Days after comments from Mario Draghi shook markets out of their complacent daze, CPI in the Eurozone in June rose 1.3% y/o/y, one tenth more than expected but down one tenth from May. The core rate though rose two tenths m/o/m to 1.1% and one tenth above the forecast and this matches the quickest pace of core inflation since mid 2013 if we don’t include the April 1.2% print that was distorted by the timing of Easter. Services inflation in particular was higher by 1.6% y/o/y, matching a 39 month high, again excluding the Easter impact in April which needs to be averaged with March. Markets in Europe are rebounding notwithstanding the core rate after the rough week. The German 10 yr yield after spiking by 20 bps thru Thursday is down by 1 bp today. The euro is slightly lower to $1.14 and European bourses are up modestly after the DAX yesterday closed at the lowest level in more than two months. Bottom line to the week with all this, there is a regime change in global monetary policy as the central put is now further out of the money. If you believe monetary policy didn’t have much of an impact on global markets over the past few years, then stay bullish and don’t worry. If you believe otherwise, watch your back.
At least from the perspective of this German ECB Executive Board member (thus her comments are not a surprise), Sabine Lautenschlaeger, speaking this morning in Berlin, the monetary direction needs to change. “I consider it imperative that monetary policy should return to normal as soon as can be justified…Monetary policy should already be making preparations for a return to a normal stance. And it should adapt its communication accordingly.” I guess Mario Draghi started that process on Tuesday. Sabine went on by saying what most of us already know, “Unusually loose monetary policy does not just have the intended effect, it always has undesired side effects too. Among other things, it increases the risk of asset price bubbles.” While Sabine is hitting the nail on the head, it’s too late for the European bond market and won’t change the outcome. Alan Greenspan might as well have given the same speech in March 2000 and Bernanke in late 2007. Central bankers should think of these risks before the bubbles blow but lessons never learned.
Here is a quick data review of what came out in Europe today data wise. German unemployment unexpectedly rose by 7k in June vs the estimate of a drop of 10k but the unemployment rate held steady at 5.7% (not harmonized with how rest of Europe calculates it which would have it with a 3 handle). Bottom line, on this one month miss I’m not going to read too much into it as the German economy has been pretty solid. A spokesman from the Labor Agency said “Employment and companies’ demand for new workers continued to increase strongly.” Dated as it’s for May, retail sales rose .5% m/o/m, two tenths more than expected and the y/o/y gain was pretty solid at 4.8%, the best since April 2016.
French consumer spending best expectations in May as the economic mood has clearly changed for the better there. Sales rose 1% m/o/m, twice the estimate. Politically, we await Macron’s attempt to reform the sclerotic French labor market. MFGA!
The Japanese unemployment rate in May jumped 3 tenths to 3.1% in part due to a 30k person drop in employment and a 220k increase in the size of the labor force. Positively, the participation rate rose 5 tenths to 60.8%, the most since 2008. For comparison, the US rate is at 62.7%. The labor market still remains drum tight as the Job To Applicant ratio ticked up another tenth to 1.49, the most since 1974. It peaked at 1.08 in the mid 2000’s expansion. Higher wages of substance still allude the average worker though as we know. Industrial production fell 3.3% m/o/m in May but is still up almost 7% y/o/y. As for consumer price inflation in May, the core/core rate (ex food and energy) was unchanged m/o/m instead of rising one tenth as expected. The more up to date June read for Tokyo saw prices drop .2% ex food and energy vs the estimate of no change. Can the BoJ at some point realize that owning 40% of its bond market (and rising every month) and having its balance sheet approach 100% of GDP is not working in generating the inflation they so desperately crave but will blow up their bond market if they actually get it? Maybe one day. The consumer wants nothing to do with higher inflation because they aren’t spending with no inflation. Overall household spending fell .1% y/o/y and while better than the forecast of down .7%, it still is negative for the 20th month in the past 21.
The end result to all this news from a market perspective saw the yen up a touch, the Nikkei down by almost 1% following Europe and the US and the JGB market finally succumbed to the bond selling seen everywhere else. The 40 yr JGB yield was up by almost 4 bps to 1.03%, the highest in 5 weeks. Even the 10 yr yield was up by 2.3 bps to near 9 bps and the furthest from zero since March. Bonds got smoked in Australia with their 10 yr yield higher by 9 bps and New Zealand’s jumped by 10 bps. Yields were up 2-3 bps elsewhere in Asia.
China reported its state sector weighted PMI figures for both manufacturing and services for June and they improved slightly m/o/m. The manufacturing PMI was up by .5 pt to 51.7, above the estimate of 51 and the best since November. New orders and exports in particular improved but employment fell slightly and is still below 50. Backlogs rose but are also still below 50. Prices were up slightly for both inputs and outputs. As for business expectations, they rose to a 4 month high. Bottom line, Chinese manufacturing is in this balancing act where some of it is purposely being shut down in the cutting of excess capacity in coal, steel and iron ore for example while they try to make it up elsewhere in order to get to the 6.5% growth rate they so crave.
The services PMI in China in June was up by .4 pt to 54.9 and this does include the property sector. This index is at a 3 month high. New orders improved to 51.4 and backlogs, export orders and employment were up too but are all still below 50. Business expectations rose .9 pt to 61.1, a 3 month high too. Bottom line, the Chinese economy continues its slow stabilization but again, how much is organic and how much is short term policy driven. I don’t know. The Shanghai comp was up a hair, by .1% while the H share index joined global markets with a .6% drop. The onshore yuan is sitting at its highest level vs the US dollar since November while offshore yuan is at 3 week high. The US dollar’s poor performance is pretty wide spread and I remain bearish on it and bullish on gold/silver still.