Another day and another discussion about Japanese bonds because oh man, what a night. With the BoJ now saying that they will tolerate a 20 bps band around the zero yield on 10 yr JGB’s from 10 bps previously, that was just an open invitation for a test. Overnight the 10 yr yield spiked by 7 bps to .13%. That is the highest level since January 2016 and compares with .035% one and half weeks ago. The 40 yr yield was up by 6 bps to .93%. I know, these yields are still very low but that is not the point, it is the direction and it is the correlation among global bonds that is bearing fruit. European bond yields are up across the board and the US 10 yr yield is right back to 2.98% from 2.95% yesterday. The German 10 yr is up 2.5 bps to .47%, a 6 week high. The UK 10 yr gilt yield is up by 3 bps to also a 6 week high ahead of a rate hike tomorrow.
Bottom line, any discussion on where the US yield curve goes has to include the direction of Japanese and European bonds as their central banks try to tip toe their way away from extreme easing. I expect a steepening from here for the sole reason that rates are rising in Japan and Europe.
10 YR JGB YIELD
The 7 bps w/o/w rise in mortgage rates to 4.84% to just below a 4 year high, because of the rise in Japanese yields that lifted US rates, led to a 3.1% w/o/w drop in mortgage purchase applications to buy a home and which are up just 1.2% y/o/y. Refi’s fell 1.7% w/o/w and are lower by 29% y/o/y. We’ve seen enough data this year to know that the housing market for now has plateaued.
Notwithstanding the selling in big cap tech over the last week, professional newsletter writers as measured by Investors Intelligence remained pretty bullish as Bulls fell only modestly to 54.5 from 54.9 last week while Bears ticked up by .2 pts to 18.8. Any Bull read in the mid 50’s or higher is considered the upper end. With respect to the low level of Bears, still, II said “This category shows little fluctuation over the last few months and most editors are not worried that the bull market is over.”
Ahead of the US ISM manufacturing index at 10am est, we saw a slew of overseas ones. China’s private sector weighted Caixin PMI fell to 50.8 from 51. That is the slowest in 8 months and Caixin said “Notably, new export orders fell at the steepest pace for 25 months” and “Optimism towards the year ahead remained subdued amid concerns surrounding tough market conditions, strict environmental policies and the potential impact of the US-China trade war.” The Shanghai comp reflected this and not well to another Trump threat of more tariffs ahead of high level discussions between Mnuchin and Liu as it fell 1.8% overnight.
Elsewhere July PMI’s fell m/o/m in South Korea to 48.3, in Japan to 52.3, in Taiwan to 53.1, in Thailand to 50.1, in the Phlippines to 50.9, in Vietnam to 54.9 and India to 52.3. The only gains seen were .2 pt increases in Malaysia to 49.5 and Indonesia to 50.5, both essentially flat lining around 50. Also of note in the analysis of global trade trends, South Korean exports rose 6.2% y/o/y, below the forecast of up 7.4%. South Korea is an important proxy and measure of trade. It’s clear that business confidence overseas has gotten impacted by what’s going on in China and with tariffs.
The July European manufacturing PMI was left unrevised at 55.1 vs 54.9 in June and 55.5 in May. Similar to what China is experiencing, “July saw new export business increase at the slowest pace since August 2016.” There was also “the smallest rise in order book backlogs for two years. The clear implication is that manufacturers may have to adjust production down in coming months unless demand revives” according to Markit. Due to worries about “trade wars, tariffs and rising prices, as well as general uncertainty about the economic outlook, optimism about the future remained at one of the lowest levels seen over the past two years.”
The UK manufacturing July PMI fell a touch to 54 from 54.3. The estimate was 54.2. The UK was not hurt by exports as they rose to a 6 month high but instead “the domestic market was the main focus of the slowdown in new business growth.” Maybe related to Brexit uncertainty. Due to still intense cost inflation, there was “the steepest rise in selling prices since February.”
As expected, the Reserve Bank of India hiked interest rates by 25 bps as they feel the same pressure as other emerging markets with weakening currencies and rising inflation. The Sensex index is just off a record high and the rupee is rallying.