It was music to my ears when I heard last night the possibility that the administration is considering, upon request of the Chinese, to also roll back the September 1st tariffs on about $110b worth of consumer goods. In return we’ll have to see but it would at least further temper the negative economic impact of tariffs and take us back to where we were on July 31st, the day before they were initially threatened. China buying US ag products to the extent spoken about would take us back to where we were in 2017. So, the point of this whole thing? Hopefully we’ll get as close as we can on IP protection that we were in early May on the deal that was supposedly 90% done.
The stock market highs driven by trade deal hopes, Brexit resolution optimism, another rate cut, and QE4 via Tbills (The Fed’s balance sheet is back over $4 Trillion as they are back to monetizing the US budget deficit) has the CNN Fear/Greed at 86 and ‘extreme greed’ read and the highest level since late 2017 during the euphoria over the tax reform bill. The index, which ranges between 0-100 was 8 one year ago and 67 just one week ago. The market rallied right into mid January 2018 so don’t use this as a timing tool but do realize how much the mood has changed. What separates this index from II and AAII is that it measures what people are actually doing rather than just the emotions of II and AAII. It encapsulates the put/call ratio, the difference in the 20 day return between stocks and bonds, how extended the S&P 500 is above its 125 day moving average, the McClellan volume summation index, new 52 week highs vs 52 lows, the yield spread between high yield and IG bonds, and lastly the VIX. We’ll get the II figure tomorrow and expect a further stretch between Bulls and Bears to around 40.
Treasury yields continue higher, with the 10 yr breaking above 1.8% following weakness in overseas bonds on this trade optimism. The German 10 yr bund yield is higher by 2.5 bps to the least since mid July while the French 10 yr is getting close to zero again at -.03%. This followed a sharp rise in JGB yields of 5 bps but just gets back what if lost late last week. The BoJ again is limiting their purchases of longer term bonds in order to try to steepen their yield curve. I repeat again my belief that the August lows in global bond yields will be the lows for a while as the BoJ and ECB have reached the end of their extreme easing. And any positive news on trade and/or the economy will see yields spike I believe.
Back to the economy, the Federal Reserve’s Senior Loan Officer Survey released yesterday points to a still very mixed situation. Demand for C&I loans softened, which has been seen in the weekly data, but standards were mostly unchanged. About 85% of banks said that investment in plant and equipment weakened in some fashion. Banks tightened standards for commercial real estate loans but demand was little changed. In line with the drop in mortgage rates, residential loan demand picked up while standards were steady.
Covering about 80% of the US economy, today’s October ISM services index will be the most important figure of the week. The estimate is 53.5 vs 52.6 in September which was a 3 yr low.
Overseas, Hong Kong’s October PMI fell further to 39.3 from 41.5 and well below the breakeven of 50. No explanation is needed here. China’s private sector weighted Caixin services index fell a touch as expected to 51.1 from 51.3. That matches the lowest level since October 2018. New orders fell to the lowest since February. For the first time in a while, it was the manufacturing side that outperformed services with respect to expectations in October.
India’s services PMI in October remained below 50 but rose .5 pt m/o/m to 49.2. Singapore’s PMI weakened further below 50 at 47.4. Markit said “Difficulties endured by Singapore’s economy have merely intensified at the start of the fourth quarter, with firms registering historically marked drops in demand and output, as well as cut backs to staffing levels. Weak regional economic activity across Asia has also clearly sent shock waves through the domestic economy, and panelists have subsequently curbed their expectations for the coming year.”
The global $64k question is to what extent this global economic slowdown will be reversed when there is some deal between the US and China.
The UK services PMI in October improved slightly but did get back to 50 from 49.5 in September and vs the estimate of 49.7. Markit said “The outlook improved slightly as a number of firms expected Brexit to be resolved early next year, reducing uncertainty, but overall sentiment remained historically weak.”