With plenty of hints that QT from the Fed comes before another rate hike, the only question today is whether the groundwork is laid in the statement for a beginning of this process in September or do they rely on upcoming speeches to set the stage. As the September meeting is not until the 19th/20th, they do have some time but considering that Yellen only a few weeks ago at her Congressional testimony said QT would start “relatively soon”, it would be nice to have some more color today on what that timeline means. When it does begin, what will long end yields do? On paper the obvious answer is higher but yields fell after QE1 and QE2 was underway and sunk when they were done. Yields rose after QE3 started but really spiked when Bernanke hinted at tapering in May 2013. I continue to believe that long end yields will remain in this tug of war between modest economic growth and below 2% inflation on one hand and QT and likely ECB tapering on the other hand which could be a drag on yields to the upside.
As price likes to drive sentiment, Investors Intelligence said Bulls rose to 60.2 from 57.8 last week. That’s the first time it’s had a 60 handle since March 1st when it got to 63.1 (which was a 30 yr high). Bears fell .2 pts to 16.5, the lowest since March 1st. The spread between the two widened to a 4 month high at 43.7. Those expecting a Correction is also at a 4 month low. II said this in response to the extreme bullish sentiment read, “This is a new major warning calling for defensive measures to protect profits, renewing the same signal from earlier this year. In the historical comparison, the bulls ended January 1987 at 64.6 and then returned to 60.8 that August after further market highs.” This data is also corroborated by the CNN Fear and Greed Index which closed yesterday at 81 from 72 on Monday, 62 last week and vs 52 one month ago. This puts it in the ‘Extreme Greed’ part of the curve. Bottom line, from a purely contrarian standpoint, the times this year when bullishness has gotten stretched, markets have chopped around and consolidated which then has lead to a drop off in positive sentiment which then has set the stage for another push higher.
The MBA said mortgage applications to buy a home fell 2.2% w/o/w to a two month low but are still up 8% y/o/y. The Spring/Summer transaction season was pretty good relative to last year but I continue see evidence that buyers are beginning to push back against the persistent price increases. Yesterday, home builder Pulte Homes talked about discounting being given on some higher end homes. Refi applications rose 3.4% w/o/w as the average 30 yr mortgage rate fell 5 bps but refi’s are still down 41% y/o/y.
After yesterday’s 4% spike which brought gains in 10 out of the last 12 days, copper prices are up a hair. I would love to argue that the two year plus high in prices is due to an acceleration in global growth but I believe this is more due to supply discipline which started early last year. I also read a story today that there is chatter that China was going to restrict the imports of metal scrap which would have been used for copper extraction which would be pollute the environment . The 3 month high in nickel prices is being driven by the threats of higher taxes on mining companies in the Philippines.
Maybe coincident with the sharp drop in approval ratings for French President Macron, French consumer confidence for July unexpectedly fell 4 pts m/o/m to 104. The estimate was for no change. The context though is that it jumped by 6 pts in June. With Macron hoping to ‘break things’, particularly in the labor market in terms of liberalization and cutting government spending, many entrenched interests are digging in to protect their turf. I’m confident though that Macron can implement some real positive changes.
The UK economy grew by .3% q/o/q and 1.7% y/o/y as expected in Q2 after a .2% and 2% gain in Q1. As for the 1st half the year, the Office for National Statistics said the economy saw a “notable slowdown in the first half of this year” because the quarterly average last year was up .5%. Consumer retail spending rebounded after Q1 weakness but growth was flat in this sector when taking the two quarters together. Manufacturing and construction were particular drags on growth as they both fell q/o/q. The pound initially sold off on the in line print but has since rebounded and higher on the day. Gilt yields though are lower. The BoE meets next week and they really have to look themselves in the mirror and ask whether the most extreme monetary policy in the history of this institution is still necessary. I understand some of the concerns over Brexit so even if we did get a rate hike in response to higher inflation that would take away the emergency one implemented last year, we are definitely NOT going to be seeing a string of hikes as long as Mark Carney is at the helm.
July economic confidence in Italy fell .8 pts to a 4 month low but really has been in a tight range over the past 6 months around the highest levels since 2008. The standout was the construction component which rose to the best level since April 2008 likely helped by very low financing costs. Manufacturing was up a touch but offset by a decline in services. The next big event for Italy is next year’s election.