The worry over the impact of global tariffs is of course front and center. I do want to remind people though that starting next week, the liquidity flow from both the Fed and ECB will go negative for the first time in years. The Fed’s QT will increase to $120b in Q3 while the ECB will be injecting $105b (at current FX rate). This gets more pronounced in Q4 when the Fed’s balance sheet shrinks by $150b and the ECB will be adding just $53b. Thus, the BoJ is the clear standout in its QE policy but which has been slowing anyway. I continue to believe all this really matters and is a key reason for some of the financial accidents we’ve seen so far this year (blow up of short VIX trade, Turkey, Argentina, Italy and broader EM weakness).
We got good news on the trade front out of Hong Kong for May as exports jumped by 16% y/o/y, well more than the estimate of up 8.5%. As I’ve said before though, I don’t know how much of this was front loading activity ahead of the actual implementation of the announced tariffs and what was organic. Exports to China grew by 19.2%, to the US by 12.5% and to Germany by almost 17% to name a few of their customers. Imports were up by 16.5%, above the forecast of up 11.3%. The Hang Seng index started the day deep in another hole by more than 1% but rallied by days end to finish down by only .3%. Both A shares in Shanghai and H shares in Hong Kong closed red again. The Shanghai index is now down exactly 20% from the January 24th recent high. Hopefully we’re close to a short term bottom as the contrarian in me read a headline this morning, “China stock rout may worsen, analysts warn no end in sight.”
I’ve talked about Sweden in the past for the sole reason of their negative interest rate policy which is becoming more and more untenuous because of a near 6 year low in the Krona vs the euro, rising consumer price inflation, a housing bubble and good GDP growth. Well, today they reported that PPI rose 6.3% y/o/y, up from 4.9% in April. For comparison, you can buy a 25 year Swedish government bond and collect a coupon of 1.16%. If you buy a 5 yr note, you’ll pay .10%. The point is, we are seeing the Riksbank and other central banks getting stuck in policy that they are finding really difficult to get themselves out of. //www.youtube.com/watch?v=emFUtuotHL4
After the slightly better than expected new home sales data yesterday and ahead of Friday’s pending home sales news, Lennar reported a good quarter and said in their release, “Concerns about rising interest rates and construction costs have been offset by low unemployment and increasing wages, combined with short supply based on years of underproduction of new homes. Demand remained strong as we continued to see pricing power support margins while affordability remained consistent.” This is good to see in light of the plateau we’ve seen in the full industry data over the past few months but the push and pull among the macro factors affecting housing will continue I believe. The big, well capitalized companies such as Lennar can certainly handle rising labor costs, raw materials and lots much better than smaller ones in terms of protecting margins and being price competitive.