Tax Plan, Retailers Strike Back, Overseas

The content was optimistic and the delivery was smooth but we still yearn for details on the tax plan that DJT will eventually be behind and we didn’t get it, not unexpectedly. Thus, there really wasn’t anything new in last night’s speech in terms of his long wish list. On the issue of the Border Adjustment Tax (BAT) and its vital place in the Paul Ryan Better Way plan, the lobbying is getting more intense as this week the National Retail Federation rolled out a campaign criticizing a BAT, complete with a satirical website and a commercial. If you haven’t seen it:

 The real new news this week was the dramatic shift in rate hike expectations. After the sharper tone in comments from Bill Dudley yesterday, voting member Harker and non voting member Williams it has put rate hike odds up to 82% (using the mid point range and it’s 68% using the effective fed funds rate) for March. This rate was just 40% on Friday and 24% three weeks ago (again using the mid point range). While some may not care on the timing of a hike, the shift means they are more likely to raise at least 3 times this year instead of the two that was only priced in a few weeks ago. I disagree with those who think the Fed doesn’t matter anymore in terms of their influence in the context of a debt to GDP ratio that has never been higher and market valuations that are historically very rich. Changes in fiscal policy are welcome for the economy but I lean towards monetary policy in being more impactful on markets in the shorter term time horizon.

The bullish boat continues to squeeze in more participants. Investors Intelligence said Bulls rose to 63.1, the most since January 1987 when it got as high as 64.6. This is up from 61.2 last week and the 7^th week in the past 9 above 60. There is no question the bulls have been dead right at the same time sentiment has been euphoric and proves that in the short term sentiment figures should be used only along with other indicators. II in its release said the “high bullish count remains a problem, suggesting most cash available for investment has been committed.” I took out my microscope to find Bears sitting at a very lonely level of 16.5, the lowest since July 2015 vs 17.5 last week and thus puts the Bull/Bear spread up to 46.6.

With last week’s drop in mortgage rates (before the jump back this week), mortgage applications to buy a home jumped by 6.5% off the lowest level since November but it’s still down by 4.6% y/o/y. Refi’s rose by 5.1% but they are down 45% y/o/y. Mortgage rates are up about 50 bps y/o/y.

We saw weak exports for January out of Japan and Hong Kong this week and last which dampened a bit my belief that global trade bottomed but today South Korea reported a blowout February export number which has me more positive. Exports spiked 20.2% y/o/y, well more than the estimate of up 13.6%. Exports of semi’s and petro products were the main drivers. The Kospi was up .3% overnight.

Ahead of the US ISM manufacturing index at 10am, we saw a slew of February PMI’s overseas. The China manufacturing data improved slightly m/o/m for both the state and private sector weighted measures. The services PMI though fell a touch. Elsewhere, PMI’s rose in India, Malaysia (although still below 50), the Philippines and in Vietnam while falling below 50 in Indonesia and Taiwan. Japan’s PMI was revised down a hair but still is at the best level since March 2014.

The final read of Europe’s February manufacturing PMI was 55.4, up from 55.2 in January and a hair below the initial print of 55.5. It’s the best level in almost 6 years. Markit said “Companies are reporting stronger demand in both home and export markets, with the weakened euro providing an accompanying tailwind to help drive sales.” Also, “the rate of job creation seen so far this year in the manufacturing sector has consequently been among the best seen in the history of the euro.” It’s great to see economic activity in Europe able to offset all the political worries but growth in the region this year is still only expected to be around 1.5%.

The number of Germans that were unemployed in February fell by 14k, a bit more than the estimate of a drop of 10k. The unemployment rate held at 5.9%, the lowest since reunification. The labor agency said simply, “The development on the labor market continues to be positive.” It certainly is and the region should be thankful for the German economy and stop whining about its trade surplus. At 8am est, we will likely see German February CPI up by 2.1% y/o/y, the highest level since September 2012 at the same time the ECB has its deposit rate at -.40% and QE running full speed for another month. German bund yields are jumping today with the 10 yr yield up by 6 bps.

The manufacturing PMI index in the UK fell to 54.6 from 55.7. The estimate was for a slight rise to 55.8 and its now at a 3 month low but still at a good level. Prices pressures eased from January “but remained among the fastest seen during the survey history.” The pound is weak but along with other currencies vs the US dollar on the heighted odds of a Fed rate hike.