As I’ve expressed my opinion before, because the big legislative initiative of a tax bill is done, nothing was going to be of near relevance to the economy and the markets regardless of who ran the House in the coming two years. Rates and the direction of the China negotiations remain of the greatest importance. Will the results of the election influence the latter? As for the former, the Fed will do what they do but longer term yields are falling as there will be no movement on making the recent tax cuts permanent. I still though expect higher interest rates in 2019. We’ll hear all about infrastructure but I’d fade that too. Firstly, rising deficits don’t help the case and good luck finding the skilled workers to actually get on the job.
Even with the rebound in stocks over the past week, Investors Intelligence said Bulls fell by 1.8 pts w/o/w to 42.5 while all of those went to the Correction side (still bullish and want to buy the dip) which rose to a 7 month high at 37.7. Bears were unchanged at 19.8, a 6 month high. From a sentiment standpoint and only relevant in the very short term, not seeing a rise in Bulls with the bounce in stocks is what you want to see for those looking for a further rally. On the other hand, the number of Bears still remains microscopic.
Another rise in the mortgage rates, by 4 bps w/o/w to 5.15% to the highest since April 2010, led to a 4% drop in mortgage applications. Purchases fell 5% w/o/w and are flat y/o/y while the index level is at a two year low. Refi’s fell 2.5% w/o/w and are down 33% y/o/y. In order to offset the rise in rates, consumers are shifting more into ARMS and the percentage of ARM volume rose to 7.8%, the most since mid May 2017. Bottom line, high prices and rising mortgage rates have turned away many buyers who are choosing to rent or staying where they are. Who wants to give up a mortgage with a 3 handle on it?
Wage growth moderated in September in Japan after a much better run this year. Regular base pay was up by .8% y/o/y vs 1.3% growth in August and 1% in July. I’m disappointed and was hoping that the drum tight labor market would help to accelerate the rising wage trend this year. Maybe the lack of it was why household spending in September seen last Monday fell 1.6% y/o/y instead of the 1.5% rise that was expected. There was little market response and the 10 yr inflation breakeven in Japan at .40%, sits to match the lowest level since October 2017. Kuroda and the BoJ are of course stuck but are still trying to get out from underneath what they’ve done. QE has been cut in half and Kuroda said this on Monday, “Unlike in the past, Japan is no longer in a situation where a decisive, large scale policy is needed to overcome deflation.” Considering the still low wage growth, he should be rooting for low inflation and not a rising trend.
China’s FX stash in October shrunk more than expected. They totaled $3.053T, down from $3.087T in September and below the forecast of $3.058T. This is the smallest level of reserves since April 2017. A higher US dollar against their other currencies along with the outflows of capital were the main reasons. Notwithstanding the lower reserve pile, the yuan is rallying against the US dollar but also along with many other currencies post election. The yuan will likely slice thru 7 at some point but the PBOC is just trying to slow the trajectory.
In Europe, the Markit German construction index for October did dip below 50 at 49.8 from 50.2. That is the first print less than 40 since March. Markit said reflects a reduction “in work on both housing and commercial building projects.” Also, the “latest data showed a weakening of constructors’ confidence towards the outlook for activity over the next 12 months. Reports from surveyed firms highlighted concerns over a slowing manufacturing sector.” Keep in mind that construction has been a robust bright spot in the German economy over the last few years helped by incredibly low interest rates (amazing how that works). Something to watch but never a market moving number.