Initial jobless claims totaled 243k, 5k more than expected and up from the holiday distorted level of 223k last week. Smoothing out last week puts the 4 week average to 237k from 234k and vs 241k in the week prior. Continuing claims, delayed by one week, fell by 6k. Bottom line is a repost from last week’s, “Employers are optimistically awaiting fiscal reform and that combined with the difficulty of finding competent employees is why there continues to be a modest pace of firings.”
Instead of changing forward guidance as some thought, the ECB did not and said again that they “expect the key ECB interest rates to remain at present or lower levels for an extended period of time, and well past the horizon of the net asset purchases.” Mario, you are out of your mind if you think that cutting rates deeper negative should still be on the table. While they are cutting QE by 25% next month, the ECB repeated that they can ramp it up again if needed. Mario still believes in the omniscience of monetary policy.
The euro is up slightly and bond yields are at the highs of the morning as Mario Draghi is trying to sound somewhat more upbeat but with the same bunch of worries while still threatening more easing if needed. He’s trying to straddle the line of acknowledging the better economic data, the uptick in headline inflation and that downside risks have diminished with saying that core inflation is still low, country reforms are still slow and he thinks “present policy stance is appropriate.” He is also patting himself on the back by saying ECB policy has been successful. He didn’t elaborate on how he defines success but memo to him: The success or failure will not be determined until after the ECB fully exits from QE and negative interest rates.
On the modestly more positive tone, the 10 yr German bund yield is up by 4 bps to .41%, the high of the morning and its taking the US 10 yr yield to the high of the day at 2.57-58%. Sovereign yields elsewhere are all off their lows too.
I continue to like the euro because everyone hates it and I’m less worried about the political overhang.
We enter the day with the S&P 500 at 2363. It closed last Tuesday at 2363 before the Trump address to Congress and the subsequent 32 pt rally. A technical island reversal? Maybe. A temporary sign of exhaustion? We’ll see. I don’t mention it very often because of the EKG type volatility week to week but the AAII individual investor sentiment measure is in stark contrast to the flood of retail money into ETF’s. Bulls fell 8 pts to 30, the lowest since November 3rd when it was as low as 23.6 right before the election. Bears jumped by 11 pts to 46.5, the most since February 2016, smack in the middle of that market panic on the downside. I’m at a loss to explain as its in direct contrast to the weekly II numbers, the CNN fear/greed indicator, the Daily Sentiment Index and the fund flows as mentioned.
We just might finally be seeing the whites of the eyes of wage inflation in Japan. Weird to say but it seems to be happening. Base pay in January rose .8% y/o/y, twice the pace seen in November and December which was double the rate of September and October. It still doesn’t sound like much but it’s the quickest pace of gain since March 2000. The labor market has been very tight now for a while and the wage growth that has been so desperately wanted seems to finally be happening. The BoJ wants higher consumer price inflation but if it just offsets the rise in wage gains, then what is the point. We want higher REAL wages. In response the JGB 10 yr yield is back to near 10 bps at .096%, up 1.6 bps on the day. The longer term 40 yr yield that I like to watch, since the BoJ is not specifically targeting it, was unchanged. We just might see the BoJ back away from their extreme policy this year if inflation stats do rise further. They will then join the Fed, the ECB and most likely the BoE which would be the first time in this grand experiment that all 4 have pulled back together.
To this last point and as we are celebrating the 8th year of this bull market, let’s quantify how beneficial the impact multiple expansion has been to the market rally and the help that central banks gave to this. For the 4 quarters ended 2009, non GAAP earnings per share totaled $56.86 and was $50.97 GAAP for the S&P 500. They both rose to $106.6 and $95.34 respectively as of Q4 2016, gains of 87% for both. Off the intraday low of 666, the S&P’s are up by 255%.
The Chinese inflation data for February was mixed. PPI continued its sharp gains with a 7.8% y/o/y spike with easy comps and commodity rise being the main factors. It was about in line. CPI was up just .8%, well below the estimate of up 1.7% but it was due to a 4.3% drop in food prices. Prices ex food and energy was higher by 1.8% y/o/y, in line with the 1.7-2.2% range over the past 6 months. With the Lunar holiday impacting business activity in the beginning of the year, some of this is timing issues. Chinese stocks traded weak overnight with the Shanghai comp down by .7% and the H share index falling by 1.8%, the biggest one day drop since December 12th with oil stocks particularly weak. The Hang Seng index, very sensitive to US monetary policy, closed at a one month low with the Hang Seng Properties index down by 1.2%. Sell Hong Kong property with rates now moving higher. Sorry to those in Hong Kong that now have to deal with the back side of Federal Reserve policy but you chose it via the peg.