Unites States / Central Banks
Is this time different in terms of the new drama created by DJT and the market reaction? I have no idea but I do know that up until this point everything non economic policy related has been nothing but noise and markets haven’t cared one iota. Markets only care about what tax and regulatory reform will look like and that’s it. One thing though is for sure, parts of the media won’t stop going after the President until Mike Pence is inaugurated as President which some in the market would be fine with.
I’ll still say that the extent of monetary policy removal, globally, will still be the main driver of markets but that certainly is not the case yet. I do have to ask this question rhetorically though because it’s something that every single investment manager must contemplate, what do you think will happen to the European bond markets when ECB QE is over sometime next year and negative interest rates no longer exist? Will German yields 7 yrs out still be negative? Will the German 10 yr yield still be at .42%? Will you pay Italy to lend them money for 2 yrs? Will their 10 yr yield still be below the US 10 yr yield? I’m pretty sure I know the answer and I keep raising this because this will trump Trump in its market reaction and not just in Europe because the Fed is tightening too.
The US dollar index is now just 10 cents from the November 8th election close but the weakness is really only vs the euro, yen and pound today. The dollar is slightly higher vs the Aussie and Canadian $ and also is up against the Asian currencies. I still don’t like the dollar and gold is trying to get back to $1250. Gold sat at $1285 on election day. After falling for 16 straight days, silver is higher for a 6th straight day and is a great levered play on gold.
Stock market sentiment remained very bullish according to II but a hair less so. Bulls did fall .6 pts to 58.1% while Bears fell too by .2 pts to 17.1%, the lowest since March 1st when the Bull side hit a 30 yr high. Those expecting a Correction took the balance as it was higher by .8 pts to 24.8%. Since March 1st when the Bulls hit the highest level since 1987, markets have just been one big churn fest and I still believe, strictly speaking from a sentiment standpoint, this bullish sentiment must cool in order to create a good contrarian set up for another leg higher.
After seeing a good NAHB builder sentiment number and mixed single family housing start and permit figures, the MBA said mortgage applications to buy a home fell 2.7% w/o/w but is still up 9.2% y/o/y which certainly points to a spring season that has been pretty good but still constrained by inventory and pricing issues. Refi applications fell 5.7% w/o/w and are down 37% y/o/y.
The UK
Job growth in the UK for the 3 months ended March was much better than expected as 122k net new jobs were added, well more than the estimate of 21k and this brought the unemployment rate down one tenth to 4.6%. I had to go back to August 1975 to see a rate this low at the same time monetary policy from the BoE has NEVER been this easy. The percentage of 16-64 yr olds employed is at a record high of 74.8%. The wage side though continues to be mediocre as they rose just 2.1% y/o/y ex bonus’ and while in line with the estimate, it’s still the slowest pace of gain since July. This compares with CPI running at 2.7% as seen on Monday. Mark Carney and the BoE should focus only on taming inflation and let the private sector deal with wage gains as the UK citizen is getting screwed by its central bank because of the damage being done to purchasing power and their standard of living, aka, it is shrinking. The April claims number rose 19.4k which is the 2nd biggest increase, after the one seen in March, since 2011 which means the March jobs spike might not be sustainable. The estimate was up 7.5k.
Europe
The eurozone consumer inflation data for April was left unrevised with headline CPI up by 1.9% y/o/y and the core rate higher by 1.2%. Draghi wants to ignore the headline figure because of the influence of energy prices but the core rate gain is the quickest since 2013. That said, the timing of Easter vs last year did mess with the numbers and if we average the March and April core reads, it is no different than the 3 prior months. I still believe the German/Mario Draghi battle on monetary policy will only intensify this year if the ECB doesn’t further taper. Today, the German Deputy Finance Minister Jens Spahn said “Unless monetary policy starts normalizing soon, negative side effects will become more damaging.”
China
After about a week of talking about China every day, I took a break the last few days but I’m back today as their yield curve gets more funky with its inversion. The 5 yr yield was higher by 2.5 bps to 3.69%, the highest since December 2014. The 7 yr yield was up by 9 bps to 3.80%, also the highest since then while the 10 yr yield was flat at 3.64%. While it’s clear from the recent data that the Chinese economy is slowing and we can simplistically look at the Chinese yield curve inversion as a reflection of this, there is also so much noise in the liquidity spigot back and forth that I don’t know what to make of it just yet.
Peter is the Chief Investment Officer at Bleakley Advisory Group and is a CNBC contributor.