The United States
If you were wondering why the Fed has ramped up its monetary tightening after a 1.6% GDP growth rate in 2016 followed by 1.2% in Q1 and a move from 58 to -76.5 over the past 3 months in the US Citi Surprise index, I think Patrick Harker’s comments to the FT laid out their thinking very clearly. The FT reported that Harker “stressed that his business contacts were being ‘really pressured’ by demands for wage rises given the strong jobs market and that he expected inflation should eventually assert itself.” Harker went on to say “You look at this labor market and you do have to question when we are going to start to see some increases in inflation. We know from history that when that happens it happens very quickly.” On QT, he said “We need to get on with this” and alluded to the possibility of it starting in September and could come before the next rate hike. Treasuries are not responding to the interview as it still reaffirms what they are hoping to do this year, hike one more time (whether in September or December) and begin QT.
Bottom line, are we approaching the reverse of the David Tepper moment for markets? On September 24th, 2010 on CNBC he laid out two scenarios, both which would be bullish for stocks and was dead right. He said “So let’s see what I got, I got two different situations: One, the economy gets better by itself, stocks are better, bonds are worse, gold is probably worse. The other situation is the Fed comes in with money.” Now, if the economy remains steady and/or gets better, the Fed will keep on tightening and if the economy rolls over, then there is not much room between 1.5% growth and no growth and/or a recession. Just a thought. Here is the link from youtube to that interview, https://www.youtube.com/watch?v=eMx8QimKaMY. You only need to listen to the first minute of it.
In a post Macron election victory, French business confidence in June rose 1 pt to 106 which matches the best level since 2011. It still though remains well below its ’07 peak of 115 but there are now high hopes for real economic liberalization in the bastion of the welfare state. Within the report, the manufacturing component was down 1 pt after rising by 1 pt in May. The services index was unchanged while the Retail Trade index jumped 4 pts to the highest level since 2008. The CAC is lower however with the rest of the region. While there is a lot of bullishness on European stocks, I think deservingly so, keep an eye on the bank stock index as its trading at a two month low today. The direction of ECB policy from here will of course be a huge determinant on their performance in the 2nd half of this year.
With a growing number of BoE members now wanting to raise rates but Mark Carney afraid to because of the uncertainties of Brexit which will take years to unfold, the UK CBI industrial orders index rose 7 pts to +16 instead of falling to +7 as forecasted. This survey of 464 manufacturers is now at the best level since 1988. Yes, a near 30 yr high at the same time the unemployment rate is at the lowest level since 1975, inflation is flaring and BoE monetary policy is set as if there was a 5 alarm emergency fire with rates at multi century lows and a balance sheet that has never been so bloated. The CBI said “This was underpinned by a broad based improvement in 13 of the 17 sub sectors, led by the food, drink and tobacco and chemicals sector. Export orders also improved to a 22 yr high, hitting similar peaks to those seen in 2011 and 2013.” The price index was unchanged and off 9 pts from the February high “but pricing pressures remain strong, with manufacturers continuing to expect a sharp rise in average selling prices.” As of this writing there is no market response as the pound is flat along with the 2 yr note yield but the pressure is clearing growing on Carney to at least take back the emergency 25 bps rate cut after Brexit.