I have to applaud Dallas Fed President Robert Kaplan for the essay he wrote and posted late yesterday. We’ve talked about pushing on a string where further Fed easing would really only goose asset prices and not really impact economic activity because rates are already so low. He wrote “I am concerned that adding monetary stimulus, at this juncture, would contribute to a build up of excesses and imbalances in the economy which may ultimately prove to be difficult and painful to manage.” To the point that rates are already low, “In addition, financial conditions, the cost and availability of credit, are particularly robust by historical standards.”
At least someone is looking at the experience of the ECB where an epic bond bubble has been created with no economic benefit derived. Not only is the ECB completely trapped, Draghi seems intent on further digging a hole. The same holds for the BoJ. Kaplan is not blind to the economic risks, particularly trade driven but said “It would be wise to take additional time and allow events to unfold as we consider whether it is appropriate to make changes to the stance of US monetary policy.” Kaplan does not vote but his opinion is a welcome contra point to Bullard and Kashkari who never saw a low inflation print they didn’t wanted to stamp out.
Powell speaks today at 1pm in the context of a Treasury market that we know is priced for multiple rate cuts this year. I thought last week that Powell would not want to be bullied by the bond market and would try to take back some of its certainty on cuts (maybe by trying to shift the July rate cut odds to 50% from 80% at the time to give him optionality) but instead he fed the beast (100% chance priced in now with more to come).
In looking at the housing market and the interest rate easing the bond market has already done for the Fed, Lennar the homebuilder reported a good quarter relative to expectations. In the press release they said “Our 2nd quarter results benefited from both first quarter deliveries postponed by weather as well as a recovering housing market. The well documented market pause in the 2nd half of 2018 set the stage for more moderate home price increases and lower interest rates which stimulated both affordability and demand, leading homebuyers back to the market.” I say, the Spring season has been decent and we’ll see new home sales data today for May.
The Hong Kong trade data for May was a bit better than expected but still down y/o/y. Exports fell 2.4% y/o/y, a similar pace seen in April but less of a decline than the 4.5% expected. Specifically, exports fell 4.1% to China, were down by 15% to the US and lower by 17% to Germany. This is the 7th straight month of y/o/y drops. Imports fell 4.3% y/o/y vs the forecast of down 5.8%. While rarely a market moving number, Chinese stocks and those in Hong Kong were pretty weak overnight with the Hang Seng lower by 1.2% and the Shanghai comp weaker by .9%. What was noteworthy about the decline was the weakness in Chinese bank stocks on stories about some of them getting caught up with laundering money for North Korea and violating sanctions.
After the weakness seen yesterday in the German IFO business confidence index, the French version today was unchanged m/o/m at 106 but manufacturing confidence continued to fall as it was down 2 pts m/o/m when no change was expected. Services and employment confidence helped to offset the weakness in manufacturing, a trend we’ve seen in the US and elsewhere. I’m still a believer in the economic changes that Macron is trying to implement in liberalizing the business environment in France.
The UK CBI retail sales figure was a disaster for June. The index fell to -42 from -27 and well worse than the estimate of -5. That is the lowest print since March 2009 during you know what. Online retail sales continues to stand out on the upside but this component saw “the weakest growth since the question was first introduced to the survey (in 2009).” CBI can only speculate why there was such a drop and even threw in the ‘weather’ excuse’ but obviously Brexit remains an overhang as does the disruption to conventional retail stores in the age of online. There was no real market response as the pound is up, gilt yields are little changed and the FTSE 100 is down about .25%.
CBI RETAIL SALES