Continuing a trend of very uneven economic data, the Japanese manufacturing PMI fell 1.1 pts to 52, a 7 month low. Markit said “Slower growth was signaled in June, with both orders and output rising at the weakest rates since last year amid reports of a slight softening in market conditions.” Of note, both input and out prices rose and Markit said that firms were able to “pass costs on to clients to the greatest degree in over 2 ½ years.” Backlogs went negative while new orders, export orders and employment all were positive but fell m/o/m. The yen was up a touch while the Nikkei was up a hair. Bottom line, there is just no consistency whatsoever in the Japanese economy. Corporate Japan though has certainly improved ROE’s and their focus on the shareholder and that’s really been the bright spot over there.
After a nice string of upside surprises, the Eurozone manufacturing and services composite index slightly disappointed in June. The index fell to 55.7 from 56.8 in May and is below the estimate of 56.6. The components were mixed though as manufacturing improved a touch but the services component was down by 1.6 pts to the weakest in 5 months. To this differential, new orders in manufacturing rose to the best level since February 2011 but weaker services sent the overall component to the lowest in 4 months. Job growth was unchanged but at a good level. Input prices fell to a 7 month low and output prices rose at the slowest pace since January. Lower commodity prices were the main reasons. Sorry Mario. There is though some inflation in the pipeline as “with supplier delivery delays worsening to the greatest extent for just over 6 years” which “suggest that inflationary pressures persist in supply chains.” As for business optimism for future growth, it fell to a 5 month low.
Bottom line, as seen in this chart, economic optimism has cooled a bit, albeit holding at a good level for Europe. European stocks are down across the board in response and again banks are weak with the Euro STOXX bank index trading at a 2 month low.
On the heels of the growing mini mutiny within the Bank of England where a growing contingency wants to hike rates, the 2 yr gilt yield is all of a sudden at the highest level in almost 8 months at .244%. This also is the first time since then that the 2 yr yield is not much below the BoE base rate of .25%. The 2s/10s spread in the UK is also at the narrowest since early October at 80 bps, similar spread to the US. In her parting words before she retires from the BoE, Kristin Forbes who has been wanting to hike rates for a while, said in a speech today that politics and too many job distractions (new regulatory responsibilities) have prevented the committee from generating the will to raise rates. She said “Central bankers may place more weight on supporting the economy today and worry less about future risks related to low interest rates and high inflation if they are constantly on the firing line for the current state of the economy, including for issues other than inflation.” She went on to say that committee members are “more hesitant to ‘take away the bunch bowl’ and make the difficult decisions on inflation.” To remind all, the UK unemployment rate is at the lowest level in 42 years and the CBI industrial orders index is at a 29 year high at the same time inflation is near 3% which is squeezing real wages. This is all why the base rate as mentioned is only at .25% and the BoE balance sheet has never been larger. The pound is rallying in response to higher yields.
With today being the one year anniversary of the UK referendum vote, you can see the 2 yr yield in this chart and the plunge that took place on the belief that the BoE would respond with a rate hike which they then soon delivered. I expect them to take that cut back within coming months. Thus, be short the 2 yr gilt.