With all due respect to the office of the President, I can’t think of many other bigger wastes of my time than watching the State of the Union address. I honestly can’t remember the last time I watched more than 10 minutes of one as nothing ever is new. It ends up being a combination of pats on the back and promises on everything with applauses every 5 minutes from about one half of the hall.
Unfortunately I’m going to have to torture myself and watch Tuesday night in search of some comments on tax reform. Will there be details? Will he mention the words border adjustment tax? Unlikely as Steve Mnuchin on Fox yesterday said “There are certain aspects that the President likes about the concept of a border adjusted tax, there are certain aspects that he’s very concerned about.” Or will we just get vague comments that something big league is coming? Likely still.
After all, that’s what this market euphoria is all about, hopes for much lower taxes. You say it’s because of earnings? Well, over the six quarters of earnings declines, the market went up. While less regulatory red tape is hugely welcome, this is all about taxes and what the final mix will look like. It’s time to find out because expectations are phenomenally high for something clean.
The 10 yr US Treasury yield has been testing its lower end of a multi month 2.30-2.60% range which adds to the debate over what all these markets are telling us. The obvious message is that longer end Treasuries have a completely different point of view over the US economy than the euphoria seen in US stocks. Maybe that’s too simplistic. Maybe the long end is sniffing out a rate hike “fairly soon” from the Fed and it’s a flattening of the curve we are seeing. Rate hike odds for March are up to 40% from 24% just a few weeks ago. On the flip side, the US dollar doesn’t trade very well and gold does (I remain bullish) so what’s that telling us? The German 2 yr note yield is approaching an incredible -1.00% vs -.65% a month ago and the euro can’t seem to break the $1.05 level. With two weeks ahead of the FOMC meeting, with a bit more than a month before the ECB cuts its monthly QE purchases by 25% and hopefully soon to be revealed details on upcoming US tax reform, all these mixed signals should start to reconcile.
On the FOMC meeting in a few weeks, Yellen and Fischer speak on Friday for the last time before that meeting as they enter a quiet period. Thus, it will be there last chance to tee up the market for what it wants to do, if it chooses to do so. We still think they hike in March.
I thought I was seeing some signs that global trade was bottoming but last week we saw a miss with Japanese exports and today Hong Kong exports in January disappointed as well. They fell 1.2% y/o/y, well worse than the estimate of up 7.8%. Imports were also soft, falling by 2.7% y/o/y instead of rising by 8.6% as expected. A government spokesman said “the trading environment is still subject to considerable uncertainties arising from the future US trade policy direction, US interest rate normalization and unfolding of Brexit. Fragile fundamentals of some major advanced economies and heighted geopolitical tensions in various regions are also sources of concern.” Let’s assume that every US trading partner around the world is dealing with the same known unknowns. The Hang Seng fell .2% overnight as every single major Asian stock market was red overnight.
In Europe, after 7 straight days of declines that took it to the lowest level since early December, the Euro STOXX bank index is bouncing by .8%. This poor action has been under the radar because the recent European economic data has been pretty good but European banks are still being dealt a really tough hand with negative interest rates.
The February Economic Confidence index for Europe was 108, essentially flat with 107.9 in January and about in line with the estimate of 108.1. This is though the best level in 6 years but is still below where it was in the peak in 2007. The business related components (manufacturing, services, construction) all improved by the consumer related indices fell m/o/m. Because of higher consumer inflation? We’ll see. In Spain, February CPI rose to 3% y/o/y, the highest since 2012. This printed -1.2% last April. Mario is happy about that but the Spanish populace is not.
The ECB said that loan growth to households in January improved by 2.2% y/o/y, a slight uptick from the 2% rise seen in December. Loan growth to companies was up by 2.3% y/o/y, the same pace of gain seen in the month prior. Money supply growth as measured by M3 was up by 4.9%. It’s certainly good to see gains in loans but just think for a second the extraordinary amount of monetary stimulus that it took just to achieve 2% type loan growth. I have to ask again, what is going to happen to the European bond market and credit growth by extension when the ECB ends QE and eventually gets out from underneath negative interest rates. I cringe to think.