2034. If real interest rates are too low, any shortfall in take up by the public will have to be absorbed directly or indirectly by the Fed.

Conclusion

Rising inventory and easing Middle East tensions have weakened crude oil prices. A long-term decline in crude would be likely to relieve inflationary pressures and allow the Fed to cut interest rates.

Copper is rising steeply due to supply shortages, but prices could fall just as rapidly if the Cobre Panama mine is reopened by the new president-elect.

Gold broke resistance at $2350 per ounce, signaling another advance. Retracement that confirms the new support level at $2350 would offer a target of $2500.

Long-term Treasury yields are testing support. Respect of support is likely and would confirm the recent up-trend.

Perceptions of market risk are rising, with Bitcoin testing support at $61K and the Russell 2000 small caps ETF (IWM) warning of selling pressure.

Financial market liquidity, however, recovered slightly in the last week.

Consumer sentiment continues to trend higher, while long-term inflation expectations remain steady at close to 3.0%.

The elephant in the room remains Treasury debt, with CBO projections understating likely deficits due to unrealistic assumptions for inflation, interest rates and defense spending. Debt issuance by Treasury is expected to exceed demand from foreign investors and the general public, leaving the shortfall to be absorbed by the Fed or commercial banks.

The result is likely to be higher long-term inflation, boosting real asset prices while eroding the value of financial assets.

We are long-term bullish on Gold, Defensive stocks, the Heavy Electrical sector, and Critical Materials (Lithium and Copper). The last two stand to benefit from the energy transition. We are also overweight short-term financial assets with duration of 2 years or less:  Mortgages, Term Deposits and Money Market Funds.

We remain underweight Growth stocks — which we consider overpriced — and long-duration financial assets.

Acknowledgements

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