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Peak growth versus abundance liquidity

Major US benchmark stock indices have continued its bullish ascend overnight with the S&P 500 up +0.60% and retested its all-time high level of 4,429 printed on 29 July while the technology heavy weight, Nasdaq 100 added a gain of +0.65% and rocketed to a fresh all-time high of 15,184.

It seems that risk assets have shrugged off the “peak growth” narrative for now. So, what is “peak growth”? In layman terms, it refers the “V-shaped” global economy recovery seen in the first half of 2021 spurted by massive troves of fiscal stimulus packages coupled with ultra-loose monetary policies to cushion the drastic downturn triggered by the Covid-19 pandemic is likely to have hit a plateau. Therefore, it increases the risk of a potential 20% correction in the major US stock indices that may occur between the end of 2021 and early 2022. Here are the recent data releases and cross asset observations that could have intensified the peak growth narrative.

  • China’s manufacturing and services activities have slowed down significantly for the month of July. The official NBS Manufacturing PMI fell to 50.4 from 50.9 recorded in June, its fourth consecutive month of declining growth and its weakest pace of increase in factory activities since a contraction in February 2020. Likewise, for the services sector, the NBS Non-Manufacturing PMI for July inched lower to a five-month low of 53.3 from 53.5 seen in the previous month.
  • US’s manufacturing activities seems to have hit a ceiling in July where the ISM Manufacturing PMI fell to 59.5 from 60.6 in June, its second consecutive month of slowdown and its weakest growth reading in six months.
  • US ADP private sector employment change report for July has painted a lacklustre US job market; 330,000 jobs were added in July, well below consensus forecast of a 695,000 rise and June’s downward revised figure of 680,000 increase. It was the softest pace of job creation since February that indicates a soft patch in US labour market recovery amid an increase in new Covid-19 infection cases across US.
  • High-yield credit market that consists of corporations with lower and “junk status” credit ratings has started to see a bit of headwind. The share price of the SPDR Bloomberg Barclays High Yield Bond ETF has underperformed its “risk-free” counterpart, the iShares 20+ Year Treasury Bond ETF by -10% since mid-May 2021, the widest level of underperformance since March 2020.

On the other hand, the liquidity backdrop is still “encouraging” for risk assets such as equities. The Chicago Fed National Financials Conditions Index (NCFI) has recorded its latest weekly reading of -0.69 for the week ended 30 July, a relative low level not seen since 27 June 2014 level of -0.77. Positive values of NFCI indicate financial conditions that are tighter than average while negative values indicate financial conditions are looser than average, an environment of “abundance liquidity”.

Chicago Fed National Financials Conditions Index

source: FRED click to enlarge chart

Another indirect liquidity factor we can observe and analyse will be via direct tradeable “risk proxy” financial instruments such as the AUD/JPY foreign exchange cross rate. A bullish trending AUD/JPY indicates on the average a risk-on environment which implies looser financial conditions. In contrast, a bearish trending AUD/JPY represents an indirect tightening of financial conditions due to a risk-off environment.

As illustrated below on the weekly technical chart of AUD/JPY, its major bullish trend in place since March 2020 low of 59.90 remains intact as latest price actions manage to hold above its 50-week moving average and the 78.00 long-term pivotal support. Hence, technical analysis of AUD/JPY advocates a potential risk-on environment which implies a supportive environment for risk assets in general.


Holding above key long-term pivotal support & 50-week MA

source: TradingView click to enlarge chart

Overall, it seems that the peak growth narrative has been negated by supportive liquidity factors which in turn are providing ammunition for on-going the bullish herding behaviour in the US stock market for now. Will Jackson Hole Economic Policy Symposium on 26 August 2021 be the game changer? Caveat emptor as Fed Chair Powell may make use of the symposium to offer a clearer guidance on the start of a QE taper that could alter the dynamics of the current liquidity equation.


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