As I’m sure all of you have been discussing, I’ve been as well over the past few days on why the market doesn’t care about all the drama from the Administration. I respond and just say here simply, the markets and our $18T economy don’t give a damn about Trump’s personality, the things he says and his tweets. It will only care if it starts to impact that $18T economy if hoped for tax and regulatory change do not come to fruition. I’m hoping Congress, irrespective of the daily noise, remains committed (at least for their own sake) in passing something but it’s clear that the extent of it is definitely much more in question. Thus, markets may eventually care. Not surprising to my readers anyway, I still believe monetary policy here and overseas will be more relevant to markets than anything that comes politically. This all said, I will include again this chart of the Value Line equal weighted index of 1700 names in order to give you a broader view of the market outside of the priced weighted DJIA and market cap weighted S&P 500. As seen, the broad market has basically done NOTHING over the past 3 ½ years.
VALUE LINE EQUAL WEIGHTED INDEX
It’s not just the Fed that is in the perpetual feedback loop with markets where central bankers chase their own tail called markets. We have Bill Dudley very focused on the Goldman Sachs financial conditions index which reflects very easy conditions in large part because of little fear of monetary policy tightening too much because after all, we are dealing with a hugely dovish committee. This market response then emboldens the Fed to further tighten policy. I guarantee when markets eventually have a hissy fit, and financial conditions tighten, the Fed will then step back as it did after the market reaction in early 2016 to the first rate hike. Today in the release of the ECB minutes from their meeting, it said “While it was remarked that the appreciation of the euro to date could be seen in part as reflecting changes in relative fundamentals in the euro area vis-à-vis the rest of the world, concerns were expressed about the risk of the exchange rate overshooting in the future.” The underline is mine on this form of verbal intervention. I just have to ask the ECB, WTF do you think is going to happen to the euro and your bond markets for that matter when you further taper? Free lunches everywhere? Trapped is the only appropriate word that immediately comes to mind. The euro is touching $1.17 vs the US dollar in response but European sovereign yields are little changed.
The Q2 unemployment rate in France fell one tenth to 9.2%, obviously still very high but it’s the lowest since March 2012. It did however get as low as 6.8% pre recession. Youth unemployment remains a big problem as its 22.7% for 15-24 year olds. Macron really needs to get his labor market liberalization reform passed in order to create a more dynamic environment where employers don’t fear hiring people full time because of the high cost of firing them if needed. If it’s easier to fire, it makes it much easier to hire.
The July eurozone CPI figures were left unrevised at 1.3% y/o/y headline and 1.2% core. That core rate, while still modest, matches the quickest pace in almost 4 ½ years.
UK retail sales ex auto fuel in July were about in line with the forecast if we include the June revision. Reflecting shrinking real wages, the 1.5% y/o/y gain is the 2nd slowest since 2013 and remains a drag on the UK economy. Instead of the BoE having their fingers crossed that wages will rise, they should instead focusing on getting inflation to fall. Notwithstanding the data miss, the pound is down slightly and gilt yields are up a touch and the FTSE 100 is not getting help from that pound fall as its lower by .4%.
Japan reported July trade data that was about in line with expectations. Exports grew by 13.4% y/o/y vs the forecast of up 13.2% while imports were up by 16.3% y/o/y, a touch below the estimate of up 17.1%. This greater growth in imports relative to exports was also seen in the Q2 GDP report where net trade was a modest drag. Looking specifically at merchandise volume exports reflects a more modest pace of gain as it was up just 2.6% y/o/y. Exports outright fell to the EU while rose 3% to the US and 6.4% to China. The data had no impact on markets as the yen is slightly weaker while the Nikkei closed down by just .1%. While overall Q2 in Japan was good, over the past 5 years since Abe took office there has been absolutely no consistency in growth patterns.
The China proxy that is Australia reported a better than expected gain in jobs in July but it was all due to a sharp jump in part time employment of 48.2k but after a similar fall of 49.3k in June. Let’s call it summer hiring where the seasonal adjustments are not very good. Even though full time employment dropped by 20.3k, it came after a sharp gain of 69.3k jobs in June. The unemployment rate at 5.6% is slightly below the 5 yr average of 5.8%. The market response was muted here too as this data is always volatile and seasonal adjustments are not done well here. The Aussie$ is unchanged and the ASX was down by .1%.
If there is one thing that Australia cares about it is metals prices and the CRB raw industrials index continues to hover near 3 year highs. If you didn’t see, zinc prices yesterday closed at a 10 yr high. Copper prices are near 3 yr highs as are aluminum prices.
CRB RAW INDUSTRIALS INDEX