My focus this week is twofold. First is on the US consumer as we know that is the only thing keeping the US economy out of recession. After hearing apprehensive comments about spending over the last few weeks from Ford, Starbucks, Dunkin Donuts and Yum Brands, we heard this (lost in the euphoria of the good payroll report) from QVC on Friday: “Beginning in early June QVC’s US sales began to experience significant headwinds, which have continued. The sales declines, as compared to prior periods, have averaged in the mid to high single digit percentages.” We get earnings releases this week from Coach, Ralph Lauren, Michael Kors, Nordstrom, Kohl’s, Macy’s and JC Penney. Department stores certainly have their own issues but we’ll see what, if any, insight they can give on the consumer. We also see July retail sales on Friday.
The other area of focus is the action in sovereign bonds. The Japanese 10 yr is now just 5.5bps from zero, up by 4.5 bps overnight, the least negative since late April and versus -29 bps 2 weeks ago and I view their bond market as the possible canary after what the Abe government and the BoJ did or didn’t announce last week. Also and maybe most importantly this comes as the BoJ and BoE and maybe the ECB are realizing that negative interest rates is a really bad idea. After all, it’s been negative rates predominately from the BOJ and ECB that was the trigger for so many trillions of negative yielding paper. The Japanese government is auctioning off 30 yr paper tomorrow. The 30 yr yield was up by 3 bps to .42%, the highest since early April. There is no spillover today from JGB weakness to Europe and the US but there was last week. For those that think foreign money continues to pile into US Treasuries in a yield grab, no longer as the cost of hedging FX exposure has gotten too expensive. Read this article from BN, http://www.bloomberg.com/news/articles/2016-08-07/bond-market-s-big-illusion-revealed-as-u-s-yields-turn-negative
With respect to the Fed and their response to Friday’s jobs number, unfortunately we won’t hear from any of them until next week. They face the dilemma of mediocre economic output, good hiring, punk productivity and falling corporate profit margins as a result. Rate hike odds are just 26% for September and 42% by year end. If they have any desire to use that September meeting as an opportunity, expect Janet Yellen to lay the ground work in Jackson Hole in a few weeks. The recent Fed creation called the Labor Market Conditions Index that supposedly gives them a broad look at the labor market is released today for July at 10am. It’s been negative for 6 straight months for the 1st time since ’08-’09.
US dollar LIBOR for 3 months finished last week at .79%, up more than 3 bps on the week and higher by almost 50 bps y/o/y. I found a stat from Fed Governor Jerome Powell in a speech he gave in 2014 where he said “there are an estimated $300 Trillion in LIBOR contracts, roughly half which reference dollar LIBOR.” Thus, $150 Trillion of loans/swaps are going to see higher funding costs. The real question is after this shift from prime money market funds into government Treasury focused funds has run its course, does LIBOR fall back down again or not.
Chinese exports in dollar terms fell 4.4% y/o/y, slightly below the estimate of down 3.5% with declines seen to all regions of the world. Yuan weakness cushioned the soft trade data as in yuan terms exports were up. Imports in both currencies fell with fake invoices still a problem with Hong Kong as imports from there miraculously rose 123% y/o/y. The decline in imports in dollar terms of 12.5% is in part to the weaker yuan but also lessened demand for goods. Also out of China over the weekend was their FX reserve data where they stood at $3.2T in July, in line with expectations and down slightly from the $3.205T seen in June. The low was $3.19T in May. The yuan was higher in July vs the US dollar but has started weakening again in the first week of August. The yuan panic of August 2015 has been forgotten for now even though the currency is even weaker since. The Shanghai comp closed up .9% while the H share index jumped by 1.6% in joining the global rally post US jobs report.
After seeing weak German factory orders and industrial production misses from France, Italy and the Netherlands last week, today German IP was up by .8% m/o/m, better than expected when we include the upward revision to May. The y/o/y data though was in line. We know the German economy continues to carry the region but their export heavy economy is not immune from soft global trade.