One day of selling after what was clear in Mario Draghi’s message and the ECB is already in panic mode as BN prints a headline: “ECB said to see market as misjudging Draghi speech on stimulus.”
The euro is dropping as are sovereign yields. This just proves how trapped they are that after just one speech and the market reaction that followed has the ECB already in a tizzy. What do they think will happen when further tapering actually takes place which we still expect to happen in September?
The German 10 yr bund yield in particular was nearing a key level. If we go back to US election day on November and map out a trading range, the 10 yr has been yielding between .15% and .49% and as of this writing we stand at .35%. A breakout above would see the yield at the highest level since early 2016. I’m sorry to be a broken record here but the European bond bubble has been epic and will go into the history books as one of the biggest, most insane (negative interest rates) ever and I think we can mark yesterday down as a major inflection point on the heels of Mario Draghi’s hint about what is to come. There is no question this process will be slow but it still will happen and be disruptive. How can it not with yields so microscopic with many below zero. The euro is at a one year high on a closing basis and I remain bullish on it and hugely bearish on bonds. Equities there remain attractive but I have to question how they will behave if yields really spike from here. To this last point, a major risk is what will happen to corporate funding rates. The European high yield index is yielding around 2.75%. Yes, 2.75% is high yield there.
MFGA thinks the French consumer. The June consumer confidence index there rose 5 pts m/o/m to match the best level since 2002. See chart
FRENCH CONSUMER CONFIDENCE INDEX
Money supply growth in the eurozone was up by 5% y/o/y as expected in May, similar to trends seen. Household loans were up by 2.6% y/o/y which is a further improvement from the 2.4% level in April. Lending to businesses rose by 2.4% y/o/y, the same pace as April. This points to continued growth in the region in Q2 with expected GDP growth for the full year between 1.5-2% which for Europe is considered ‘robust.’ It also is reason for the ECB to start their exit from QE and negative interest rates.
The US 10 yr yield is getting dragged higher and sits near a 5 week high, just below the multi month trading range of 2.30-2.60% that existed for months before breaking. The 2s/10s spread widened by 7 bps over the past two days but of course not because the economic data got better but instead to a stretched unwind of global bond positioning that has been medicated way too long on central bank largesse.
Listening to Fed members Stanley Fischer (“In equity markets, P/E ratios now stand in the top quintiles of their historical distributions, while corporate bond spreads are near their post crisis lows. Prices of commercial real estate have grown faster than rents for some time”) and John Williams (“there seems to be a priced to perfection attitude out there and that the stock market rally seems to be running very much on fumes.”) express worries about high valuations yesterday is just truly amazing. Now they are worried about financial stability? What did they think would happen when rates sit at or near zero for almost a decade and their balance sheet quintupled? Of course valuations get excessive and yesterday’s comments just typifies how backward looking they typically are. That, combined with their desire to ramp up the tightening cycle in the 9th year of an economic expansion should be a warning writ large that central bankers remain the biggest risk to asset prices.
The MBA said mortgage applications to buy a home fell for a 3rd straight week by 4.1% and puts this index at a 4 week low. It does though still remain up by 7.8% y/o/y but I keep having to speculate that we might have reached an inflection point on pricing where buyers are beginning to push back. Refi’s fell by 8.6% w/o/w after 3 weeks of gains and is down 35% y/o/y.
Bullish sentiment bounced back w/o/w as II said Bulls rose 3.4 pts to 54.9 while Bears fell by .8 pts to 18.6. The Bull/Bear spread is the most in 3 weeks. Those expecting a Correction was down by 2.6 pts to a 3 week low. Notwithstanding the bullishness and quantifying the extent of the pullback in the high flyers, the QQQ yesterday closed below its 50 day moving average for the first time in nearly 7 months, the longest streak ever.
It’s never market moving but wholesale inventories in May were up by .3% m/o/m, one tenth more than expected and April was revised up one tenth. We might get a slight tweak up in Q2 GDP estimates as a result. Retail inventories were higher by .6% and almost solely in where the trouble is brewing, auto’s. Motor vehicles/parts inventories jumped 1.1% m/o/m and are higher by 7.5% y/o/y. To put into perspective, total retail inventories were higher by 3.2% y/o/y and ex the auto sector were up just .9% y/o/y. I’ve touched upon plenty the economic problem that now is the auto sector so I want go any further than this.