At least according to newsletter writers, sentiment on US stocks remains very bullish. Investors Intelligence said Bulls rose to 56.3, a 3 week high from 55.8 last week. Bears fell by .8 pts to 17.5, a 3 week low. The peak in Bulls in the post election time frame was back on March 1st when it touched 63.1 which was a 30 yr high. That day was also the peak close in the S&P 500. II refers to any read above 55 as the “danger zone” and that was first reached on November 23rd. As of yesterday’s close, the Russell 2000 is back to where it was on December 8th, the Transportation index closed at a level first seen on December 6th, the S&P Midcap index is 1% above its December 8th close, the industrial stocks (XLI) are 2% above its December 7th close and the financials (XLF) are back to its early December close, to name a few. Tech is really the only standout with XLK up 9.5% since December 7th and in turn has helped the market cap weighted S&P 500 and NASDAQ. We are of course well above the November 8th close for all markets but the point I’m trying to make is when bullishness gets stretched, stocks usually are closer to the end of its short term move rather than the beginning. This could certainly be just a rest for another move higher but a cooling of bullishness would be a better backdrop for that. Fundamentally, I still believe that this is the time when valuations begin to matter because of the tightening of monetary policy.
In contrast to the attitude of newsletter writers, the CNN fear & greed index closed yesterday at 31 which is in the ‘Fear’ category.
This figure is calculated by looking at 7 indicators, momentum (market relative to its moving average), junk bond demand (spread b/w high yield and IG), stock price strength (52 week highs minus 52 week lows), put/call ratio, stock price breadth (McClellan Volume Summation Index), safe haven demand (difference b/w 20 day stock and bond returns), and the VIX. What to make of the discrepancies in market attitudes? I’m not exactly sure.
We start the trading day with the US 10 yr yield exactly at the lower band of its 5 month trading range as we all debate the mixed messages that all these markets are sending on growth. I want to emphasize my belief though that underlying the behavior on bonds is also the shifting behavior of QE programs which creates its own dynamic that can’t be analyzed by looking at just growth and inflation stats. Over the next year, Fed, ECB, BoE and subtle BoJ tapers are upon us and the end of negative interest rates will coincide or soon follow. That alone puts a floor on global rates I believe. As for the US 10 yr, even after a 1.6% growth performance in 2016 and a possible under 1% print in Q1, its yield is still almost 100 bps above the July 2016 lows and a lot has to do with the change in central bank action in addition to the rise in inflation expectations and hopes for Trumponomics.
In the midst of the spring selling season, the MBA said mortgage applications to buy a home rose 2.9% w/o/w and 2.8% y/o/y. That y/o/y move is the slowest since February but on an absolute basis is the best since June. Sellers are enjoying high prices. Buyers though are dealing with modest inventory, a persistent rise in prices that are running double the rate of inflation and mortgage rates that are about 50 bps above last year. Refi’s saw no change w/o/w and remain down 40% y/o/y even though the average 30 yr mortgage rate fell 6 bps to 4.28%, the lowest since mid January. I’m sure bank earnings reports will reflect the collapse in this area of their business.
The relationship between the yen and the Nikkei still remains pretty tight as the 1.2% rally in the yen yesterday drove a 1% decline in the Nikkei overnight and it closed at the lowest level since December 7th. See the first paragraph with the mention of that date. Machinery orders in February disappointed with a 1.5% m/o/m rise vs the estimate of up 3.6% but due to the quirkiness of the calculations, the y/o/y rise was 5.6% vs the estimate of up 2.5%. As this number is hugely jumpy both up and down month to month, I’ll accept the volatility in it. Importantly, the BoJ reported that bank loan growth grew 3% in March vs 2.8% in February and it hasn’t grown that fast since May 2009. Net interest margins are still shrinking thanks to BoJ policy so loan growth is trying to grow faster than the decline in margins. This news didn’t stop the 1% decline in Japanese bank stocks overnight as they still remain yield curve and profit challenged.
One more thing on the BoJ, Governor Kuroda knows that the stronger yen is making his job that much harder in achieving his made up 2% inflation target and he did his part to try to talk it down. “It’s true a further weakening of the yen might make it easier to achieve the BoJ’s inflation target.” Again, if wage growth doesn’t match the rise in hoped for inflation, the Japanese are worse off and even if all it does is match it, they are still running to stand still. It was the mid 1990’s the last time Japanese wage growth was persistently above 2%.
The only thing of note in Europe was the February UK jobs data which was mixed but there was particular weakness in March jobless claims. For the 3 months ended February, 39k jobs were added vs the estimate of 70k. It still was enough though to keep the unemployment rate steady at 4.7%, which matches the lowest since 1975. Yes, 1975 at the same time the BoE benchmark rate is at .25% and QE is ongoing. Wage growth did improve slightly but is rising no higher than CPI. It was up 2.2% y/o/y ex bonus for 3 months ended February vs 2.4% in the prior period. March CPI printed 2.3% this week. The BoE is afraid to raise rates as long as wage growth is slow but they should be raising rates because inflation is rising. Lastly, the March jobless claims figure rose by 25.5k, the biggest one month increase since August 2011. This is quite a spike and bears watching. The pound is little changed in response as are gilt yields and stocks.