The Boock Report

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A funny thing happened on the way to more QE from the BoE

A funny thing happened on the way to more QE from the BoE as some investors wised up and decided to not sell their longer dated paper (15 years+) to the BoE. After all, why give up higher yielding bonds when the alternatives with the cash are pathetic? Why would any insurance company or pension fund sell their longer term bonds? We’ll soon see if this was a summertime blues thing or something more in the next attempt but if it’s the latter and investors are finally saying ‘no mas’, the BoE would join the BoJ in reaching some logistical limits to this experiment. Because of the supposed possible scarcity now on long term gilts, yields fell to .54% in response, so the BoE is getting what they want anyway. I give my sympathy though for many others who are suffering from the collapse in yields and the yield curve.

The BoE was successfully able to buy today’s allotment of 7-15 year paper. The issue yesterday was for those maturities greater than 15 years and the BoE will try again that far out on the curve next week. The 10 yr gilt yield jumped by almost 4 bps off its lows in response.

In my now daily LIBOR look, 3 month LIBOR is now above .80 bps for the first time since May 2009. Again, we know why it’s happening but the key question is whether it falls back down again after the transition from prime to government money market funds plays itself out. Either way for now, $150 Trillion tied to US dollar LIBOR will see a higher cost of capital.

US mortgage applications rebounded after 3 weeks of declines. Purchases rose 2.6% w/o/w off the lowest level since February and are still up by 13% y/o/y. The lumpy recovery continues. Refi applications were up by almost 10% w/o/w and 65% y/o/y.

With one of my key focuses this week being the US consumer and retail earnings, after Coach yesterday cited “significant and unanticipated volatility in tourist spending flows, as well as macroeconomic and promotional headwinds” impacting their business, today Michael Kors said in its release that its business was affected by “the continued decline in mall traffic trends as well as a decrease in tourism in certain major cities which negatively impacted our comp sales performance during the quarter.” Wendy’s seems to have had a better than expected quarter but mentioned “challenging industry conditions” in its release.

After a few months of weak data, Japanese machine orders in June rose 8.3% m/o/m which was above the estimate of up 3.2%. For the quarter, orders were still down 9.2% from Q1 and on a y/o/y basis orders fell .9% y/o/y, the 3rd month in a row of declines. To put this important capital spending number into perspective, the index is at 850. The pre recession peak was 1063. The Nikkei was down slightly overnight and the yen is rallying to a stone’s throw from 100.

French industrial production was really weak in June. It fell .8% m/o/m vs the estimate of up .1%. It’s the 4th month in the past 5 that saw a drop and the y/o/y drop of 1.3% was the most since November 2014. Manufacturing production (capital goods in particular) led the decline as it fell 1.2% m/o/m and 1.5% y/o/y. We’ve already seen the first look at Q2 GDP from France which saw no growth so this data points confirms the weakness. As its pre UK vote, we of course look forward to July and August data to see what, if any, collateral economic damage we’ll see. The CAC is down by .25% along with the rest of Europe.

The number of job openings in June totaled 5.62mm, not far from expectations of 5.67mm but up from 5.5mm in May. Private hiring’s improved by 120k after May’s lowest level since December. As separations fell, the hiring rate rose one tenth to 3.6% but that is no different than what was seen one year ago. The recent high was 3.8% in February. The amount of those quitting their jobs fell back to the April level but the quit rate remained unchanged at 2%. Bottom line, the number is somewhat dated but does correlate with the bounce back seen in the BLS jobs data for June. The trend though remains the same with a slowing pace of job growth but that should not be a surprise as we approach the 8th year of this economic expansion.