If there is a stock chart (attached) that reflects that maybe markets have gotten a bit ahead of itself with its optimism over a Trump economic revolution, look at Dry Ships (dry bulk carrier) over the past few days. It closed at $4.56 one week ago and closed at $73 yesterday. What a massive short squeeze.
Responding immediately to the spike in mortgage rates, mortgage applications to buy a home fell 6.2% w/o/w as of November 11th and is now up just 3.3% y/o/y. Refi’s fell by 11% w/o/w but remain up by almost 19% vs last year because one year ago the average 30 yr mortgage rate was around 4.15%. The average 30 yr mortgage rate this past week jumped 18 bps on the week to 3.95%, a level last seen in January. I’ll say again, it is the rapidity of the move up in rates that is causing some sticker shock, not the absolute level. These stats though do highlight the dangers that are created when the Fed creates a credit/interest rate dependent economy as opposed to one more driven by savings.
The election results and subsequent rally in stocks brought out the bulls big time in the weekly II data. Bulls rose to 51% from 42.9% last week. That is a 10 week high while lonely Bears fell to 23.5%, a 3 week low from 25.7% last week. Those expecting a Correction fell to 25.5% from 31.4%. The bull/bear spread is at the widest in 2 ½ months.
The Japanese 10 yr JGB yield closed above zero overnight for the first time since February with an almost 2 bp rise. Does the BoJ start to ramp up purchases again to keep it at zero? The 40 yr yield was higher by 2.5 bps to .68%. Selling also resumed in Europe and the US 10 yr yield is back above 2.25% at 2.28%. This action comes before Yellen’s testimony tomorrow in front of the Congressional Joint Economic Committee. She’ll lock in a rate hike next month so as to play catch up to the market. The question in 2017 is whether she’ll get ahead of the curve or continue to be dragged into hiking by the market. If we needed any reminder, it’s clear that the Fed is losing control of markets. After all, what central bank wants to see the dramatic hike in rates that we’ve seen.
Along with dollar strength broadly, the bleed continues with the Chinese yuan vs the US dollar as it fell to an 8 yr low (although the yuan trades much better vs the basket). With the continued strength in the US dollar, how is President Trump going to bring all those lost manufacturing jobs back? Tax and regulatory policy becomes even more crucial to do so.
The Shanghai comp was little changed but the H share index was down by about 1/3 and of note was the Hang Seng properties index that fell by 1.2% to close at the lowest level since early July. We have an epic property bubble in Hong Kong and now they are importing US monetary policy and another rate hike and are experiencing the global rise in interest rates.
The UK economy for the 3 months ended September added 49k jobs, less than the 91k that was expected but the unemployment rate did tick down by one tenth to 4.8%, the lowest since September ’05. So, not only are we seeing major price pressures due to the weaker pound, Carney now is faces an economy at full employment. That said, the weaker job growth was followed by the October level of jobless claims that rose by 9.8k, well more than the estimate of up 2k and September was revised up by 5k. It’s the 3rd month in a row of increases and definitely bears watching. The ONS (who reports the jobs data) said “Unemployment is at its lowest for more than 10 years, and the employment remains at a record high. Nonetheless, there are signs that the labor market might be cooling, with employment growth slowing.” Are we thus seeing the first signs of the post Brexit uncertainty being reflected in the UK data?
On the wage front, average weekly earnings ex bonus rose 2.4% y/o/y as expected but the most in a year. Considering the inflation consumers are about to feel, let’s hope the pace of wage gains quickens from here. The pound is down in response but the 10 yr Gilt yield is breaking out to the highest since late May. Slowing growth and now a rise in yields?