We might get our first inkling as to what “relatively soon” means when Neel Kashkari speaks at a town hall event on Friday afternoon. He believes the fed funds rate should still be at .625% but has expressed his interest in initiating QT. We hear from Mester and Williams the week after. As the September meeting is still about two months away, they really don’t have to answer the question just yet but we can still assume that sooner is earlier than later. While most everyone is so sanguine on inflation, the CRB index yesterday closed at a 2 month high. Copper prices today are up another .5% and up for the 12th day in the past 14.
In case you missed the comments yesterday afternoon from ECB Governor Ewald Nowotny, he said “I think it would be clever to gradually take our foot off the gas. I think the ECB needs to give a clear communication soon on its exit plans, because the current bond buying program runs out at the end of the year. Growth has accelerated and there is no longer a danger of deflation.” He also did express some reservations with negative interest rates as he sees “risk of distortions.” Ya think? It’s what sent the euro above $1.17 at 2pm est yesterday in addition to the response to the FOMC statement where nothing was really new. It’s the persistent weakness in the US dollar and dovish central bankers everywhere that has gold back above its 50, 100 and 200 moving averages. European sovereign bonds are rallying after the US Treasury rally yesterday and are thus not responding to Nowotny’s comments.
We saw yesterday’s widening spread between Bulls and Bears with Bears back at the 60 level and Bears as low as 16.5 in the II data. Today, AAII’s measure of individual sentiment said Bulls fell 1 pt to 34.5 off last week’s highest level since early May but Bears fell 1.5 pts to 24.3, the lowest since November 24th. Ebullient sentiment, an historically low VIX, valuations approaching year 2000 peak and a Fed that will be initiating QT “relatively soon” at the same time the ECB announces another taper will all matter at some point but who the heck knows when or from what market level.
Money supply growth in the eurozone was up by 5% y/o/y in June as expected and the same level as seen in May. Loan growth did slow however. Loans to non financial companies moderated to a 2.1% y/o/y growth rate from 2.5% in May. The ECB tried to explain it away by saying the decline “reflects to a significant extent intragroup transactions.” I’m not exactly sure what that means but we’ll assume for now it’s just a one off then. Loans given to households were up by 2.6%, the same pace in May and the best level since March 2009. The next big data point in the eurozone is Monday’s CPI for obvious reasons.
Hong Kong exports jumped 11.1% y/o/y in June, almost double the estimate of up 6.4%. I would like to say its reflective of strength in global trade but the real increases were all within Asia. Exports to China rose 12.2% y/o/y, to Japan by 13.4%, to India by 38% and Singapore by 18.6%. But, exports to the US were only up by .6% and fell 4.1% to Germany. Imports were up by 10.4% y/o/y, exactly twice the estimate of up 5.2%.
As Q2 GDP numbers continue to trickle in, South Korea said its economy grew by .6% q/o/q and 2.7% y/o/y (vs 2.9% in Q1). I’ve been bullish on the Kospi on cheap valuations and hope for change in the structure of the country’s big conglomerates. I’m hoping that the left of center President who is for raising the capital gains tax on big investors, ramping up public sector hires and raising labor costs by 16% doesn’t become an impediment to growth.
Falling real wages in the UK did not stand in the way of the CBI retail sales index in July as it rose to 22 from 12. That was well above the estimate of 10 and up from 2 in May but this number is literally all over the place. It was 35 in December, -8 in January, +9 in February and March and +38 in April. A spokeswoman at CBI gave the positive spin and also the caveats by saying “The warm summer has added a sizzle to our high streets as shoppers defied expectations, with sales growth in clothing shops and grocers driving overall performance. But while retailers expect a similar pace of growth next month, the factors underpinning their sales growth are more shaky. Although employment is strong, real incomes are falling in the wake of higher inflation, and that’s expected to feed slower consumer spending growth ahead.” The pound is now above $1.31 and at the highest level since mid September in response to this data point. The FTSE though is flat and gilts are rallying with the rest of the region’s bonds.
Lastly, Brazil’s central bank slashed its Selic rate by 100 bps to 9.25%. They have the flexibility to do this because of falling inflation which is down to just 3%. Imagine that in Brazil. Also, Michel Temer in the face of all his political challenges has been able to pass legislation limiting government spending to the rate of inflation and just recently passed a bill liberalizing the country’s labor markets. We now await pension reform but this might be harder to pass. This all comes as a massive corruption crackdown continues in this very corrupt country. I still believe that real change for the better is taking place in Brazil and I remain bullish on its stocks and bonds. The CAPE ratio for Brazil is 10x.