Find a better reason

If the market is rallying this morning because the government won’t shut down again, I’d find a better reason for chasing it at 9:30am est since we had the best January in 30 years when it was closed. Make your reason related to China trade talks (where the March 1st deadline is likely to be extended), earnings, Fed policy, economy, etc…

Small business optimism according to the NFIB continued to retreat in January. The index fell to 101.2 from 104.4. That’s the lowest print since November 2016 when it sat at 98.4 during the month of the presidential  election. Plans to Hire fell 5 pts to the least since April 2018. Those that Expect a Better Economy is down to 6% from 16%. It was 34% six months ago. There were also notable declines in those that Expect Higher Sales and it’s a Good Time to Expand. Those that Plan to Increase Inventories fell to just 1% from 8% in December. Capital spending did hold steady, rising 1 pt after falling by 4 last month. Earnings expectations remained negative by a bit less so. The wage components were mixed as current plans for pay rose 1 pt but future plans for it fell by 4. Lastly, those expecting Higher Selling Prices fell 2 pts.

The number one business problem remained “the availability of qualified labor” followed by “regulations and red tape.”

The NFIB is mostly blaming the government shutdown for the change in confidence even though the total dollar impact will be $3 billion in the context of a $20 Trillion economy and it’s lower for a 5th straight month. It’s thus noise but we’ll certainly see next month just how much its reopening boosted confidence. They are also citing “plenty of financial market commentators talking ‘slowdown’ in Europe, China, and in the US.” They also said “owners did express concerns about future sales growth, some weakness in business conditions later in the year and some deterioration in conditions that would be supportive of business expansion.” The data is not market moving but does follow the sharp fall in consumer confidence data points seen over the past month that was also partially blamed on the shutdown. Again, the partial closure was an embarrassment and certainly a huge inconvenience for those not getting paid but for everyone else, it shouldn’t have mattered much in their daily lives.

The US dollar is approaching a big level as another .50 rally in this euro heavy index would place it at the highest level since mid 2017. I’ve listened to a bunch of earnings conference calls and plenty of multinational companies were citing it as a crimp on earnings. That said, I remain a bear on the US dollar, especially now with the Fed backing off from more rate hikes and gold trades pretty well in the midst of the dollar bounce. As for when the ECB will try to get out of negative rates, which would theoretically be euro positive and damaging to their bond market, Governing Council member Ewald Nowotny today said they will look at that in the summer. If there is one monetary experiment that includes NIRP and QE to generate higher inflation, we’ve certainly seen a massive failure over the past few years.

EURO 5yr 5yr inflation swap since NIRP began

In response to the 10 yr JGB yield going back below zero last week, again just crushing the profits of Japanese banks, the BoJ overnight cut the amount of 10-25 year bonds to 180b yen from 200b last time in order to try to steepen the curve again. Banks live and die by the yield curve and they’ve certainly died in Japan and in Europe over the past few years. The 10 yr JGB yield rose 1.5 bps but is still negative at -.013%. The TOPIX bank stock index rallied 2.2% on the news. Here is a chart of the index since 1989 when the bubble popped and was followed by decades of rates around zero and years of QE. If the banks are supposed to be the transmission mechanism of monetary policy, where is the self introspection on the part of central bankers?

TOPIX BANK STOCK INDEX