Wow, the Monday after the Super Bowl is tough, especially after that amazing game. Who’s with me on a petition to have today be a national holiday? Either that or have the game on a Saturday. My favorite commercial was only 11 seconds and for the Amazon echo:
It’s been like watching snail’s crawl but wage growth in Japan continues its glacial pace upward. In December, regular pay (thus taking out overtime and bonus’) rose .5% y/o/y vs .4% in November and .2% in October. It doesn’t sound like much but it’s the fastest pace since March and is just one tenth away from the best post Abenomics. While the BoJ was back in the market today after the wild action on Friday that saw the 10 yr yield ‘spike’ to .15% intraday which kept the yield steady at around 10 bps, ultra longer yields continue to rise. The 20 yr yield was up 3 bps to .72%, the highest level since February 2016 and the 40 yr yield was up by 4 bps to 1.06%, also last seen one year ago. ‘Yield curve control’ will only continue to get tested and I see it inevitable that the BoJ will have to shift up their 10 yr yield target sometime this year.
I mentioned last week the large weekly selling on the part of the Japanese of foreign bonds for the week ended January 27th. In case you missed it, the WSJ carried a story over the weekend titled “Foreign Bonds Lose Appeal, Japanese, eurozone investors are selling more global bonds than they are buying.” The 1st paragraph of the piece says:
“After years of splurging on international debt, the world’s two largest economies with negative interest rate policies are showing tentative signs of losing appetite for foreign bonds.”
This can help to explain some of the resiliency in the euro and the yen. In the CFTC data Friday for the week ended Tuesday, euro net shorts fell to the lowest since May 2016 and yen net shorts were the smallest in two months. We know in the monthly TIC data that foreigners have certainly lost their appetite for US Treasuries, particularly the Chinese.
The Chinese private sector weighted services PMI for January weakened to 53.1 from 53.4 but just gives back the .3 pt rise in December. Employment improved and as seen in many places, “service companies also reported higher cost burdens, with the rate of inflation edging up to a solid pace that was the fastest in 47 months.” New orders were above 50 but down slightly from the prior month. As I’ve said many times, it’s so tough to figure out what is underlying organic growth and what is credit driven by government mandate. Notwithstanding the slight monthly drop, the Shanghai comp rose .5% and the H share index was up by 1.6%. There was chatter about Chinese pension funds being allowed to buy stocks.
German December factory orders blew out the estimates with a 5.2% m/o/m jump, well more than the estimate of up .7%. The y/o/y gain was 8.1%. The capital goods component is where all the strength came from and the German economic ministry said “this signals a further revival of momentum in manufacturing in the winter half.” The market reaction was not as one would expect as German bund yields are lower as is the DAX and the euro. I believe worries about the French Presidential election is filtering in at least to bond trading. The German/French 10 yr yield spread today is widening by almost 5 bps to 71 bps, the most in 3 years. Under accusations of nepotism, the business friendly candidate Francois Fillon is holding a press conference today at 4pm Paris time.
Of note today is Mario Draghi speaking to the European Parliament as pressure grows on him to further back off from QE. He will do so by 25% beginning in April. Yields are rising in Italy, Spain and Portugal by 4-6 bps.
We also hear from Fed voting member Patrick Harker today but not until after the US market closes. His topic is on payment systems so nothing in the speech should address what the FOMC plans on doing this year with respect to rates but there is a Q&A that hopefully we can get some sound bites on. The fed funds futures market is not even pricing in fully 2 hikes this year so if 3 is there goal, they better start getting their messaging right. We know Wayne Gretzky skated to where the puck was going, the Fed seems to keep responding to where the puck was.