Assume at 8am est the BoE will finally get off its arse and hike rates by 25 bps more than one year after it cut by the same amount because they feared the end of the world after the Brexit vote. The only question is whether they plan a few more in 2018 or this is a one and done for a while. The 2 yr Gilt yield is at a crucial spot at .50%. It matches the same level of one week ago which is the highest level since June 23rd 2016, the day of the Brexit vote when it sat at .52%.
Jerome Powell, meet the new boss, same as the old boss!? I hope he doesn’t mind getting tweeted about when the going gets tough. He gets to preside over the bulk of QT. Good luck. Buy gold and then sell it in a few years at higher prices.
Following the extreme bullish sentiment read in Friday’s Investors Intelligence figures, the much more fickle and volatile AAII measure of individual investors got more bullish. Bulls rose 5.4 pts to 45.1, the most since the first week of January. Bears fell 4.5 pts to 28.6 but basically gives back last week’s 5.1 pt rise. The one year average in Bears is 31.2.
Notwithstanding the take no prisoner desire for 2% inflation, we know the BoJ has been in a subtle taper as they focus more on yield curve control. They are on track to buy about 60T yen of assets this year instead of the stated goal of 80T. Here is a chart on the rate of change at which they are adding to their balance sheet reported overnight and while still robust at up 14.5% y/o/y, the pace is the slowest since early 2013 and was as high as 56% in 2014.
BOJ MONETARY BASE OUTSTANDING YOY
Japanese consumer confidence for October rose .6 pts to 44.5 and that was about 1 pt above the estimate. It is also the best level since September 2013. Its recent peak was 45.4 in the heart of the Abenomics enthusiasm back in September 2013. Importantly the Income Growth component rose .7 pts, the highest since May 2007 and maybe this is the beginning of something as the consumer has been the key missing link of the uneven Japanese economy since Abe took office. The yen is a touch higher off a 6 month low and the Nikkei powered up again by .50% and at a fresh 21 ½ year high. Corporate Japan is back with higher ROE’s and more shareholder friendly managements.
The eurozone manufacturing PMI from Markit for October was basically left unrevised at 58.5 with the first print of 58.6. It is at an 80 month high with every single country in the region reporting “increases in output, new orders and employment.” Even Greece, although it fell a touch m/o/m. Employment rose to a record in this survey. While the ECB did not get what it wanted in the CPI figure this week, the commentary in the press release today has price pressures written all over it: “Capacity pressures also impacted on supply chains during October, as reflected by a further substantial lengthening in vendor lead times. Delivery times increased to the greatest extent in 6 ½ years, with especially severe lengthening signaled in Germany, France, Austria and the Netherlands. Robust demand for raw materials and associated shortages of certain inputs both contributed to the latest increase in vendor lead times. The development of sellers’ markets for a number of purchased items also led to an increase in their cost. Average input prices rose at the fastest pace in 6 months, with stronger inflation signaled in almost all of the nations covered (the exception being Ireland). Part of the increase in purchasing costs was passed on to clients in the form of higher selling prices. Output charges rose for the 13th successive month, with the rate of inflation rising to its highest since June 2011.”
I wonder and hope Mario Draghi reads this press release. The euro is higher, sovereign yields are lower while the 5 yr 5 yr euro inflation swap is unchanged at 1.66% and quite a distance from a negative .40% deposit rate. The DAX is taking a breather off its record high close yesterday.
Speaking of Germany, the number of unemployed fell by 11k in October, about as expected and their unemployment rate held at 5.6%, the lowest since Checkpoint Charlie went down. German bund yields are still negative out 7 years.
For those not watching and who are worried about low inflation, the CRB commodity index yesterday closed to match an 8 month high. In this chart you can see the pretty good relationship over the past year of inflation expectations in the TIPS breakeven and the CRB index:
CRB INDEX IN ORANGE, 10 YR INFLATION BREAKEVEN IN WHITE
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.