The 10 yr note auction was weak. The yield of 2.33% was 1 bp above the when issued. The bid to cover of 2.29 was well below the one year average of 2.50 and the 2nd lowest since 2009. Direct and indirect bidders took about 70% of the auction vs the 12 month average of 72%.
Bottom line, the recent back up in yields resulted in a soft auction. The recent fall in yields has also seen inflation expectations in TIPS back off its recent highs. I’ll say this with the 10 yr yield at 2.35%, they have a very different view point of the economic environment and what’s to come compared with the stock market.
The Patriots won the Super Bowl, no not this time but against the Eagles. Million Dollar Baby won Best Picture, Mariah Carey’s We Belong Together won best song, the Rolling Stones embarked on the biggest grossing tour of the 2000s (A Bigger Bang Tour it was called) and George W. Bush started his 2nd term. The year is 2005 and that is also the last time we’ve seen this many Bulls in the weekly Investors Intelligence survey. Bulls rose to 62.7, the most since January of that year, up from 61.8 last week. Bears fell .9 pts to just 16.7, the least since July 2015. The 46 pt spread between the two is the highest since January 2014. Looking back to 2005, the S&P 500 was up 3% in but all because of a rally in November and December. By early November 2005, the market was flat on the year and thru April the S&P 500 was down 6%. Bottom line, extremely bullishness sentiment doesn’t mean we have to go down but history shows that at least for a while, most of the gains are in. Thus, the necessary condition to fuel another rally from here is a cooling off of this ebullience as right now is not a good starting point.
Mortgage applications on the week were up slightly. Purchases grew by 1.8% and are up 3.6% y/o/y while refi’s were higher by 2.2% but are still down 40% y/o/y as the average 30 yr mortgage rate is up about 50 bps y/o/y. As for purchases and stated here many times, without an acceleration of first time households wanting to buy, the housing market’s glacial recovery will likely continue. The market needs more lower priced new homes to satisfy the demands of this buyer.
We’re seeing another day of a rise in gold and earlier we saw dollar strength. What’s that saying? That all fiat currencies are flawed and no one wants theirs to rise? I believe so.
The pound is little changed as are Gilts the day after Kristin Forbes, a Bank of England member, said
“It will become increasingly difficult for me to justify tolerating such a large and likely overshoot of inflation, especially when compared to such a small and uncertain softening in growth and unemployment…If the real economy remains solid and the pickup in the nominal data continues, this could soon suggest an increase in bank rate.”
Adding to the inflation pressures, a January survey by the Recruitment and Employment Confederation, REC and IHS Markit Economics said their Permanent Salaries index rose to a 9 month high. Mark Carney cut rates and expanded QE as an emergency step after Brexit and that emergency never came to pass. If he was a prudent central banker he would at least take back the rate cut. The purchases of corporate bonds seems to be ending soon.
European bank stocks are trading poorly for a 3rd straight day and the Euro STOXX bank index traded at a 3 month low with French banks again leading the way. After all, the negative ECB deposit rate of 40 bps is still a punitive tax they are dealing with.