Yesterday II said Bulls rose .5 pt w/o/w to 52.6 while Bears fell .2 pts to 21.1 after jumping over 20 last week. Today AAII said Bulls fell 4.5 pts to 38.9 after rising by 10.2 in the two prior weeks but all of them went to the Neutral side, or we can call it the “I don’t know” crowd. Bears fell too, by 6.1 pts to 27.2 and that is the least since July 29th with all also going to the Neutral group. Bottom line to all this is that bullish sentiment is certainly off the boil but with the drop in Bears in AAII, I’d call it overall in no man’s land. Evidence of this too is the CNN Fear/Greed index which is basically smack in the middle of the 0-100 range at 49. About as neutral as it gets.
While Atlanta Fed president is repeating his belief that a tempering of asset purchases will begin this year he also said “I wouldn’t lean in too heavily to expecting anything on taper at the next meeting.” He votes too. Just as I did for John Williams yesterday, I recommend Bostic read the Beige Book, which I’m sure he will. Also, every single Fed member needs to ask themselves what is the point of QE at this point? Some we’ll say we need to keep interest rates low because growth is moderating but do the two most interest rate sensitive areas of the US economy, housing and auto’s, need more juicing of the demand side especially when there is so little supply?
This said with Bostic, if Powell wants to get a taper going in October, he can be persuaded because he’s still optimistic. “I actually think that the economy is in a fairly strong position” and “I do take some comfort in the perspectives of business leaders throughout my district who are still pretty bullish on things, and believe the economy is very close to having its full on sea legs and not needing as much accommodation of policy. Also, with respect to Covid, “Delta has definitely slowed the pace of progress, but it hasn’t stopped it. I haven’t seen evidence to suggest that it stopped, or even reversed it.”
I’ll print again what Larry Summers said in an editorial last month on QE, “The Fed is running QE at current levels not because anyone has analyzed that as appropriate given current conditions. Rather, there is a felt need to maintain credibility given previous commitments and a reluctance to accept the immediate pain and dislocation associated with changing course, coupled with faith in the ability to manage the situation down the road.” And I’ll say with respect to the ‘previous commitment’ of ‘substantial progress’ when it comes to the labor market, if they are expecting to see a pre Covid labor market with a 3.5% unemployment rate at some point they are searching for an environment that no longer exists. Again, read the Beige Book. The labor market is as tight as can be and wages are jumping in response.
We’ll hear from the other big central bank, the ECB, today and sovereign bonds are little changed ahead of it. We know the PEPP is currently scheduled to run out in March 2022 so the question today is whether they bring forward that timeline. I’m sorry to be hyperbolic here but the ECB with negative rates, along with the others that did the same, has created the biggest financial bubble in the history of markets and how they manage trying to reverse what they’ve done will have global repercussions for sure. As of yesterday’s close, there are $14.6 Trillion of negative yielding securities, although that is down from almost $17 Trillion in the beginning of August.
$ Value of Negative Yielding Bonds
Here is another anecdote on the global supply chain problems, this time from Restoration Hardware’s shareholder letter yesterday. “As it relates to the ongoing supply chain challenges, the Vietnamese government recently ordered a shutdown of manufacturing facilities due to the rapid spread of the Delta variant. This began with partial shutdowns in early July and expanded to full factory closures by late July. We are currently expecting manufacturing to restart in Vietnam in October with production ramping to full capacity by the end of the year. Additionally, suppliers globally continue to experience a number of challenges, including sourcing raw materials, and we are seeing price increases in the majority of our product categories. Shipping also continues to be a headwind with longer transit times and higher transportation costs.”
I don’t mean to downplay the impact of Delta lately as it definitely shapes the behavior of some but just as the virus ebbs and flows, so will consumer demand, again on the part of some. So the comments from a bunch of airlines today is not a surprise but once the Covid numbers go back down again, flying will pick up. Thus, Covid is just deferring some spending, not eliminating it for those wanting to travel.
With persistent global supply problems, China said its August PPI rose 9.5% y/o/y, above the 9% estimate and vs 9% in July. While some commodity prices have moderated, we still have aluminum, steel, nickel, and coal prices ripping higher along with transportation costs. The pass thru to the consumer though remains muted as August CPI rose .8% y/o/y, two tenths less than expected and vs 1% in July. A factor here though was the 4.1% drop in food prices. Prices ex food and energy were up by a still modest 1.2% y/o/y. While Chinese yields were little changed, they still rose for the 6th straight day. Chinese stocks were mixed with H shares getting slammed with another round of selling in gaming companies while the A shares were higher.