Firstly, I want to clarify a comment I made yesterday in discussing manufacturing and exports. I mentioned that US exports make up about 10% of the US economy. I should have been more specific in saying that the exports of GOODS are about 10%. Adding in the exports of services brings the combined total to about 14%.
Overseas markets are another mess again today. The Shanghai comp fell 1.7%, the H share index was lower by 2.3%, the Kospi weaker by 1%, the Australian ASX down by the same amount, while the Nikkei was lower by .8% and the Jakarta comp by almost 4%. As seen on the screens this has spilled over into further weakness in Europe with the German DAX in particular falling to the lowest level since May.
The only respite is Italy where bonds there are rallying again as the political leadership is trying to calm fears that the next budget they produce will have a deficit of less than 3% of GDP. The MIB stock index is up too and its helping to rally the EURO STOXX bank index.
In spite of what is going on overseas and in a world that is so interconnected, the Bulls in the US see little risk according to Investors Intelligence. Bulls rose to 60% from 59.6%. That is the highest since late January and II said that when Bulls get to 60+ it “signals elevated risk and the need for defensive measures.” Bears meanwhile slipped down to 18.1% from 18.3% last week. That is the least since April 4th. The balance that are looking for a Correction is at the lowest level since late January. The bull-bear spread is the widest since January 31st. Bottom line, while the Bulls can certainly be right for a period of time, the current extreme both absolute and relative to the bears can’t be ignored. This year stocks have tended to top out and consolidate when getting to a Bull reading of 60+ and they’ve bottomed out and rallied after when they got into the 40’s.
With mortgage rates holding steady near 7 year highs, mortgage applications were little changed w/o/w. Purchase applications to buy a home rose .6% after falling by .9% last week week. The y/o/y gain is a modest 2%. Refi’s fell 1.4% w/o/w and are down by 37% y/o/y. Bottom line, the evidence seen this year is clear, home price inflation that has run more than 3x the pace of consumer price inflation along with the 7 year high in mortgage rates has combined to slow the pace of housing transactions as buyers have called a time out.
The same can be said for vehicle sales where yesterday’s SAAR for August totaled 16.6mm, 200k less than expected and that is the slowest pace of sales since August 2017. “Average transaction prices are up for the industry, as most manufacturers reported gains from the sales mix continuing to shift from cars to SUVs,” Tim Fleming, analyst for Kelley Blue Book, said in a statement. We can add the end of zero percent financing, higher interest rates and less incentives as automakers try to preserve profits.
Higher inflation is a deterrent to higher REAL growth, not a driver of it.
A key factor in the weakness in Asian markets was the decline in the private sector weighted Caixin Chinese services PMI for August to 51.5 from 52.8. That’s the weakest since October 2017. The Singapore PMI fell to 51.1 from 53, India’s slowed to 51.5 from 54.2 and Australia’s dropped to 51.8 from 52.3. Japan’s was up slightly to 51.5 from 51.3. Hong Kong’s was higher too but is still below 50 at 48.5 from 48.2 last month. Markit said worries about business relations with the US is why the business expectations component for the Hong Kong PMI fell to a 20 month low.
In Europe, the August services PMI for the eurozone was 54.4 as expected, in line with the preliminary figure and up a touch from the 54.2 print in July. For comparison, the average this year is 55.2. The domestic, service side of the European economy has held up much better than the manufacturing side. However, Markit said “Geo-political trade tensions ensured that business expectations in the service sector were at their lowest for 21 months in August.”
In the UK, their August services PMI did improve to 54.3 from 53.5 and that was better than the expected figure of 53.9. The business outlook though fell to the lowest since March, “which was attributed to political uncertainty and the unpredictable impact of Brexit on clients’ business operations” according to Markit.
Bottom line to today’s services data and yesterday’s manufacturing figures, there is a clear level of trepidation in overseas economies as we await more news on trade, particularly tomorrow from our Administration and what they will announce about the possibilities of new tariffs.
One last thing, I find it interesting that long bonds have not been a flight to safety in light of what’s going on in overseas markets. The US 10 yr yield is at a 3 week high and Japanese and German yields have been trending higher. We are just 3 weeks away before the net liquidity injection from the Fed, ECB and BoJ goes to zero in Q4 vs $100b per month in Q4 2017.