There was nothing new in the House Financial Services Committee’s Q&A of Powell and Mnuchin. There was discussion on trying to help small and medium sized businesses but what was not asked of Powell and Mnuchin was what Fed policy was doing to the profitability of small and medium sized banks which in turn impacts small and medium sized businesses. The big banks have their capital markets business as a cushion, the others do not. What the others need is a yield curve which Fed policy has deprived them of. The Fed has learned nothing from the damage done to the business models of Japanese and European banks which I’ve spent years complaining about. I call for the Fed to END QE NOW so we can get some steepening into the curve. We’ve seen that whatever benefit lower long term rates is giving to the housing market, higher home prices in response is taking it away. Maxine Waters should now be getting the CEO’s of these small banks to testify.
KRE (regional bank stock index)
With an average 30 yr mortgage rate of just 3.10%, housing continues to get a lift but no help to the 1st time buyer as they are paying higher prices and don’t have a mortgage to refinance. Purchases rose 3.4% w/o/w and are up 26% y/o/y. Refi’s grew by 8.8% w/o/w and 86% y/o/y.
September PMI data is beginning to roll in. In Asia, Australia said its manufacturing and services composite PMI rose back above 50 to 50.5 from just below at 49.4 with both components higher and particular strength seen in manufacturing. The ASX rallied by 2.4%. Japan’s though was little changed well below 50 at 45.5 vs 45.2 in August. Manufacturing was 47.3 from 47.2 while services came in at 45.6 vs 45. While there doesn’t seem to be much improvement in the Japanese economy in Q3, Markit did say “Firstly, employment moved closer to stabilization, with only a marginal drop in workforce numbers that was the weakest in the current sequence of job shedding. Secondly, business sentiment improved to the strongest since the start of the year, with manufacturing firms particularly optimistic about the year ahead outlook.” There wasn’t much response in Japanese markets. I continue to like Japanese stocks for those looking for value and the best balance sheets in the world.
JAPAN’S MFR’G AND SERVICES PMI
In the Eurozone, the September manufacturing and services PMI did fall to 50.1 from 51.9 and less than the estimate of no change. Manufacturing did further improve by 2 pts to 53.7 led by strength in Germany but services slipped back below 50 at 47.6 from 50.5 with both Germany and France also falling below 50. This weakness in services is coinciding with a flare up in Covid spread. Markit said “A two speed economy is evident, with factories reporting that production growth was buoyed by rising demand, notably from export markets and the reopening of retail in many countries, but the larger service sector has sunk back into decline as face to face consumer businesses in particular have been hit by intensifying virus concerns.” Manufacturing I believe continues to be helped by the need to rebuild inventories. While European equities are higher, following the US bounce, the euro and sovereign bonds are little changed in response to the data.
EUROZONE MFR’G AND SERVICES PMI
In the UK, its composite index for September fell to 55.7 from 59.1 and that was slightly below the forecast of 56.1. Both components were down m/o/m. Markit said “The UK economy lost some of its bounce in September, as the initial rebound from Covid lockdowns showed signs of fading.” Weighing on services was the end of the Eat Out to Help Out program but also “demand for other consumer facing services also stalled as companies struggled amid new measures introduced to fight rising infection rates and consumers often remained reluctant to spend.” The need for rebuilding inventories though did help manufacturing as it fell just .9 pts m/o/m to 54.3 vs the 3.7 fall in services.
The October German consumer confidence index was little changed at -1.6 vs -1.7 but below expectations of -.8. It was at +10 pre Covid.