The Boock Report

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Mr. Market has sway

One month ago I wrote this: “It now seems we have a 3rd party at the US/China trade negotiation. His name is Mr. Market.” This comment followed a  WSJ report “As Trade Battle Unfolds, Trump Keeps Close Focus on Markets.” Randall Forsyth also hit it on the head in Barron’s the weekend before saying “It’s the Stock Market Stupid.” I also said, “live by the Tweet on the stock market, die by it.” Now we have the Bloomberg news story yesterday titled “Trump wants deal with China to boost stock market, sources say.”

Bottom line, are we going to get a deal that is substantive or one that is optically nice for the sake of saving the stock market? If it’s the latter, what a complete waste of time, resources, jobs, money and livelihood for many this has all been on the road of tariffs. I am hopeful and do believe though it will be the former. Regardless, any tempering of the tensions will be welcomed.

I don’t expect any new news within today’s FOMC minutes from the meeting 3 weeks ago. Markets heard all they wanted to hear from Jay Powell. I do want to point out again the circular nature of the focus on ‘financial conditions’ when Fed policy is the front car, not the caboose in driving it. Fed tightens, markets have a hissy fit as any child does, financial conditions cramp up, the Fed then backs off. Market then rallies, financial conditions ease and the Fed is back in the game (have you seen what rate odds have done since Powell was supposedly dovish? We took out the rate CUT odds and balance sheet will keep on shrinking). We also get a bunch of Fed speak today from members but again, Powell has spoken.

There was no better stock market sentiment set up to the rally seen over the past week than last week’s Investors Intelligence big shift to the bear side. Last week Bulls fell almost 10 pts to 29.9, the fewest since Feb 2016 while Bears spiked by 13.2 pts to 34.6, the most since early 2016 too. This week, Bulls bounced almost 5 pts to 34.8 while Bears fell 5.2 pts to 29.4. II said “Editors are now rushing to put funds to work, to avoid missing more gains.” With the markets a bit overbought now and with this shift back in sentiment (although I’m still not used to seeing Bears above 20), the market is likely headed for a breather in the coming week as we gear up for earnings.

I argued the last few weeks that mortgage applications always fall at year end and always bounce back in the new year, for the sole reason that the focus is on holidays and getting back to work. This week was no different according to the MBA but the drop in mortgage rates certainly helped refi’s. Purchase applications bounced 16.5% w/o/w after falling by 14.5% in the 3 prior weeks. Refi’s rebounded by 35.3% after a 14% drop in the 3 weeks before. That 30 yr mortgage rate did fall to 4.74% on average, down 10 bps on the week and that’s the most attractive since April. I look forward to see the data in coming weeks on purchases to see how potential buyers respond to the drop in rates.

With the US housing market clearly in a slowdown, Lennar said this today in their earnings press release: “we continued to experience slower sales due to higher home prices and rising mortgage rates, consistent with what we highlighted on our 3rd quarter conference call. We continue to believe that the housing market is adjusting to a temporary disconnect between sales prices and buyer expectations and that the basis underlying fundamentals of low unemployment, higher wages and low inventory levels remain favorable.” With respect to guidance, “due to continued softness and uncertainty at this seasonally slower time of year, we are deferring guidance for fiscal year 2019 until the markets further define themselves.”

If only the Japanese saw faster wage growth. Well, they are getting there. November saw regular base pay rise by 1.6% y/o/y vs 1.5% in October and that is the fastest pace of gain since 1997. The Bank of Japan should be celebrating this and officially quit the 2% inflation target (which seems to be happening behind the scenes). REAL wages are going higher, don’t spoil it with an offsetting rise in inflation. JGB yields did rise on the news with the 10 yr yield up 2 bps to +.03%. (Yes, I’m back putting pluses and minuses before JGB yields unfortunately)

REGULAR BASE PAY INCREASE in JAPAN


The last two days brought us weaker than expected industrial economic data in Germany. Today they reported that exports in November fell .4% m/o/m which was one tenth more than expected and October was revised up by two tenths. Imports were really weak, falling by 1.6% m/o/m vs the estimate of no change and the prior month was revised down by 5 tenths. We will get GDP numbers next week and if there is a major economy dependent on the state of global trade, it is Germany. We’ll see if they can avoid a technical recession. The euro is up a touch and bund yields are little changed.
Positively in the Eurozone, the November unemployment rate did fall to 7.9% from 8% in October. That is the smallest level of unemployment since late 2008. The region is finally seeing this figure fall back to near the pre crisis lows. Wages have also been rising in Europe and we’ll see how the ECB tries to get out of NIRP this year as growth though slows.
EUROZONE unemployment rate