United States
About a 1.5% move above the 2400 level in the S&P 500 brought out the bulls again over the past week according to Investors Intelligence. Bulls rose 5.8 pts to 55.8 with almost all of them dropping out of the Correction side. Bears were down .9 pts to 18.3. Off a 6 month low, the bull/bear spread jumped by almost 7 pts. We know most of the action has been in the fast growth stocks of big tech (or more specifically, online advertising, online retail and cloud storage, and a movie channel) and the slow growth sectors of utilities and consumer non durables. Looking at the equally weighted and broad Value Line Geometric index of about 1700 stocks has it at 521 vs 528 on March 1st when bulls saw its biggest count in 30 years. Thus, bullishness in II is wide but in actual behavior it’s more selective.
VALUE LINE GEOMETRIC EQUAL WEIGHTED INDEX
Is this the canary in the savings rate coal mine? Goldman Sachs is raising its savings deposit rate to 1.2% from 1.05% which Bankrate says is the highest interest paid of any bank. On their website, CIT was previously the most generous at 1.15%. The canary is really for the largest banks that have the most deposits and have been stiffing depositors because they haven’t moved its rates after 3 Fed rate hikes. Bank America, Wells Fargo, PNC are offering just .03%. JP Morgan and Citi are the most stingy with a rate of just .01%. With another rate hike next week, I would assume these banks would be interested in getting more competitive with its own rates but at the cost of their net interest margins.
As we get to the latter part of the Spring housing transaction season, the MBA said mortgage applications to buy a home spiked by 10% w/o/w which comes after 3 straight weeks of declines. The y/o/y increase is 5.5%. I don’t have any particular reasons for the jump as there is no color in the press release behind it. Lower interest rates likely helped as the average 30 yr mortgage rate fell 3 tenths to 4.14%, the lowest since mid November. This also helped refi’s which rose by 3.4% but they still remain 34% below the pace of one year ago.
China
A day after a story leaked that the Chinese were interested in buying more US Treasuries because they seem to be tired of the weakness in the yuan, they announced that its FX reserves in May rose to $3.053T from $3.030T and which is about $7b above expectations. The $24b m/o/m increase is the most since April 2014 and it’s the 4th straight month of increases after dipping below $3T in January. Helping the rise was the weakness in the US dollar which boosted the value of China’s other currencies. The dollar index fell from 99.1 to 96.9 in May. The State Administration of Foreign Exchange said “Residents and companies are acting more rationally when buying foreign currencies.” Considering the capital controls and pressure on outflows, that certainly is a nicer way of saying things. Speaking of pressure, I read a story yesterday that China is going to start tracking every single credit card purchase outside of mainland China of more than a few hundred bucks. The yuan is weaker today while the Shanghai comp jumped by 1.2% and is back in the green year to date. The H share index though was flat but with a 13% year to date gain.
Europe
After a good Q1, we saw some softer than expected European data today for April. German factory orders fell 2.1% m/o/m, well worse than the estimate of down .3%. Most of the weakness was from overseas and in the capital goods space where weakness was seen in chemical, metal production, computers/electronics, engineering and autos/parts. The German Economic Ministry said “Slight upward momentum in output and sales as well as a stellar business climate send strong signals for a continuation of the moderate upswing in manufacturing.” I’m not going to come to any conclusions yet as to whether Q2 growth in Germany and the region has down shifted but I can say for sure that the US appetite for German auto’s is slowing as it is for all brands.
Spanish industrial production was up by .1% m/o/m in April, below the estimate of up .4% with a slight one tenth upward revision in March. Capital goods were particularly weak as seen in Germany. The Spanish IBEX is underperforming the eurozone markets today because of Santander but it still though is the big winner in Europe this year with a 16% year to date gain.
Ahead of tomorrow’s ECB meeting, Bloomberg news is reporting that euro area officials are saying the ECB will trim its CPI forecasts to 1.5% for the next few years from 1.6-1.7% because of lower energy prices. Herein lies the ECB conundrum and the nonsensical obsession with 2% inflation. They welcome lower oil prices for the average consumer (Mario Draghi has said that many times) but its fall makes it that much more challenging for them to get to 2% inflation. The euro is weaker on this story which hit the tape right after 6am est. Sovereign European bonds though are little changed. The OECD is throwing in its 2 cents on ECB policy. “With core inflation projected to slowly approach the inflation target by end of 2018, the ECB should gradually taper asset purchases in 2018. Inflation developments also warrant a gradual phasing out of the negative interest rate policy; in particular, the negative deposit rate could be raised toward the end of 2018 to make the policy rate corridor symmetric again.”