The ECB
The ECB is saying that they will cut in half their QE purchases in 2018 to 30b euros per month thru September. He couched it in dovishness by saying they can always increase it if needed and that NIRP will remain in place “well past” the end of QE. They will also reinvest maturing securities just as the Fed did with their balance sheet and this will be “for an extended period of time.” Keep in mind though, if the ECB is actually successful in generating inflation closer to 2% (they are at 1.5%) sooner rather than later, this could change again.
Bottom line, this is pretty much exactly as has been telegraphed. To quantify the reduction in buying next year comes to 450b euros ($530b) from the current run rate. Add $450b of liquidity being taken out by the Fed from Q4 thru the end of next year and we’ll see about $1 Trillion of less liquidity next year. The euro is falling as some thought maybe they would cut QE to as little as 20b euros per month but it still is trading in a range of $1.17-1.18 lately. The German 10 yr yield is down by 3.5 bps to .45%.
In his prepared statement at the press conference, Mario Draghi is doing his best to dilute the impact of his ending QE next year with as much dovish talk as possible. He acknowledges the “solid and broad based growth” being seen in the region but still believes that the outlook is “still reliant on ECB support.” He did mention the “uptick in measures of underlying inflation” but said “an ample degree of stimulus is still needed.” Also, Mario Draghi is purposely not using the word “taper” and instead is calling this a “recalibration.” Semantics. The euro remains weaker right at $1.175 and the German 10 yr bund yield is still down 3.5 bps.
Understand that the ECB is literally running out of bonds to buy according to the current capital key criteria so much of this has to do with logistics. Also, the Germans are losing their tolerance with Draghi. On the tape right now, a German Bundestag member Brinkhaus is saying “ECB step towards exiting QE welcome” and they “must follow with more steps, signal rate change.”
I’ll just say this about the ECB meeting and Draghi press conference. They created one of the biggest bubbles in the history of bubbles in their bond market and now they are going to tell us straight out that it’s time to reverse itself (as dovishly as possible). To quantify the extensive influence they have had on bonds, ECB QE has been 7 times bigger than net issuance of eurozone government debt. The Federal Reserve QE never was more than net issuance. I continue to loath the European bond markets and I still like the euro. Most European stock bourses, while cheaper than the US, I think are now less attractive after the run over the past year.
United States
Initial jobless claims totaled 233k, a touch below the estimate of 235k but up from the 44 year low seen last week of 223k. Puerto Rico and the US Virgin Islands still of course have power issues and its resulting in many applying for claims via the mail instead of online which is slowing the reporting of claims in these regions. The 4 week average of 240k is down from 249k last week. Delayed by a week, continuing claims fell another 3k and are at the lowest level since 1973.
Bottom line, again, we are in the midst of a very modest pace of firing’s as the supply of available workers continues to shrink.
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The first look at the trade deficit in goods in September saw it total $64.1b as expected. That’s up from $63.3b in August. Exports rose to the best level since December 2014 helped by the weaker dollar and rebound in overseas economies. Imports were also higher m/o/m to a 5 month high. While this stat is only on the goods side (services yet to be reported), it won’t change Q3 GDP estimates as of now.
The UK
As measured by this index from the CBI in the UK, retail sales in October literally tanked. Its index fell a whopping 76 pts to -36 from +42 in September, well worse than the estimate of +14. It’s the worst print since the depths of the recession in March 2009. CBI said “It’s clear retailers are beginning to really feel the pinch from higher inflation. While retail sales can be volatile from month to month, the steep drop in sales in October echoes other recent data pointing to a marked softening in consumer demand.” This data point is all the more reason why the BoE needs to raise rates on November 2nd and get some grip back on this rise in inflation. The BoE unnecessarily panicked after Brexit with a rate cut and more QE (including nationalizing its corporate bond market) which in turn sent the pound much lower than it would have gone and now it has a stagflation problem on its hands. The pound is lower on the news but gilt yields are holding steady. The FTSE 100 is up on the weaker pound.
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Even though the Swedish Riksbank said “Economic activity is strong and inflation is close to the target of 2%” they still held its repo rate unchanged at -.50% and doesn’t want to raise it until the summer of 2018. They also want to continue with QE. This out of control policy is all because they don’t want a stronger currency god forbid. Inflation ran 2.3% in September and they have a massive housing bubble on their hands. Yields are negative out 5 years and you can buy a 20 yr bond yielding 1.29%, thus locking in a REAL loss with inflation running almost double that. How is this going to end well?
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Economic sentiment in Italy rose to the best level in 10 years in October. While still 10 pts below its 2007 peak, we will take what we can get in terms of growth from Italy. The 1 pt m/o/m rise was led by ‘retailers’ confidence.’ The Italian stock market is higher by .9% and up by 18% year to date. I recommended buying Italian stocks more than a year ago and my conviction was confirmed when last October at a conference I asked the crowd whether anyone thought of investing in Italy and not one hand was raised.
Asia
Reflecting again the rebound in global trade that we’ve seen for most of this year, Hong Kong exports in September rose by 9.4% y/o/y, well more than the forecast of up 5.9%. Exports to China rose by 7.5%, to the US by 4.1% (but after falling by 5.5% in August and are only up .4% ytd), to Japan by 18%, and to Germany by 39% to name a few destinations. Imports also exceeded expectations with a 9.7% y/o/y rise, almost double the forecast of up 5%. The better trade data came out after the Hang Seng close which ended the day .4 lower. A key thing of note in Hong Kong has been the spike in 3 month HIBOR (interbank lending rate) recently. It was up 13 bps overnight to the highest level since April at .91%. It’s up for the 9th straight day and started this move at .76%. Because the Hong Kong Monetary Authority essentially imports US monetary policy via the peg, this move in HIBOR is closing the gap with US 3 month LIBOR. Keep in mind that this rise in the cost of capital comes with a major bubble in Hong Kong property where good luck buying a 500 sq foot apartment for under $1mm US dollars.
3 MONTH HIBOR