For the 3rd time (1st in November and then in February) since initiating ‘yield curve control’, the BoJ stepped in with an offer to buy unlimited quantities of paper to lower the 10 yr yield. There were no sellers but it was enough to lower the yield by almost 2 bps to just below 9 bps. Kuroda and the BoJ won’t give up on that game but while it worked on that part of the curve, the 40 yr yield was up another 2 bps to 1.09%, a breakout to the highest level since February 2016 in response to the selloff in sovereign bonds elsewhere. Yields across Asia were sharply higher too following what we saw yesterday in Europe and the US and whose yields are up again today. “The Times they are a Changin’.” “Come gather round people wherever you roam and admit that the waters around you have grown.” Stay short European bonds and I still think they can single-handedly drag higher US yields irrespective of the US growth and inflation stats.
While the BoJ has been the least forthcoming on when they will back away from their monetary madness (outside of their subtle taper currently), they did get some good news overnight. Regular pay in May in Japan jumped .9% y/o/y helped by a 1.2% increase in hours worked. That is the biggest one month wage/salary increase since it did the same in March 2000. It was in 1997 the last time it rose more. Maybe the shrinking pool of available labor is finally resulting in the long awaited wage gains which the BoJ hopes will lead to higher inflation. The problem though is if inflation starts rising at the same pace as wage growth, the Japanese are still no better off. Mr. Kuroda, we want higher wages and low inflation. Higher inflation from here would also put upward pressure on interest rates in one of the bastions of the global bond bubble. The yen weakened after the BoJ bond tender which lifted the Nikkei off its early morning lows although stocks still closed down by a 1/3 of a percent.
China said its FX reserves in June rose for a 5th straight month by a modest $3.2b to $3.057T. That was though about $4b less than expected. Capital controls, weakness in the dollar and rise in China’s other holdings and stabilization in the recent economic data was enough to lift reserves. The yuan is little changed in response. The $64k question for the Chinese is what happens when they back away from the tight capital controls. The Shanghai comp closed up by .2% but the H share index sold off sharply with the rest of the global markets with a .9% drop to the weakest level in almost 2 months.
We got some good export numbers from Malaysia for May and Taiwan for June which continues the trend of better trade data this year after two years of softness but with a caveat. Taiwan’s June exports in particular jumped by 13% y/o/y vs the estimate of up 8.8% helped by semiconductor exports which rose 23%. Exports to China and Hong Kong made up 40% of Taiwan’s exports. The caveat though was the 3.7% growth in imports which was well below the forecast of 12% as many imports go into the finished product that is then exported.
Germany, France and Spain all reported upside surprises in their industrial production figures for May while the UK continues to show signs of slowing and less of a positive impact from the weaker pound. Manufacturing production in the UK fell for the 4th month in the past 5 m/o/m led by a sharp decline in auto production and it has the pound at a 1 ½ week low. For Germany, their IP figure comes a day after missing estimates for factory orders. The Economic Ministry today said “The strong dynamic in orders at the end of 2016 has translated into brisk expansion of output since the start of the year. The revival stretches over most branches of the industrial sector. Overall, industrial momentum has broadened and gained momentum this year.” Strength in France was driven by auto’s but that will slow for those coming to the US. Spanish IP jumped by 1.2% m/o/m vs the estimate of up .5%. Bottom line, the continued strength in the Eurozone economic data will continue to pressure the ECB to alter monetary policy come September (they meet again on July 20th) while the BoE is just completely screwed with the stagflationary environment they are currently in.
If I was directly betting on the US payroll number I’d say there is potential for upside surprise for the sole reason that the prior 3 months have been so soft. The last 3 months have averaged 121k, so if correct, it would just be in that context. The estimate is for a rise of 178k.