The appointment of Christine Lagarde is certainly giving more adrenaline to the epic bubble of negative yielding bonds but the euro isn’t really moving as its flat for a 2nd day. It remains quite astonishing to see what is going on in European bond yields, to say the least. God help us when this unwinds one day. Lagarde is really in an impossible situation left to her by Mario Draghi. Easing more is nuts and how will she ever get out of negative rate policy.
With respect to Trump’s new Fed picks, I’m a fan of Judy Shelton but she is no Mario Draghi as Trump wants our Fed to be. I don’t know anything about Chris Waller other than he works with James Bullard who we know is a dove.
While European markets are rallying on disappearing bond yields and the S&P futures are following, Asian markets were mostly red. China’s private sector Caixin services index for June fell to 52 from 52.7, below the estimate of 52.6 and its the weakest print since February. India’s services PMI fell below 50 at 49.6 from 50.2. Japan’s was up slightly after 3 months of declines at 51.9 from 51.7.
Europe’s services PMI for June was revised up a touch to 53.6 from 53.4 initially and that’s up from 52.9 in May. The services side is certainly outperforming the manufacturing sector. Markit said “Higher overall services activity in the euro area was associated with a similar sized and stronger increase in new business volumes…Jobs were subsequently created at a faster rate across the euro area services economy.” The negative in the report was the business outlook, “business sentiment slumped to a 4 1/2 yr low during June. According to the latest data, German and French service providers were the least confident of a rise in activity from present levels in 12 months’ time.” Growth overall when including manufacturing is still punk as Markit estimates Q2 growth of just .2% q/o/q.
The UK services PMI continued to soften and is approaching the breakeven of 50. In June it fell to 50.2 from 51. The estimate was for no change. Markit believes that when combining services with manufacturing and construction it is likely “the economy has slipped into contraction for the first time since July 2016.” With services Markit said “Subdued activity was often attributed to sluggish domestic economic conditions and greater risk aversion among clients in response to ongoing Brexit uncertainty.” The pound is weaker in response along with Brexit disarray and the 10 yr gilt yield is lower by another 3 bps.
Investor sentiment got more bullish according to Investors Intelligence and this is before the past weekend’s US/China trade detente. Bulls rose to 55.2 from 53.3 and that’s at a 2 month high. Bears were unchanged at 18.1 with the spread to Bulls rising to 37.1. II said “spreads above 30% are warnings signs while those above 40% call for defensive measures.” Thus, we’re getting close to having that Bull boat pretty full.
Mortgage applications were little changed w/o/w as purchases rose 1.1% while refi’s fell by 1.2% w/o/w. Versus last year, purchases were higher by 9.8% and refi’s up by 93%. It’s an easy comparison though as the average 30 yr mortgage rate is now 4.06% vs 4.80% one year ago. Again, it seems that the US market has certainly been helped by lower mortgage rates but still high prices limits the opportunities for buyers and why renting still remains strong.