The Boock Report

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Some more data but just look at yields

The revised January services PMI for the Eurozone was lifted to 51.2 from the first print of 50.8 and that puts it unchanged with December. That though is a 49 month low with France and Italy “the primary sources of weakness, with both countries registering declines in activity during January.” Business improved in both Germany and Spain. The combined manufacturing and services index is at 51, the weakest in years. Markit said “The Eurozone has started 2019 on a flat note, with growth close to stagnation amid falling demand for goods and services.” They forecast this level as equating to growth of just .1% q/o/q which would be the slowest since 2013. They summed up the report by saying “The survey indicates that political uncertainty, both global and local, is increasingly taking a toll on growth, dampening demand and driving increased risk aversion. Add in rising global trade tensions, Brexit uncertainty, the ‘yellow vest’ protests in France and a spluttering auto sector, it’s clear that the business environment is at its most challenging since the height of the region’s debt crisis.”

Is it any wonder that German yields are negative out to 8 years and the 10 yr yield is less than 20 bps even with the ECB done increasing the size of its balance sheet? That France is paying just .59% on a 10 yr vs .90% in October or Spain at 1.24% vs 1.74% a few months ago? And even the Italian 10 yr at 2.72% is no different than the US 10 yr yield? Bottom line, QE and NIRP don’t work.

To this point, this piece released yesterday by the San Francisco Fed I believe is complete nonsense, //www.frbsf.org/economic-research/publications/economic-letter/2019/february/how-much-could-negative-rates-have-helped-recovery/.

NIRP in the US would blow up the money market industry, the source of $3 Trillion of funding for a variety of short term debt. And, how exactly would a tax on capital lead to faster growth?

The UK economy is also at stagnation as its services index fell to 50.1 from 51.2 and the composite index with manufacturing is down to 50.3. New orders fell to the lowest since April 2009 “as customers tightened their belts” and “service sector employment fell for the first time in the past 6 years in a sign that the slowdown is feeding through to the labor market…Such worries were in turn most commonly linked to heightened Brexit anxiety, though wider global political and economic factors were also seen to have been taking their toll on demand.”
Is it any wonder that the UK 10 yr Gilt yield is at just 1.27% vs 1.73% back in October? The pound is down slightly just above $1.30.
Japan’s services PMI for January rose to 51.6 from 51.0 in December and vs 52.3 in November. It seems to be the same story with many countries that for now there is better performance on the domestic side with services and weakness with exports in manufacturing. Markit said “The improved expansion was supported by healthy inflows of new business from domestic clients, as a renewed decline in export orders was observed.” Combining manufacturing services has the composite index at the lowest level since September 2016, “indicating the downside momentum in Japan’s underlying growth trajectory.” The key question is whether Abe will follow thru with another increase in the VAT rate come October.Notwithstanding the services uptick is it any wonder that the 10 yr JGB yield is still a hair below zero at -.009%?

JGB 10 yr yield

The Reserve Bank of Australia kept rates at 1.5% as expected but they are in a tough spot as their housing bubble is now unwinding. They said “The housing markets in Sydney and Melbourne are going through a period of adjustment, after an earlier large run up in prices. Conditions have weakened further in both markets and rent inflation remains low.” On the other hand, “the stronger labor market has led to some pick up in wage growth, which is a welcome development.” Overall they believe “The outlook for global growth remains reasonable, although downside risks have increased. The trade tensions are affecting global trade and some investment decisions.” The overall tone has them holding at the current rate level for the foreseeable future.

I highlight the RBA for two reasons, Australia hasn’t had a recession in 28 years but is now threatened with one because of falling home prices and the RBA never fell for the allure of QE, deeply negative real interest rates, or anything close to zero on a nominal basis. The ASX rallied 2% overnight and the Aussie $ is up a touch.

Finally, I didn’t highlight it yesterday because it was an old November number but capital spending in the US definitely slowed into year end. Non defense capital goods orders ex aircraft, aka core capital spending, fell .6% m/o/m in November, the 3rd monthly decline in the prior 4. We’ll soon see December but with everything going on that month, I’d be hard pressed to think it improved. The US consumer right now is the main pillar of US growth with a strong labor market and rising wages.