United States
If I was on the Fed staff, here are some anecdotal things I’d be bringing into the meeting this week:
In case you missed these two headlines on Friday it will help to define the Fed’s thinking in further tightening policy come September, most likely via QT. From the WSJ, “For the Low Income, Big Growth in Pay” and right below it “Wage Race Accelerates to Fend Off Poachers.” In the first piece, here is the first sentence:
“For the first time in years, pay for the lowest income Americans is rising faster than for other groups.”
In the 2nd piece it starts with:
“As the job market tightens, many small business owners are racing to boost pay to keep experienced hands from jumping ship.”
I’m not going to get into a Phillips Curve discussion now but the biggest cost in a company’s P&L continues to show signs of rising faster than current trends, however lumpy the evidence. This of course is great for the employee but the cost to a company will be dependent on productivity which we know has been punk. Thus, companies can either eat the higher cost or raise prices in their good or service or accommodate a bit of both.
I’d be remiss if I also didn’t mention the irony of modern day monetary policy. We’ve of course seen massive money printing and ZIRP and NIRP for the main purpose of generating higher inflation when in fact it leads to deflation because of the excess capacity it creates and the massive debt it generates which then slows growth. In Saturday’s WSJ, the story summarizing Schlumberger’s earnings from Friday is titled “Oil CEO Blames Wall Street.” He should also be blaming the Fed since still cheap money is leading to no end to the financing of shale drilling which in turn has suppressed oil prices and headline inflation. The story starts by saying “US investors are driving down the price of oil by shoveling too much money into American shale companies, the CEO of Schlumberger said Friday.”
We are certainly going to hear about inflation being below their target in Wednesday’s Fed statement. But, by repeating their goal of a rise in the cost of living of 2% per annum (and the ridiculous belief on behalf of members that if they don’t get there, it somehow damages their credibility in the eyes of the rest of us), you just have to wonder how many FOMC members have Prime memberships with Amazon or at least have shopped there because of the low prices and convenience. I was just curious. Amazon reports earnings on Thursday by the way and outwardly the Fed is in effect rooting for them to announce they are raising prices by 2% on all of their inventory every year in perpetuity. I wonder what that would do for their business.
I’ll finish this discussion on the Fed with this, a comment from a strategist at Deutsche Bank (Aleksandar Kocic) that I saw quoted somewhere.
“The accommodation and QE have acted as a free insurance policy for the owners of risk, which, given the demographics of stock market participation, in effect has functioned as universal basic income for the rich.”
Japan
Markit’s manufacturing PMI for Japan in July fell .2 pts to 52.2. That is quietly the lowest level since November. Markit said “The slowdown was driven by stagnation in export orders, amid reports of weaker demand from South East Asia markets. Nonetheless, the sector continues to add jobs, with employment growth remaining amongst the best since the financial crisis, whilst optimism hit its highest level in 5 years of data collection.” New orders slowed but remained above 50 while backlogs fell back below 50. Price pressures moderated. Bottom line, the uneven nature of the Japanese economic recovery continues in this 5th year of Abenomics. Abe by the way had to appear today in a parliamentary hearing where he had to explain himself against accusations of cronyism (allegation that his friend got special government treatment on the opening of a business). His approval rating has fallen to just 26%, the lowest since he took office and his disapproval rating is up to 56%. Also not helping Japanese stocks is also a 6 week high in the yen while the Nikkei fell .6%. I want to like Japanese stocks but I’m just not comfortable with what will happen when they eventually stop buying ETF’s. If they ever do.
Europe
A moderation in manufacturing in the Eurozone (from 57.4 to 56.8) according to Markit drove lower the manufacturing and services composite index for July to 55.8 from 56.3. That is the lowest of 2017 but the services side was at least unchanged m/o/m. The composite indices for both Germany and France were down m/o/m but are still at mid 50’s levels. Notwithstanding the moderation in the numbers, Markit still sounded pretty optimistic for the region, “Forward looking indicators such as new order inflows remain elevated, suggesting robust growth will be sustained in coming months. Job creation is consequently booming as companies seek to expand capacity in line with growing demand.” Backlogs are near 6 yr highs and “manufacturing suppliers’ lead times also lengthened to the greatest extent for over 6 years as demand exceeded supply for many inputs. These are symptoms of a booming rather than an ailing economy.” On the pricing front, “input costs continued to rise, though the rate of inflation cooled further from the 5 ½ yr high seen at the start of the year, driven lower by slower growth of manufacturing costs. The overall rise in input costs was the lowest since last November.” On the modestly softer number, the euro is down a hair after last week’s 1.7% rally vs the US dollar. Sovereign bond yields are a touch lower while European stocks are glaringly weak again on the euro’s recent strength. I still like the euro (albeit now overbought), hate European bonds and am more neutral on European stocks after being positive for a while.
EURO STOXX 600
The Magazine Cover Effect
Just as human nature never changes, neither does the magazine cover effect. Notice on the chart that this index peaked on May 15th. The May 13th front cover of Barron’s was “Europe on Sale: Time to Buy Foreign Stocks.”
The dollar index in this cycle peaked on December 28th at 103.3. That was just a few weeks after The Economist printed a front page story titled “The Mighty Dollar: America’s Currency, the World’s Problem.”
Both magazines are great but sometimes sharp market rallies are only noticed late into their moves.
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.