Ahead of the July CPI print today, the 10 yr inflation breakeven stands at 1.63% as of this writing. For reference, the average over the past two years is 1.67% and it stood at 1.80% on the 1st trading day of 2020.
I forgot yesterday to mention the China loan data where the credit creation slowed in July and was below expectations likely as the economy needed less of it as their economy is almost fully open. Even the large gathering Macau is getting a greater flow of visitors as restrictions are lifted. Aggregate loans totaled 1.69T yuan vs the estimate of 1.85T with bank loans making up 993b of this vs the forecast of 1.2T. Lending however is still up about 42% year to date y/o/y so they have the same debt addiction that others do. Put aside what’s going on between the US and China and the terrible outcome with Hong Kong and understand that China will be the most important growth story (particularly the Chinese consumer) in the coming decade that will have reverberations everywhere. Own Asian stocks when looking for return in the next 10 years.
In Europe, all we saw of note was June data with UK GDP a bit better than expected m/o/m (with the 2nd quarter still down 20.4% q/o/q and 21.7% y/o/y) and industrial production for the Euro area about in line with a 2nd month of rebound as factories reopen. The economic hold was purposely dug, and now purposely being filled up. The only question is how long it will take.
Mostly of note in Europe is another day of selling in sovereign bonds which the US in turn is seeing also. Quietly the 10 yr German bund yield is at the ‘highest’ level since mid July at -.44%, up 4 bps today and after a 5 bps increase yesterday. The US 10 yr yield is approaching .68%. I’ll say this again, when we get an effective vaccine, you can kiss goodbye to the greatest financial bubble in the history of financial markets, aka credit and anything priced off it.
GERMAN 10 yr yield
US 10 yr yield
Another leg lower in mortgage rates, that will be reversed with the uptick in Treasury yields this week, to 3.06% drove an almost 7% w/o/w increase in mortgage applications. Purchases rose 2% after two weeks of declines and remain up a solid 22% y/o/y. Refi’s were up by 9.1% w/o/w after last week’s 6.8% decline. The y/o/y increase though continues to slow and is up ‘just 47%’ y/o/y. We know the story in housing.