Ahead of another Fed rate hike today, I’m including two charts. One is of the yield curve and specifically the 2s/10s spread and this goes back to mid 2013. As you can see it was December 31st, 2013 when the spread at 265 bps begin its long journey lower as that was 4 weeks before the tapering of QE3 began. The Fed then started its rate hike cycle on December 16th, 2015 as the spread stood at 129 bps. Here we are today sitting at just 84 bps, 9 bps from the lowest level since mid November 2007.
The 2nd chart is the REAL rate 5 yrs out. On this day of the 4th rate hike, the REAL 5 yr yield is at .08% vs .51% on the day the Fed first hike rates on December 16th, 2015. This also helps to explain why the US dollar index is below that day in December. Thus, all the Fed has done is play catch up to the rate of inflation.
Now what happens after today for the Fed? I think they are happy they have 3 more months before the next real live meeting on September 20th to digest more news so Yellen today doesn’t need to lean too much in any one direction. A decision free summer. Ideally for the Fed though, we’d see a continuation of their plan, 3 hikes per year and the beginning of QT.
Stock market sentiment ahead of this which captures the NASDAQ drubbing saw Bulls fall 5.8 pts to 50 after rising by 5.8 pts in the week prior. Almost all went into the Correction side which rose to 31.4 from 25.9. This is near a 3 month high. Bears crept up by .3 pts to a still microscopic 18.6 even as we see another round of monetary tightening which any student of history knows where it typically leads.
After a 10% spike last week, the MBA said mortgage applications to buy a home fell 2.8% w/o/w but are still up a good 8% y/o/y. With the lowest 30 mortgage rate since November, refi’s rose by 9.2% w/o/w while still remaining down by 27% y/o/y.
Bottom line, the spring housing season was pretty good but it’s apparent in some of the data that MAYBE we’ve reached an inflection point in terms of the market’s ability of absorbing continued 5-6% annual price gains. For the interested first time household, they’d welcome some price slowdown but until we get it, renting will still remain a very viable option. I still like the secular multi family story from the demand side.
Are we finally seeing the impact of China’s attempt to slow excessive credit growth? Total loans in May extended added up to 1.06T yuan, 130b below expectations and which is down from 1.394T in April and the slowest since October. However, the year to date pace of increase is still a robust 15%. The non bank side saw an outright decline in May of lending, albeit modest, as bank lending was steady m/o/m. Noteworthy was the 9.6% y/o/y increase in the money supply which was well below the estimate of 10.4% and down from 10.5% growth in April. We can only assume from this that loan growth will moderate further as this is the slowest pace of M2 growth since I have records back to 1996. The PBOC referred today to this slowdown in money supply as the “new normal” and follows a “prudent, neutral monetary policy, and intensified supervision that has compelled the financial system to reduce leverage.” Bottom line, this time authorities seem to be very serious about their attempt to deleverage or at least slow the pace of leveraging which then in turn has obvious growth implications. This data came out after the stock market closed. If you are watching global trends, you must have China on that radar.
Elsewhere in China, retail sales grew by 10.7% y/o/y in May as expected and is the same pace of gain seen in April. IP was higher by 6.5% y/o/y, also the same rate as in April but one tenth more than expected. Fixed asset investment slowed to a 8.6% y/o/y ytd jump from 8.9% in the month prior and two tenths less than forecasted as residential construction moderates in response to government dictate.
Bottom line, the juggling act continues of trying to deleverage the Chinese economy while still trying to maintain the ‘mandated’ 6.5% growth rate. The Shanghai comp response to the data was a .7% decline while the H share index was down by .1%.
Really disconcerting was the wage data out of the UK a day after CPI printed 2.9% for May after a 2.7% rise in April y/o/y. For the 3 months ended April, wages ex bonus’ were up just 1.7% y/o/y instead of the estimate of up 2% after only a 1.8% gain in the month prior (revisions were made going back years). Thus REAL wages are in contraction as the BoE is stuck in their self induced conundrum of letting inflation run as they fear the impact of Brexit. As for actual job hirings, for the 3 months ended April, 109k were added, below the estimate of up 125k while the unemployment rate held at 4.6%, the lowest since 1975. As for what was seen in May, jobless claims were up by 7.3k which brings the 3 month increase to almost 63k, the most since 2011. The UK economy is in its own form of stagflation and Mark Carney will have some explaining to do tomorrow when the BoE has its rate announcement.