He doesn’t vote but Boston Fed President Rosengren is on board with more rate hikes as he’s said before. Thus if the US Treasury market was open, I would have expected no real response. He was fine for a while with the “patient approach to removing accommodation than in recent recoveries” but now “failing to respond to very tight labor markets with rates remaining negative in real terms could potentially risk unnecessarily shortening the economic recovery…we’re definitely seeing that tighter labor markets are causing wages and salaries to gradually go up as well.”
On the belief of many, ‘Don’t Fight The Fed’ has now turned into ‘Who Cares About the Fed’ and all of that is because of the hopes for tax reform and the liquidity flow predominantly from the ECB and BoJ. This belief happens almost every time in the beginning of a Fed tightening cycle also on the confidence the economy is good and can handle it but the cycles still typically end up the same way (10 of the last 13 since WWII put us into a recession). The ECB though is about to cut the flow of that spigot again in coming months with an announcement in 2 weeks and with all that largesse from the BoJ (including ETF buying), the Nikkei is still down about 50% from its peak in 1989. I’ll steal this analogy again from my friend Fred Hickey. The Fed is playing a game of Russian Roulette with markets and each round of QT and Fed rate hike is another bullet in the gun pointed at the markets. When it fires though no one of course knows. The minutes from the FOMC meeting 3 weeks ago is out on Wednesday but we’ve heard from enough of the members since that we already know the path they are on.
Last week we saw a m/o/m improvement in the state sector weighted manufacturing and service PMI indices from China. We did however also see last week a drop in the small business, private sector weighted manufacturing index and today we saw a 2.1 pt m/o/m decline in the sister services index for these small companies to barely above 50 at 50.6. This brought the combined composite index to 51.4 from 52.4 and that’s a 3 month low. New orders were also barely above 50 and backlogs fell below. Employment growth grew at a slower rate and are also only a touch above 50. Caixin bottomed lined the report by simply stating “the expansion in both manufacturing and services cooled in September, suggesting downward pressure on economic growth may re-emerge in the fourth quarter.” It is now coincidence that the PBOC lowered reserve requirements (to begin in 2018) for those banks that would step up lending to small and medium sized businesses as there is a clear discrepancy in the business outlook between this group and the state sector owned big companies.
We also saw China release its FX reserves for September and they grew for an 8th straight month to $3.109T, up by $17b from August and slightly above the forecast of $3.10T. It’s also the highest valued portfolio in about a year. A stronger yuan vs its basket and the crackdown on big Chinese companies going on overseas spending sprees were the two main catalysts. We can also assume that Chinese authorities were influential in keeping things calm before the People’s Congress get together. The State Administration of FX talking its book added ‘solid economic growth’ and ‘balanced international payments’ as other factors keeping things relatively stable. The yuan is rallying rather sharply after the reserve data with the biggest jump for both onshore and offshore vs the dollar in a month. Back from holiday saw the Shanghai comp rally by ¾ of a percent (also first reacting to that RRR cut) but the H share index which was open 3 days last week fell by .6%. The Hang Seng closed lower as well.
Following the sharp rebound in August factory orders seen last week from Germany, they followed up today with an upside surprise in its industrial production figure. It jumped 2.6% m/o/m, well more than the estimate of up .9%. The Economic Ministry said “The good business morale and the positive development in industrial orders point to a continuation of the solid industrial upswing.” The only caveat I would give is there are July plant shutdowns typically that reopen in August. There was no real market response as the DAX is flat as are German bunds and the euro is up a hair.