I want to start by saying that today will be my last day of writing this year. I want to thank you for taking the time to read what I have to say each day. It’s so appreciated as I know we all get flooded with so many emails and things to read and there is just not enough time in the day. Have an amazing holiday, whatever you celebrate, and you’ll hear from me again in 2023.
Yesterday’s rise in Japanese yields sliced the remaining amount of negative yielding bonds in half. We are now down to ‘just’ $685b of bonds that yield less than zero vs $1.33t on Monday and vs $18t at the peak in December 2020. I’ll repeat something I said a while ago, that negative interest rate policy will go down in the history books as the dumbest idea in the history of economics.
Like a magnet, the 10 yr JGB yield rose another 7.2 bps to just under the new 50 bps band at .48%. The 40 yr yield though was unchanged as is the yen after yesterday’s spike rally. The TOPIX bank stock index rallied another 2.6% after yesterday’s 5% bounce but this index is still down 87% off its peak in 1989 in nominal terms. The BoJ monetary policy of flattening the yield curve to a pancake, along with NIRP, has literally killed the profitability of the country’s banking system. If there is any hope of sustainable positive nominal interest rates and any yield curve possible, there is a lot of value in the Japanese bank stocks.
The one to watch from here on who will replace Kuroda as Governor of the BoJ is Hiroshi Nakaso. He was the Deputy Governor of the BoJ from 2013 to 2018 and wrote a book in May titled “The Last Line of Defense: Crisis and the Bank of Japan” where he talked about ending YCC, only focusing on short term interest rates, ending NIRP and shrinking their balance sheet.
$ amount of negative yielding bonds
TOPIX Bank Stock Index
Here are some key comments from the notable earnings calls yesterday,
FDX (a stock we own): “The declining demand trends we saw at the end of Q1 (their fiscal yr) softened further in the second quarter and we are moving faster and with more determination than ever to accelerate our cost actions…Volumes declines continue to accelerate across major product categories both in the US and internationally throughout the second quarter.”
“As we look to the second half of the year, we expect volume declines to begin moderating in Express and Ground by the end of the third quarter with comparisons easing further in the fourth quarter as we lap the onset of softer volumes.”
“I think, the main macro issue in the US is really the e-commerce reset. If you were to just follow along here prior to the pandemic, e-commerce represented about 16% of retail. During the pandemic, it peaked at about 22%. And ever since, it’s been kind of going down. We are probably about 18% or 19% right now. It’s still higher than 16%, but not quite high as 22%. So that’s the part of the reset that’s going on in the US domestic package business.”
NKE: “Our Q2 growth was broad based across our brands, channels, and geographies…Clearly, our brand continues to not only be top of mind but prioritized by consumer around the globe.”
“We believe the inventory peak is behind us as the actions we are taking in the marketplace are working.”
“As I said last quarter, we are taking a measured approach in the 2nd half against an uncertain macro outlook, as we continue to prioritize a healthy pull market. That said, we remain positive regarding the strong consumer demand we see across our portfolio of brands, as well as the health of our product franchises.”
“we are very pleased with the results in China this quarter. And the thing that we’ve been really focused on is the consumer, the Chinese consumer and their connection to Nike, Jordan and the Converse brands.”
GIS: “The operating environment remains volatile. While we’ve seen some modest improvement in recent months, it is still far from pre-pandemic conditions, particularly at our up-stream suppliers…We’ve seen some modest improvements in the supply chain environment in recent months, with logistics challenges continuing to ease and a slight reduction in the level of upstream supply disruptions.”
“Our inflation for the company in the back half of the year will be up double digits. And so it’s not as if we’re entering into a deflationary environment.”
“First of all, we say the economic situation in Europe is more challenging than it is here, particularly driven by energy prices and unemployment, that’s a little bit higher than it is in the US…The second, I would say, is that elasticities in Europe tend to be a little bit higher than they are in the US normally, and we’re seeing that in this environment as well.”
“it’s highly possible consumers will be under more pressure over the next six months. And when that happens, consumers tend to eat at home more rather than eat out more. And so we – it’s very possible we’ll see – continue to see trading into food eaten at home.”
With another drop in the average 30 yr mortgage rate to 6.34%, down 8 bps w/o/w and the lowest since mid September, refi applications rose 6% w/o/w but are still down by 85% y/o/y. For perspective and according to Fannie Mae, of those that have mortgages, 92% are below a 5% rate. 71% are below 4% and about half are less than 3.50%. Purchase applications were flat w/o/w but still down 36% y/o/y. We’ll see November existing home sales at 10am but that will reflect contracts that were mostly signed over the past 2-4 months.
South Korea said exports fell 8.8% y/o/y in the first 20 days of December and follows an almost 17% drop in the same period last month. A 24% drop in chip exports drove the decline product wise and geographically it was down by 27% to China.
Consumer confidence in Germany improved a touch as expected m/o/m but still remains well below zero at -37.8. GFK said “With the third rise in a row, the consumer climate is slowly working its way out of the trough. The light at the end of the tunnel is getting a little brighter.” That said, “The recovery of the consumer sentiment, as we are currently experiencing, is still on shaky ground. If the geopolitical situation were to worsen again, leading to significantly higher energy prices, the light at the end of the tunnel would very quickly become dimmer again or even go out altogether.” European stock markets are bouncing by about 1% with sovereign yields lower and the euro little changed. There is value in European stocks but there always is. We’re long the European oil stocks that trade at half the multiples of the US majors as an example.
Peter is the Chief Investment Officer at Bleakley Advisory Group and is a CNBC contributor. Each day The Boock Report provides summaries and commentary on the macro data and news that matter, with analysis of what it all means and how it fits together.