What is most noteworthy this morning is again European bonds and their yields which are again higher. German bund yields in particular are breaking out to the upside. Go back to January 2016 the last time the German 10 yr bund yield was at .54%, up 7 bps on the day and more than double its level of .25% just two weeks ago. The UK 10 yr gilt yield is at a 5 month high. The Italian 10 yr is at a one month high, Spain at a 6 ½ week high and French oat yields are at a 7 ½ week high. In case you missed the story yesterday the ECB is literally running out of German bunds to buy as they are being forced to buy less than the capital key would dictate. As they report their monthly purchases, they are being forced to buy more French and Italian bonds who have greater supply right now. As for the main catalyst today for selling that began around 5am, French bond auctions didn’t go so well. The bid to cover for today’s 30 yr auction was the worst since June 2016 and the yield tailed.
Selling also occurred in Japan overnight as their 10 yr yield closed at .10%. That’s the highest in almost 5 months and is very relevant considering the BoJ policy of yield curve control which is trying to pin this yield close to zero. The 40 yr yield, the area of their yield curve least impacted by BoJ policy, is at 1.08%, up 2 bps overnight and the highest level in 3 months and just 1 bps from the highest close since February 2016. In turn, the US 10 yr yield is now at 2.36-.37%, the highest level in 8 weeks. I’ve argued the biggest risk to US Treasuries is not a breakout in growth and inflation right now but a selloff in bonds in Europe (or popping of the bond bubble there) and Japan and that is now in the midst of happening. Yields of course are still ridiculously low globally but the rate of change here is obvious.
The ECB next meets on July 20th and no policy change is expected but they better come to the table with some discussion of what comes next because telling us they still haven’t discussed another taper would not be good for their credibility. ECB Chief Economist Peter Praet today said “Our mission is not yet accomplished. Maintaining a steady hand continues to be critical to fostering a durable convergence of inflation toward our monetary policy aim.” Praet did acknowledge however that the recovery is “increasingly solid” and they’ve successfully fought off what central bankers hate and consumers love, deflation. The problem the ECB has is they are so deep in easing both via QE and negative rates that they really need to focus on where that puck is going.
German factory orders in May rose 1% m/o/m but that was below the estimate of up 1.9% and after falling by 2.2% in April. The Economic Ministry said “The solid development in orders, as well as the excellent business climate, signal further moderate upward momentum in manufacturing.” European growth story has certainly improved this year thankfully but growth is still expected to be no better than 2% and we’ve seen some more mixed reads over the past month.
I forgot to mention this yesterday and that is about stock market sentiment. Investors Intelligence said Bulls fell by 2.4 pts to 52.5 while Bears were up by .2 pts to 18.8. The balance are those expecting a Correction (long term bullish who want to buy the dip) and were up by 2.2 pts to 28.7. The extreme in sentiment was on March 1st and stocks have essentially done nothing but churn since. Looking at the broad, equal weighted Value Line Geometric index and it closed yesterday 1% below the March 1st close. I’ve been saying this for months, putting aside one’s fundamental/technical view point of the market, looking at it strictly from a sentiment perspective, bullishness needs to cool further in order to provide a better set up for a rally. Looking at the AAII read of individual sentiment saw Bears rise 3 pts to 29.9 off the lowest level since January last week. Bulls were unchanged and are at about the exact same level as Bears at 29.6. Neutral remains the preferred stance at 40.5.