The two way market that has been established again over the past week resulted in a 3.5 point drop in the weekly II data for Bulls. Interestingly, no one got more bearish as Bears dropped by .1 pts to 22.6. Thus all of the Bulls went to the Correction side as it rose to 28.4 from 24.7 last week. Again, these are people who expect a correction but want to buy it. The one constant, which reflects the never ending belief in the central bank put, is that in any type of pullback in the market the desire to buy that dip is persistent. As we are in the 2nd longest bull market on record it certainly has worked. I’ve exhausted myself trying to figure out when it wouldn’t but I’ll get back to my new found emphasis on what is going on in global bond markets. If long rates have reached a major inflection point over the past month as I think they have, buying on any stock market dip becomes more fraught with risk I believe.
Speaking of bonds, the 10 yr JGB yield touched zero overnight but closed at -.02%. While the FOMC meeting will of course be a major market focus (even though they will most likely do nothing), the BoJ may be the one most influential on longer term bonds. After the Japanese markets closed Reuters reported that “The BoJ will consider making negative interest rates the centerpiece of future monetary easing by shifting its prime policy target to interest rates from base money at its review next week, sources familiar with its thinking say.” Importantly and to my constant talk of logistical limits being reached by central banks, “The change would underscore growing concerns in the central bank and financial markets over the limits to the BoJ’s economic stimulus efforts, as more than three years of aggressive bond buying is draining market liquidity.” Also, the article states they are “unlikely to abandon its current base money target…or adopt an explicit cap on long term rates.” They will likely “abandon the two year timeframe it set for achieving the price goal” of 2% although they will still “pledge to hit its 2% inflation target.”
With the catalyst last month to the bond market selloff the belief that the BoJ was tapering the purchases of longer term bonds, the article states “The BoJ will also consider reducing purchases of super long government bonds to give financial institutions such as insurers and pension funds a better environment for earning returns, the sources said.”
Bottom line, maybe we get a reverse operation twist where the BoJ goes deeper into NIRP and offsets less buying on the long end with more buying on the short end and thus tries to push the yield curve steeper. The yen was down on the news a touch but was prior to the story.
In China, just when we thought loan growth was moderating, another credit fire was lit. Aggregate financing in August totaled 1.47T yuan, almost 600b yuan more than expected and up from 488b in July which was a two year low. The 1.47T figure is actually not that much different than the montly average of 1.33T but still reflects the reluctance of Chinese officials to let up on the stimulus. Of the total, 950b came from banks, 200b more than forecasted. Yuan denominated loans (mostly to households, aka property loans) led the lending increase. The data came out after the Chinese close where the Shanghai comp was down .7%.
In the UK, the July unemployment rate for the 3 months ended July (and thus captures one month of post Brexit) was unchanged at 4.9% and in line with the estimate. The job growth of 174k was also as expected. Wage growth ex bonsus’ grew by 2.1% y/o/y which is a modest slowdown but is still above the .6% headline CPI trend. We’ll see though for how long real wages can stay positive with the now weak pound. August jobless claims rose a bit more than expected and July saw a less than expected initial drop. Bottom line, the UK economy has held in much better than fear mongers thought they would in the initial aftermath of the vote. The pound is little changed.
Back in the US, purchase applications to buy a home saw a nice 8.6% w/o/w rebound and is up for a 3rd straight week which comes off the lowest level since February. The y/o/y gain was 7.7%, a touch better than the 6.9% gain seen last week. Maybe there was a rush to lock in as mortgage rates have ticked higher over the past week coincident with the rise in Treasury yields. We know they are still very low however but consistent with my view, they won’t go any lower. Refi’s were up 1.7% w/o/w and 43% y/o/y