Durable goods orders at the core level in August, defined as non defense, ex aircraft, rose .6% m/o/m, better than the estimate of down .1% BUT it comes off a lower than expected July which was revised down by 7 tenths. Thus, let’s call it a push. Orders were higher for vehicles and parts but fell for computers/electronics and machinery. Orders for metals were mixed. Estimates for Q3 GDP may get trimmed as actual shipments of core goods fell .4% m/o/m, 5 tenths more than expected and July was revised down by 2 tenths. As inventories rose, the inventory to shipments ratio rose to 1.66, a 5 month high.
Bottom line, the modest capital spending trend continues. Orders are up for a 3rd month but are still down 1.3% y/o/y and on an absolute basis, the current spending level was also seen in 2006. This of course is not new news but disappointing nonetheless. What is also clear is that the econometric model that says ‘lower rates should lead to more capital spending via borrowing’ is of course broken. The proceeds from borrowing have gone to other uses with the result being corporate debt is at record highs and debt/ebitda ratio’s are above where they were in 2000 and 2007.
The MBA said mortgage applications fell slightly w/o/w. Purchase applications were up by .8% while refi’s were down by 1.6%. On a y/o/y basis, purchases are still up by 10% while refi’s are higher by 34%. With purchases, we need more new homes priced below $200k for the first time household. For those who haven’t refi’d yet, WTF are you waiting for?
The 7 yr note auction was uneventful. I’m highlighting only to point out the key level to keep an eye on in Treasury yields. On September 6th, the 10 yr bottomed (for the month) at 1.53-54% when the ISM services index printed a 6 ½ year low. Three days later the yield was at 1.68% following weakness in JGB’s and European sovereign bonds.We are thus retesting that level.
The German 10 yr bund is retesting its July low yield of .19% after its close at -.15%.
The 2s/10s spread in Japan widened by 2 bps overnight but only because the short end fell more than the long end. The 10 yr yield fell another 1.5 bps to -.09% and is now down 6 bps since the BoJ said they want to pin it at zero. Let’s build another scenario (thanks to the help of a client) that could cause issues with “yield curve control.” What happens if the 10 yr yield continues to fall, does the BoJ have to sell outright JGB’s in order to move the yield back to zero? We should start referring to Mr. Kuroda as Dr. Frankenstein. The TOPIX bank stock index fell 3.3% overnight, down for a 4th straight day. The index has now given back all of its 7% rally last Wednesday and then some. I’ll say again, what is happening now with the BoJ and their bond market is the global canary.
European banks are bouncing by nearly 1% as Deutsche Bank is up by almost 2%. Of interest today is the Mario Draghi closed door meeting with German lawmakers. Hans Michelbach, a German lawmaker is getting ready. He said “We don’t see that this policy has been successful in any way, either on budget deficits or on economic growth. We want clear answers on what monetary policy has achieved, apart from an expansion of joint liability in the euro zone.” If only the heads of all the German banks can sit it on that meeting too. Mario Draghi is beginning to realize the end point he is reaching. The WSJ reported yesterday “At a hearing at the European Parliament in Brussels, Mr. Draghi warned of adverse side effects of keeping interest rates low for too long and said ECB action was ‘not enough for delivering real and sustainable growth in the long term.’”
Bottom line, we are reaching a major, global inflection in this almost 10 year experiment with uber activist monetary policy. You want to get your stock market call right in the coming quarters? Well you better get your central bank/interest rate story accurate from here.
Non voting Fed member John Williams continues to pound the table for a rate hike. He said last night “It is getting harder and harder to justify interest rates being so incredibly low given where the US economy is and where it is going. I would support an interest rate increase. I think the economy can handle that. I don’t think that would stall, slow or derail the economic expansion.”
We talk a lot about modest global trade and in case you missed it yesterday the WTO quantified the extent of that moderation. Here is direct from their press release: “World trade will grow more slowly than expected in 2016, expanding by just 1.7%, well below the April forecast of 2.8%, according to the latest WTO estimates. The forecast for 2017 has also been revised, with trade now expected to grow between 1.8% and 3.1%, down from 3.6% previously. With expected global GDP growth of 2.2% in 2016, this year would mark the slowest pace of trade and output growth since the financial crisis of 2009.” They then expressed this message, “The dramatic slowing of trade growth is serious and should serve as a wake-up call. It is particularly concerning in the context of growing anti-globalization sentiment.”
We got consumer indices from Germany, France and Italy and sentiment didn’t change much. The German confidence index was 10 vs 10.2 last month. French consumer confidence was unchanged while it fell .4 pts in Italy. Italian confidence is quietly at a one year low as we await the December 4th referendum. Economic sentiment in Italy though did improve by 1.5 pts.