With just a week to go before the next FOMC meeting where it’s expected to be a non event for reasons well known, the 2 yr note auction was soft. While the yield was in line with where the when issued was trading, the bid to cover of 2.53 was well below the previous one year average of 2.81 and was the 2nd weakest since December 2008. Also, dealers got stuck with 56% of the auction, well more than the 12 month average of 38%. This is the 2nd lowest amount of direct and indirect bidding since 2014.
Bottom line, a 2 yr note yield approaching a 4 month high didn’t bring out the buyers. Yes, the Fed seems very intent on raising rates in December as they seem to be looking for every reason to do so and maybe that explains some of the hesitancy. When the Fed first hiked rates last December, the 2 yr note yield stood at .95% vs .85% today but that was because market expectations at the time was for a series of hikes in 2016. Of course that never happened and the fed funds futures table isn’t fully pricing in another rate hike after the next one until September 2018. Yes, September 2018. To my point from this morning, if the dollar bull case is only predicated on the Fed hiking rates, they may have to wait a long time to get a 3rd hike in this cycle.
The Conference Board consumer confidence index for October fell to 98.6 from 103.5 in September. That was about 3 pts less than expected but follows a gain of 6.8 pts over the two prior months. The Present Situation component was down by 7.3 pts and Expectations fell by 3.3 pts. The answers to the labor market questions were mixed as those that said jobs were Plentiful fell by 3.3 pts to a 3 month low but those that said jobs were Hard To Get fell .2 pts to the lowest since August ’15. Looking forward, those expecting More Jobs fell to a 5 month low. Those expecting an Increase in Income was unchanged. As for buying intentions, those that plans to buy a home fell .8 pts to match a 4 month low. Those wanting to buy a car rose a slight .1 pts. Of note, those planning on buying a major appliance (life a fridge, washing machine, TV, etc…) fell 5.6 pts to the lowest since January ’15. With respect to the business outlook, more saw a decline in those saying things were Good and an increase in those saying they got Worse. One year inflation expectations fell two tenths to 4.8% after rising by two tenths in September. This level is pretty much in line with the one year average of 4.85%.
The Conference Board had a very simple bottom line which is what the rest of us have been hearing for years, “Overall, sentiment is that the economy will continue to expand in the near term, but at a moderate pace.” I couldn’t have said it much better. This index bottomed in February ’09 and after a steady march higher through 2014 has basically flat lined over the past two years. This index was at 103.8 in January 2015 and at 96.3 in December 2015. As for the influence of this economic miss relative to expectations on markets, markets don’t care about consumer confidence indices because it says nothing about how consumers will behave in the months and quarters to come. I look forward to seeing if there is any noticeable change in confidence when we pick our next President in a few weeks. I’d think not.
The October Richmond manufacturing index rose 4 pts but at -4 was below zero for a 4th month in the past 5. The Richmond Fed referred to manufacturing activity as “sluggish.” “New orders and backlogs decreased this month, while shipments flattened. Hiring activity strengthened mildly across firms and wage increases were more widespread. Prices of raw materials and finished goods rose more quickly in October, compared to last month.” The underline is mine. I repeat my belief that the inflation stats will continue higher.
Bottom line, we now have 2 out 3 manufacturing survey’s for October seen that were below zero (NY was negative but Philly was positive) but if Markit’s national measure seen yesterday is any indication, manufacturing actually improved m/o/m.
As I’m always looking for the collateral impact from the Chinese economic slowdown, South Korea’s economy grew by 2.7% y/o/y in Q3, about in line with the estimate of 2.6% but the slowest pace of gain since Q2 ’15. Construction/property (thank you low rates) gave growth a boost while exports were a drag (Samsung note 7 defect was of course a problem) as was business investment. Separately and in a bizarre story there was chatter that China was going to limit the amount of Chinese tourists traveling to South Korea in retaliation for the agreement between the US and South Korea to put a new defense system in South Korea to ward off the crazies in North Korea. Anything benefiting from tourists sold off hard overnight such as cosmetic makers, LG, a casino company, and a travel agency to name a few. This may very well be an isolated incident but the growing anti globalization and anti free trade mentality on a growing number of people and countries is not a good thing. The Won is lower on the data and the China spat story and the Kospi closed down by .5%.
The yuan continues its slow but steady decline and while the Shanghai index was barely higher, it did close at a 10 month high. The yen weakness had the Nikkei rally again overnight to close at a 6 month high. The US dollar certainly has had a nice bid over the past three weeks as its clear the Fed is trying to getting away with another hike by yr end but as it will come in the context of a 1.5% US growth story, I argue that the FX discussion will shift from an interest rate differential one to where the growth is. Thus, I think the US dollar is just moving to the upper end of its multi year range rather than being on the cusp of a breakout.
The October German IFO business confidence index rose 1 pt m/o/m to 110.5 which was also 1 pt more than expected. It’s at the highest level since April 2014 with both current conditions and future expectations gaining from September. The IFO said “The upturn in the German economy is gathering impetus.” Thanks to low rates and the scramble for yield, the construction component “continued its record breaking run in October, rising for the 7th month in succession.” Manufacturing also improved. Bottom line, the German economy remains the rock of the region but the one size fits all monetary policy being applied is wholly inappropriate for Germany as its throwing gasoline on a fire. In response the German 10 yr yield is up 1.5 bps to a whopping .04%. The cost of money in the region has ZERO relationship to what would be the equilibrium rate of the supply and demand for money. What else is new.