Bulls / Bears
Bullish stock market sentiment has gotten extreme again according to Investors Intelligence. Bulls rose 2.9 pts to 60.4 after being below 50 one month ago. Bears sunk to just 15.1 from 17 last week. That’s the least amount since May 2015. The spread between the two is the most since March and II said “The bull count reenters the ‘danger zone’ at 60% and higher. That calls for defensive measures.” What we’ve seen this year the last few times Bulls got to 60+ was a period of stall and consolidation. When the bull/bear spread last peaked in March, stocks chopped around for 2 months. Stocks then resumed its rally when bulls got back around 50. Expect another repeat. I started the year saying 2017 would be a tug of war between the hopes for tax and regulatory changes on one hand and the tightening of monetary policy on the other. Tax reform hopes has certainly trumped the tightening of monetary policy (the ECB and BoJ easing dramatically offset modest Fed tightening and definitely helped), for now. In 2018, we will however see the ECB join the Fed (I view tapering as a form of tightening) but also the actual passing of tax cuts.
As for the ECB and their meeting 2 weeks from tomorrow, ECB Governing Council member Ignazio Visco in an interview last week that was published today said bring on the tapering. “Start of a gradual process of monetary normalization would be welcome news. It would signal the materialization of sizable and self sustained improvements in inflation and economic activity.” I’ll bottom line this very simply as we approach 2018, where European bond yields go in response to the possible end to ECB QE (in terms of expanding the balance sheet as they will continue reinvestments) may very well drive global interest rates and thus global stocks. Don’t forget the epic bubble that is the European bond market. The ECB though will do its best to keep it alive by keeping negative interest rates in place until 2019. On this last point, European banks won’t be happy. The Euro STOXX bank index peaked around the same month NIRP began in June 2014.
I don’t think we need another reminder that the Fed is raising rates again in December but voting member and typically dovish Charlie Evans this morning said “if anything, US fundamentals are getting better” in his opinion. He however continues to be flummoxed and obsessed in getting higher inflation and said survey expectations on inflation has him “nervous.” Charlie, please step into a Wal-Mart one night at around 11:50pm right before shopper wages flow into their debit cards and explain to them why higher inflation is a good thing.
With another 4 bps rise in the average 30 yr mortgage rate to 4.16%, the highest since the end of July, refi applications fell for a 4th straight week and by 4.2% w/o/w to the lowest since mid July and are down 38% y/o/y. Purchase applications to buy a home were unchanged vs last week but are still up 7.4% y/o/y. The pace of transactions has basically flatlined for both new and existing homes over the past year with the issue of low inventories, aggressive 5-6% annual price increases and the high cost of labor, lots, raw materials and permitting that are limiting the supply of lower priced new homes that is most in demand by first time households that are still more inclined to rent than buy.
In what is always a very volatile monthly figure, Japanese August core machinery orders rose 3.4% m/o/m vs the estimate of up 1%. This follows an 8% jump in July and 3 prior months of declines. Since Abenomics took hold, the Japanese recovery has been very uneven with households basically sitting out the rebound. The industrial and export side pretty much drove the bus and that continues. Optimism after today’s number sent the Nikkei to a 20 yr high. Another double from here will finally get it above its 1989 peak. The yen is up slightly while JGB yields were little changed.
After a sharp rally in the last two days, the yuan is off by 1/3 of a percent against the US dollar. The daily moves this week have certainly picked up ahead of next week’s Party Congress. Chinese stocks were mixed overnight with a slight rise in the Shanghai comp and very tiny fall in the H share index.
In quantifying the relatively solid European economic rebound this year, at least for Germany, its government raised its 2017 growth forecast to 2% from the 1.5% they were expecting in April. They said “capacity utilization is good, employment continues to rise and consumer prices remain stable.” The 1.8% inflation forecast remains unchanged. For 2018, the growth estimate is 1.9%. The 10 yr bund yield is up by 2 bps to .46%. The euro is up again after yesterday’s rebound on the Catalan delay in making a decision. The Spanish 10 yr yield is down by 2 bps after rising by 2 bps yesterday and the IBEX is rallying by 1.5%.