Likely taking advantage of this yield spike, the 7 yr note auction was very good. The yield of 2.215% was well below the when issued of 2.23%. The bid to cover of 2.68 is above the one year average of 2.49 and the best since February 2014. Also, direct and indirect bidders took 82% of the auction, more than the previous 12 month average of 67%.
Bottom line, the highest yield since June 2015 brought out the buyers and yields are coming slightly off their intraday highs in response, although still remain sharply higher on the day.
Markit’s November US manufacturing PMI rose .5 pt to 53.9, the best since October. “Higher levels of output were supported by a continued rebound in new business volumes, with strong domestic demand helping to offset subdued export sales growth. Manufacturers also reported a moderate rise in staffing numbers and another robust increase in purchasing activity…which partly reflected continued efforts to rebuild inventories.” On the inflation front, “cost pressures remained subdued…despite some further upward movement in many commodity prices” while “average prices charged by manufacturers increased slightly, but the rate of factory gate inflation eased from the near two year high recorded in October.”
Bottom line, Markit referred to the sentiment improvement as a “strong post election bounce” as “many factories reported that demand from customers had picked up as uncertainty about the election result cleared. Domestic demand rose especially sharply, helping to make up for subdued export growth, linked in turn to the strong dollar.”
October new home sales, in a month where the average 30 yr mortgage rate was 3.72% vs 4.16% as of Monday, totaled 563k, 27k less than expected and September was revised down by 19k to 574k. This brings the 6 month average to 575k vs the trend seen last year at around 500k. Months’ supply rose to 5.2 from 5 and that matches the most since March but is still below the longer term average of around 6 months. The median price was higher by 1.9% y/o/y but fell 3.1% m/o/m. In terms of sales price distribution, there was a slowdown in the number of homes sold valued at more than $400k but encouragingly more homes priced below $200k were sold as this is where the dearth of the inventory has been which has resulted in more renting by first time households.
Bottom line, considering the sharp rise in mortgage rates in November, I’ll consider this October data old news. We’ll get a fence sitter effect in November as seen with mortgage apps but then that will flame out. The positive will be a slowdown in the rate of home price increases for first time buyers and will that be enough to offset the higher monthly payments buyers now face.
Core durable goods orders in October rose .4% m/o/m, one tenth more than expected but the prior month was revised down one tenth so we’ll call this about in line. Importantly, core capital spending is still down 4% y/o/y. Looking at durable goods ex transportation saw capital spending orders up 1% m/o/m, well more than the estimate of up .2% but are just flat y/o/y. There was a big boost to aircraft orders which juiced the headline number to a 4.8% m/o/m gain. Vehicle/parts orders fell .6% m/o/m and are down 1.5% y/o/y. Machinery orders did rose .2% vs last month but remain down 4.7% vs last year. Orders for computers/electronics and electrical equipment were higher both m/o/m and y/o/y. Metals mining was mixed. Core shipments rose .2%, one tenth more than expected and this gets plugged into GDP and comes after a .4% rise in September.
Bottom line, orders ex volatile transportation saw a nice upside surprise but are still only unchanged vs last year and core capital spending remains mediocre. The caveat to all this was this is pre election data and it will be most relevant to see how capital spending plans change with new economic policies coming our way.
Initial jobless claims totaled 251k, about in line with the estimate of 250k and up from the plunge to 233k last week. The 4 week average fell to 251k from 253k. Continuing claims, delayed by a week, rose by 60k after falling by 60k last week. Bottom line remains the bottom line in that the pace of firing’s remains muted.
Treasuries sold off in response to the headline and ex transportation number within durables but the core level of spend was only about in line. Claims rose w/o/w but are still near the lowest level in 43 years. The 10 yr yield at 2.35% is now a ‘tightening’ of policy vs where the 10 yr was just one month ago. The Fed is just playing catch up with a rate hike next month. The US dollar continues its strong move higher.
Considering the rip roaring rally we’ve seen that has been relentless over the past two weeks, stock market sentiment has gotten extremely bullish. Investors Intelligence said Bulls rose to 55.9%, a 3 month high and up from 51% last week. II refers to this level above 55% as entering “the danger zone.” Anything above 60% is considered uber bullish and “would be a major call to consider defensive measures” according to II. Bears fell to a 3 month low to just 21.6% from 23.5% last week and this brings the Bull/Bear spread to 34.3 from 27.5 last week. Those expecting a Correction was down 3 pts. Bottom line, extreme sentiment doesn’t stop rallies in their tracks but it should alert everyone that in the very short term, this one is due for a breather. This also comes coincident with extreme overbought conditions.
Simply stated, the market and economic story for 2017 will be the tug of war between hopes for faster policy driven growth on one hand and the unwinding of the epic global bond bubble on the other.
Call it the ‘fence sitter effect’ where a rise in interest rates panics home buyers into getting off the fence to buy and lock in that mortgage rate. With a dramatic 20 bps spike in one week in the average 30 yr mortgage rate to 4.16%, a level last seen in January, resulted in a scramble as mortgage applications to buy a home jumped by 19% w/o/w which brings the y/o/y rise to 11.1%. This trend will then cool off as monthly costs rise. Refi applications, immediately sensitive to a rise in rates, fell for the 7th straight week, by 3% to the lowest level since January. The y/o/y gain has slowed to 9% from 19% last week.
The Eurozone manufacturing and services composite index for November improved to 54.1, an 11 month high from 53.3 in October. That was above the estimate of no change as both components moved up. For Germany and France, it was only the services side that saw m/o/m gains as manufacturing for both was down. New orders and backlogs were up and employment had its best month since the recession. Price pressures are also building as “average prices charged for goods and services showed the biggest rise for over 5 years, albeit with the rate of increase being very modest. However, with indicators such as rising backlogs of work and longer supplier delivery times suggesting demand is exceeding supply, price pressures look set to intensify further in coming months.” Markit estimates the region’s economy will grow by .4% q/o/q in Q4 and thus around 1.6% annualized vs the 1.4% seen in Q3.
Bond yields are jumping higher in Europe after yesterday’s rally. Nervousness ahead of the Italian referendum has the 10 yr Italian yield higher by 13 bps and is breaking out to the highest level since July 2015. The Italian MIB stock index is down by 1.3% with banks weak. The French 10 yr yield is up by 10 bps to .81%, the most since January. The election spotlight will be on France next year. The 5yr 5yr euro inflation swap is up a touch to 1.6%. Draghi and Co meet in two weeks and will most likely continue the current pace of QE past the March deadline but it is very likely that at some point in 2017 a tapering will begin.
The Chinese yuan continues its march towards 7.0 with it again today making multi year lows vs the US dollar. Is it just a matter of time that Trump calls out the Chinese for ‘manipulating’ its currency lower? The yuan vs their basket of currencies however is much more stable.