With dollar weakness continuing with the dollar index breaking below 93 to the lowest level since May 2018, commodity prices across the board are rallying as we get one step closer to notable inflation and we’ll likely see another rise in inflation expectations today in the TIPS market. The conventional Treasury market has lost its pulse, thanks to the Fed and/or due to VERY muted growth expectations. If you want to buy yourself some protection, look at commodity related stocks. Here is a chart of the CRB index relative to the S&P 500 going back 25 years. Notice the depression in commodity prices relative to stocks. A few ideas, fertilizer stocks, stocks in oil and gas and the service side, and industrial metal stocks, particularly copper. And of course, precious metals and I also like uranium.
CRB index relative to the S&P 500
If there ever was going to be a catalyst to get a shift to value stocks from growth it would be P/E multiple compression driven by higher inflation. Economically, lower purchasing power via a weak dollar and higher inflation would also damage the standard of living of our consumer driven economy. The Fed should be really careful with the higher inflation they wish for. Like I’ve said, I really hope I’m wrong on my inflation thesis.
For a 2nd straight week, mortgage apps took a breather after a great run. Purchase applications fell by 1.8% and are now down for the 3rd week in the past 4. They still though remain up a solid 21.5% and we know why. Refi’s dropped by 6.8% w/o/w and the y/o/y gain slowed to 84%. I’ll say this, if you haven’t refi’d yet, what are you waiting for?
Today’s PMI’s are focused on the services side. China’s private sector weighted Caixin services index weakened to 54.1 from 58.4. The estimate was for a more modest slip to 58. Notwithstanding the m/o/m drop, Caixin said “growth rates of new business and activity remained strong which helped to support business confidence. Sentiment about the forthcoming 12 months was the highest in over five years.” The caveat, “However, less positive, was another fall in employment as firms sought to boost productivity at a time of mildly rising costs but further falls in output charges.” The Shanghai comp was little changed but the H shares rallied .50% in Hong Kong and the yuan is higher again to a 5 month high.
The other PMI’s of note in Asia were all well below 50. Hong Kong’s weakened to 44.5 from 49.6, Singapore’s rose but to only 45.6 from 43.2 and Japan’s was 45.4 vs 45 in June. It was January the last time it was above 50 in Japan but “the rates of contraction eased since June and remained much less severe than those seen in April.” Conditions softened in Hong Kong “with rising concerns over the adverse impact of a new wave of coronavirus cases on the economy.” In Singapore, “While business activity rose for the 1st time in six months, the expansion was largely driven by a rebound in construction and wholesale and retail activities as businesses return to work rather than any real increase in demand. Manufacturing and services both reported a decline in activity. Demand conditions meanwhile weakened further despite a renewed (but marginal) growth in export sales.” Asian stock markets were mixed in response. I continue to be bullish on Asian stock markets for the coming years even with the current economic challenges.
In the Eurozone, the July services PMI was revised slightly lower to 54.7 from the first print of 55.1 and vs the estimate of 55.1. That still is up from 48.3 in June and the 1st time above 50 since February. Markit said “despite increasing for the 1st time in five months, levels of incoming new business rose at a relatively modest pace. Moreover, growth was primarily driven by domestic markets as export trade remained weak.” With respect to the coming months, coincident with the reopenings “Confidence picked up across the euro area region, with positive sentiment the highest amongst Italian services providers.” Italy will also be an outsized beneficiary of the upcoming 750b Eurozone spending plan. The euro is back above $1.18 and sovereign yields are up a touch.