….Yet as the world’s second-largest economy continues to slog through the aftermath of its debt-driven economic miracle-cum-titanic housing bubble, policymakers put their best foot forward – with Chinese characteristics. Thus, aggregate financing fell by nearly RMB 200 billion in April from the prior month, data released over the weekend show, marking the first outright contraction in that metric of broad credit availability in nearly two decades.
True to form, the government looks to sweep those inconvenient figures under the rug, as Bloomberg relays that seven separate research notes from local brokerages commenting on that data release were scrubbed from the WeChat social media platform as of this morning.
Then, too, regulators have switched off live trading data showing foreign investment flows on the mainland Shanghai and Shenzhen exchanges via the Stock Connect trading link. That move, which was telegraphed in an April announcement, follows word that foreign direct investment registered at just $10.3 billion during the first quarter, down 56% from the first three months of 2023.
~ Jim Grant, Grant’s Almost Daily
ASX sector performance
The ASX 200 jumped sharply yesterday but ran into resistance at 7800 today. Declining peaks on the Trend Index warn of secondary selling pressure and another test of support at the recent lows (orange line) is likely.
The 6-month chart shows the up-trend losing momentum. Breakout above 7900 is less likely but would offer a target of 8200.
Economy
The real cash rate (cash rate minus CPI) remains close to zero, reflecting easy monetary policy despite rate hikes in 2023.
But declining credit growth warns that economic growth is slowing.
Consumer sentiment is lower than in the 2008 financial crisis — the result of high inflation from negative real interest rates after the pandemic.
Sectors
The 6-month chart of Financials shows the up-trend losing momentum, as with the ASX 200.
Net interest margins of the major banks remain under pressure.
Consumer Staples are in a down-trend after breaking primary support (red below). Trend Index peaks at zero warn of selling pressure.
A-REITs are still in an up-trend but declining Trend Index peaks warn of selling pressure.
Health Care threatened a primary down-trend after breaking support at 42K but has since recovered — a bullish sign.
Consumer Discretionary is also losing momentum — similar to Financials.
Telecommunications are in a strong down-trend, with the Trend Index breaking below zero.
Information Technology is outperforming, with accelerating trendlines and rising Trend Index troughs above zero.
Utilities is another bright star, displaying similar accelerating trendlines and rising Trend Index troughs above zero.
Energy is testing primary support at 10K with a bearish Trend Index declining below zero.
The ASX 300 Metals & Mining index is attempting a recovery. Breakout above 6100 would be a bullish sign, while respect would warn of another test of primary support at 5600.
The All Ordinaries Gold index is in a strong up-trend. Respect of support at 7500 would signal another advance with a target of 8500. Breach of support, however, would signal another test of 7000.
Conclusion
The ASX 200 is losing momentum. So are Financials, A-REITs and Consumer Discretionary.
Staples and Telecommunications are in a down-trend and likely to be joined by Energy.
Health Care and Metals & Mining show signs of recovery but further confirmation is needed.
The All Ordinaries Gold index is in a strong up-trend. Respect of support at 7500 would confirm another advance but breach of support, while less likely, would test 7000.
Acknowledgements
- RBA Chart Pack: 8 May 2024
S&P 500: Upside limited, while downside risks grow
Corporate profits (before tax) ticked up slightly in the second quarter of 2019 but remain below 2006 levels in real terms. The chart below shows corporate profits adjusted for inflation using the GDP implicit price deflator.
Growth in production of durable consumer goods remains week, reflecting poor consumer confidence.
The chart below shows growth in bank credit and the broad money supply (MZM plus time deposits). Credit growth (blue) remains steady at around 5%, slightly ahead of nominal GDP growth (4.04% for 12 months ending June); a healthy sign. Broad money (green) surged upwards in the first three quarters of this year. Not an encouraging sign when there were similar surges in broad money before the last two recessions.
The S&P 500 is testing resistance at 3000. Bearish divergence on Twiggs Money Flow warns of secondary selling pressure. Expect a test of support at 2800. Breach would flag a reversal, with a target of 2400.
The cyclical Retailing Index displays a similar pattern, with resistance between 2450 and 2500.
Our view is that upside is limited, while downside risks are growing.
On the global front, the outlook is still dominated by the prospect of a prolonged US-China trade war. More great insights from Trivium China:
Tariff delays may be aimed at creating warm, fuzzy feelings before the next round of talks in early October, but……These small gestures do nothing to resolve the underlying trade conflict. We’re still pessimistic on prospects for a deal.
Zhou Xiaoming – China’s former top diplomat in Geneva – expressed the same view in a recent interview (Guancha):
“The two sides disagree too much on the objectives of the negotiations……It is almost impossible to reach an agreement in the short term.”Zhou urged Chinese officials to be clear on the US’s objective:
“Economic and technological decoupling is the objective of the entire US government.”Zhou said that officials must prepare for that potentiality, even if it is not their desired outcome.
So should we.
Dow Jones – UBS Commodity Index found support at 76 before rallying to 79. Rising troughs on the Trend Index reflect increased support. Consolidation between 76 and 81 is likely but we maintain our bearish long-term outlook for commodities.
On the global front, weak crude oil prices flag an anticipated slow-down in the global economy. Trend Index peaks below zero indicate selling pressure. Breach of support at $50/$51 per barrel would be a strong bear signal, warning of a decline to $40 per barrel.
We maintain our investment in quality growth stocks but have reduced equity exposure to 40% of (International Growth) portfolio value.
Australia: The elephant in the room
June quarter real GDP growth slowed to an annual 1.4%, the lowest since the 2008 global financial crisis (GFC). Major contributors to growth are household consumption, public demand and exports; while the biggest handbrake is investment.
A quick look at the RBA chart shows that consumption is slowing but at a slower rate than disposable income. Households are dipping into savings to support consumption, with the savings ratio (savings/disposable income) declining to near GFC lows.
Gerard Minack warned of the danger that households will dramatically increase savings, and cut consumption, if employment prospects grow cloudy.
That brings us back to investment. Low investment is a drag on employment growth.
Low interest rates, on the other hand, are a tailwind at present. They seem to have shored up housing prices,
And states are taking advantage of ultra-low interest rates to boost infrastructure spending.
But low interest rates are a double-edged sword. Bank net interest margins are under pressure.
And credit growth is plunging.
The housing recovery will be short-lived if there is not a dramatic increase in loan approvals.
AMP chief economist Shane Oliver believes that:
“growth will remain soft and that the RBA will have to provide more stimulus – by taking the cash rate to around 0.5% and possibly consider unconventional monetary policy like quantitative easing. Ideally the latter should be combined with fiscal stimulus which would be fairer and more effective. While Australian growth is going through a rough patch with likely further to go, recession remains unlikely barring a significant global downturn.”
But that ignores two factors:
- increased pressure on bank net interest margins from lower interest rates; and
- the elephant in the room: China.
China’s economic model is built on a shaky foundation and trade war with the US is likely to expose the flaws.
Chinese leaders are growing increasingly worried about the economy. Premier Li Keqiang said at this week’s State Council meeting:
“The current external environment is increasingly complex and grim.
….Downward pressure on the domestic economy has increased.”
(Trivium)
BEIJING, Sept. 5 (Xinhua) — Chinese and U.S. chief trade negotiators agreed on Thursday to jointly take concrete actions to create favorable conditions for further consultations in October.
The agreement was reached in a phone conversation Chinese Vice Premier Liu He, also a member of the Political Bureau of the Communist Party of China Central Committee and chief of the Chinese side of the China-U.S. comprehensive economic dialogue, held upon invitation with U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin. (Xinhua)
…Extend and pretend. Neither side wants a full-blown trade war. But they are miles away from an agreement.
S&P 500: Expect slower earnings growth but no sign of recession
Credit growth in the US above 5% shows no signs of tighter credit conditions from an inverted yield curve. Growth in the broad money supply (MZM plus time deposits) has also not slowed, remaining close to 5%.
Growth in hours worked has slowed to 1.71%, suggesting that real GDP growth will dip below 2% in 2019 but remain positive.
The Fed is unlikely to cut interest rates when average hourly earnings are growing at 3.2% (Total Private for the 12 months ended March 2019).
The Leading Index from the Philadelphia Fed fell below 1%, giving an early warning that GDP growth will slow.
A similar dip below 1% occurred ahead of the last three recessions. A second, stronger dip would warn of recession ahead.
The S&P 500 is advancing to test resistance at 2950/3000, while the Volatility Index crossed below 1%, signaling that risk is no longer elevated.
Real GDP is likely to slow this year but remain positive. S&P 500 earnings growth is expected to slow and the index is likely to meet stubborn resistance at 2950/3000. The Fed is still a long way off cutting interest rates (a strong bear signal) and there is no sign of recession on the 2019 horizon. An extended top is the most likely outcome.
ASX 200 spikes but will it last?
The reason for the upward spike in the ASX 200 is clear. While shortage in iron ore supply may be temporary, while Brazil reviews mine safety, it is sufficient to cause spot prices to jump 20% in the last week.
Windfall profits are likely to benefit not only the Materials sector but the entire economy over the next few months. The ASX 200 Materials Index ran into resistance at 12500 while a bearish divergence on Money Flow continues to warn of selling pressure.
The ASX 200 broke resistance at 6000 but remains in a bear market. Reversal below 5650 would signal a primary decline, with a target of the 2016 low at 4700.
ASX 200 Financials Index rallied on release of the Royal Commission on Banking final report. The outcome could have been a lot worse, or so the market seems to think.
I suspect the bank rally will be short-lived. Credit growth is falling and broad money warns of further contraction.
House prices are falling and concerns over a slowing economy have caused many to call for further rate cuts. I believe this is short-sighted.
One of the biggest threats facing the economy is ballooning household debt. Tighter credit and falling house prices are likely to curb debt growth….provided the RBA doesn’t pour more gasoline on the fire.
I have been cautious on Australian stocks, especially banks, for a while, and hold more than 40% in cash and fixed interest investments in the Australian Growth portfolio.
CPI rises but US stocks rally
June consumer price index (CPI) jumped to 2.8% but forward estimates of inflation, represented by the 5-Year breakeven rate (5-year Treasury yield minus TIPS) remain subdued at 2.06%.
Core CPI (excluding food and energy) is at 2.2% while average hourly earnings (total private: production and non-supervisory employees) annual growth, representing underlying inflationary pressure, is higher at 2.7%.
Credit and broad money supply (MZM plus time deposits) growth remain steady, tracking nominal GDP growth at around 5.0%. A spike in credit growth often precedes a similar spike in broad money supply by several quarters.
And a surge in broad money supply growth, ahead of nominal GDP, flagged rising inflationary pressures ahead of the last two recessions, prompting the Fed to step on the brakes.
Overall, the inflation outlook appears subdued, with little urgency to hike interest rates at present.
The market is also getting more comfortable with the idea of trade tariffs. The S&P 500 is testing resistance at 2800. Breakout is likely and would suggest a primary advance to 3000.
The Nasdaq 100 followed through above 7300, confirming the primary advance, with a target of 7700.
This is the final stage of a bull market but there is no sign of it ending. I am wary of the impact of a trade war on individual stocks and have reduced exposure to multinationals that make a sizable percentage of their sales in China.
Financial markets are supposed to swing like a pendulum: They may fluctuate wildly in response to exogenous shocks, but eventually they are supposed to come to rest at an equilibrium point…. Instead, as I told Congress, financial markets behaved more like a wrecking ball, swinging from country to country and knocking over the weaker ones. It is difficult to escape the conclusion that the international financial system itself constituted the main ingredient in the meltdown process.
~ George Soros on the 1997 Asian Financial Crisis and the need for greater regulation of global financial markets
Low inflation risk keeps yield curve safe
The Fed is advancing interest rates at a measured pace, with the objective of restoring balance in financial markets rather than to curbing inflationary pressures. Only if inflation spikes is the Fed likely to adopt a restrictive stance.
Elliot Clarke from Westpac sums up the FOMC (Fed Open Market Committee) view from their latest minutes:
Beginning with inflation, whereas the market has recently been concerned that inflation may be getting away from the FOMC (given annual CPI inflation at 2.5%yr and persistent strength in the oil price), the Committee is unperturbed.
Instead of the CPI, the FOMC’s benchmark remains PCE inflation, which is currently 2.0%yr on a headline basis and 1.9%yr for core…..
To see upside inflation risks build, a stronger wage inflation pulse is necessary. At present the employment cost index is only reporting “a gradual pickup in wage increases”, and the signal from other wage measures is “less clear”. Two other important considerations for the pass through of wages to activity and thus inflation is that real hourly earnings growth is currently flat and the savings rate near historic lows. The capacity of households to boost consumption and thus inflation is therefore very limited.
Hourly wage rates are growing at a gradual pace.
Personal savings are low.
And credit growth is modest.
So not much sign of inflationary pressure.
….Turning to financial conditions, as yet there is no concern of them becoming an impediment to growth or policy. The 10yr yield has moved back to the highs of 2013, but the US dollar has only partly retraced its 2017 depreciation. Further, asset markets remain near recent highs.
Equally significant however is the reference to being nearer neutral and a clear desire to keep the yield curve’s positive slope…..
We do not believe that the yield curve will invert in this instance, in part because higher deficits should see the term premium rise. However, the curve will remain comparatively flat versus history, restricting both the timing and the scale of further rate hikes. This is a key justification for both the market’s and our own view of only two further hikes in 2018 and two more in 2019 – a stark contrast to the FOMC’s seven hikes to end-2020.
A negative yield curve — when 10-year minus 3-month Treasury yields falls below zero — would give a strong recession warning. But the yield curve is only likely to invert if the Fed steps up interest rate increases. With little sign of rising inflationary pressure at present, the prospect seems remote.
RBA strategy: Fight fire with gasoline
This is just plain wrong.
The Australian economy is sitting atop an enormous housing bubble caused by credit expansion from 1995 to 2007. To counter the end of the mining boom, the RBA lowered interest rates to stimulate the economy. While this may be necessary to relieve pressure on borrowers, what we don’t need is another credit expansion. That would simply make the economy more unstable and increase the risk of a crash. Banks are moving to curb lending to speculators, with lower LVRs, but not fast enough in my view. We can’t afford a credit contraction, but the RBA needs to impose sufficient discipline to keep credit growth at/below the inflation rate — so that it gradually declines in real terms as the economy grows.
GOLDMAN: Here’s The Simple Reason We’re Probably Not About To Have Another Huge Crash | Business Insider
From Joe Weisenthal:
Historical analysis of past big busts done by top economist Jan Hatzius and Sven Jari Stehn shows that while there is growing risk of a stock market drop because of the big rally we’re missing one of the key preconditions needed for a true bust: high credit growth.
They write: “[C]redit growth is the most important predictor of house price busts, especially when we focus on busts that involve a recession. House price busts have also tended to follow periods of high inflation, high equity volatility and large current account deficits, although all of these effects become less pronounced when we focus on recessionary busts….”