This morning I was CNBC and one of the things we discussed was the importance of keeping an eye on Japan’s government-sponsored bonds for equity signals. If Japan does pivot from NIRP there are ramifications across global bond yields and therefore equities. Watch here:
The NAHB home builder sentiment index for August rose to 60 from 58 in July (revised from 59). That was in line with expectations. Present conditions rose 2 pts to 65, the best since March while the Future component was up by 1 pt after falling by 3 pts in July. Prospective Buyers Traffic remained below 50, down by 1 pt to 44, matching a 5 month low. It was October 2005 the last time that this component was above 50. The NAR is optimistic housing, saying “Builder confidence remains solid in the aftermath of weak GDP reports that were offset by positive job growth in July. Historically low mortgage rates, increased household formations and a firming labor market will help keep housing on an upward path during the rest of the year.”
Bottom line, with a lack of inventory of existing homes and rents rising by 4-5% per annum, the market needs new homes and hopefully builders will deliver with the confidence they currently feel. The real demand though is for cheaper homes, those priced below $250k, and that is the least profitable for the builders. The industry as a whole still remains depressed (so that “builder confidence remains solid” is a relative view point) with single family starts still 25% below the 25 year average and with new home sales 17% below its 25 year average but therein also lies the opportunity to catch up in the years to come. The builder etf ITB is up 1.4% on the day and rallied further after the print.
In the first August industrial number to be reported, the NY manufacturing index fell back into contraction at -4.2 from +.6 in July. The estimate was +2.0. The internals were weak but not as much as the headline figure which is not a sum of its parts. New orders rose almost 3 pts but to just +1.0. Backlogs stayed negative but 3 pts less so at -9.3. Employment stayed below zero but also 3 pts less to to -1.0. The workweek was up by 7.5 pts but to just +2. Inventories were below zero for the 6th straight month but was up by 4 pts. Shipments saw a huge spike of 29 pts but that’s backward looking as its off previous orders. Prices paid fell 3 pts while those received was up by 1 pt. Weakness was seen in the 6 month outlook as this component fell almost 6 pts to a 6 month low. Also disappointingly, capital expenditure and technology spending plans fell m/o/m.
Bottom line, at least measured by this first regional survey seen for August, US manufacturing continues to muddle along, into and out of expansion and contraction. Global trade remains weak, China continues to slow, Europe’s economy has major uncertainty now post UK vote and the US economy has grown just 1.5% over the past 4 quarters. And it’s apparent that the lingering impact from the strong dollar move over the two years, even though its completely stalled out, is still having an impact. As for markets, stocks care nothing about economic and earnings fundamentals and only about the level of interest rates. Bonds will have a tug of war now between central banks suppression of rates and a slow global economy on one hand, and logistical limits to that suppression that are beginning to be realized on the other. See more on that below.
Japan’s economy did not grow in Q2 q/o/q (estimate was up .2%) and was up a slight .6% y/o/y. The q/o/q annualized rate saw a slight increase of .2% vs the .7% estimate. Weakness in capital investment, exports and barely any household spending were the three main factors. With the figures not far from expectations and a reminder again that monetary policy has been a complete failure and then some and fiscal Keynesian spending is only a sugar high (for 25 years now in Japan), let’s see some 3rd arrow please from Abe.
Of most interest over the weekend however was a survey from the Financial Services Agency which studied the impact from NIRP. They estimate that Japan’s big mega banks will see profits cut by 300b yen (about $3B) for the fiscal year ended in March from negative interest rates. An article highlighting this in the Nikkei Asian Review said “Based on its findings, the financial watchdog expressed concerns to the BoJ that the banks will lose lending leeway. BoJ board members will likely discuss the results as part of a comprehensive assessment of the minus rate policy when they meet next month.” I’ve been saying over the past few weeks that the JGB market must be watched as Kuroda has lost an enormous amount of credibility with NIRP and logistical limits are becoming very obvious with QE. The JGB market is MAYBE the canary for global bond markets and imagine for a moment that in September the BoJ back tracks on NIRP because they realize the damage that’s been done to its banks. On the FSA report, Japanese bond yields were higher with the 10 yr in particular at -.085%. This sat at -.29% 2 ½ weeks ago. The Topix bank index fell for a 3rd straight day and is 41% below its 2015 peak. The yen is higher at 101 vs the US dollar.
Peter is the Chief Investment Officer at Bleakley Advisory Group and is a CNBC contributor. Each day The Boock Report provides summaries and commentary on the macro data and news that matter, with analysis of what it all means and how it fits together.