I’m certainly not going to chime in on the factual side of the allegations against Trump and only say what it might mean about the economy and markets. I’ll argue for now, nothing as no matter where it goes in the House, it dies in the Senate. Yes, Washington DC now has something else to obsess about but it will mean much less to Main Street and Wall Street. Now this said, if this starts shifting poll numbers come March and April of next year (whether up or down depending on how things go) then the possibility of a different president could start to matter, particularly if that looks like Warren (and you happen to be in the oil and gas fracking business for example).
Investors Intelligence said sentiment got even more bullish w/o/w and we’ve hit the first level of extreme. Bulls finally got back to the 55ish level at 55.1 vs 53.8 last week. That’s the most since late July while Bears slipped to just 16.8 which is also at a level last seen in July. The spread between the two is now close to 40 at 38.3. Bottom line, from a contrarian perspective with Bulls now at 55, sentiment can no longer be used for the bull case. Yes, it can get more extreme at around 60 but that is a level rarely reached.
With the average 30 yr mortgage rate above 4% for the 2nd week, the MBA said purchase applications to buy a home fell 3.1% w/o/w after 3 weeks of gains. Versus last year they are up 8.8% but it took a 100 bps drop in rates to drive that. Refi’s were down by 15% w/o/w as the recent rate rise cools things down but that 100 bps y/o/y decline in rates still has refi’s up by 104% y/o/y. Bottom line, even with the much cheaper cost of funding, the housing market is a mixed bag. The upper end is dealing with too much inventory and the cap on SALT while the lower end has too little inventory and buyers have the competition from investors who want to rent out single family homes. In between is doing better.
After the really weak UK CBI industrial orders number seen yesterday, CBI reported its data on retail sales today for September. It was less bad, rising to -16 from -49 and that was better than the estimate of -25. CBI said “Five successive months of falling volumes tells its own story about the tough conditions retailers are having to operate in. Add to this the pressures of Sterling depreciation and the need to plan for potential tariffs and supply issues in the event of a no-deal Brexit and you get a gloomy picture for the sector.” It will be amazing that no matter how it goes from here with respect to Brexit, at least knowing where it’s going could clear some clouds in the sky.
I mentioned yesterday the BoJ Kuroda comments about how he still believes that even deeper negative rates on the short end is a good idea (hey, if everyone in Europe is doing it) but also wants a steeper yield curve and higher long rates. Well, the rise in ultra long rates continues as the 40 yr yield was up by 3 bps to .44%, matching the highest level since early June. However, the 10 yr maturity is more relevant with respect to where banks lend on and that yield got more negative at -.255%, down 2 bps and further away from the 20 bps yield curve control plan. Japanese stocks, the proxy for what the BoJ has done to their yield curve, was little changed.
With the German 10 yr bund yield down for a 4th straight day on worries about growth and with the ECB back in the market, the Euro STOXX bank stock index is down 1.5% to a 2 1/2 week low. I include a 5 yr chart overlaying the German 10 yr yield with the Euro STOXX bank index and you can clearly see the relationship.
German 10 yr yield in orange, European banks in white