At least right now, what I’m most interested in this week is hearing from the bank CEO’s who report earnings on Thursday, JPM, WFC, and C. What is going on with this decline in bank lending across the board? For C&I loans to businesses, is there less demand because of the uncertainty over the timing of tax reform? Are companies tapping the capital markets instead of utilizing bank loans? Are companies just lessening their demand for credit because of already high leverage ratios? Are oil companies mostly responsible for the decline in C&I loans because they are paying back credit lines tapped last year? Are banks cutting back on mortgage warehouse lines because of the sharp contraction in refinancings? With respect to the decline in consumer credit lines, the questions are easier. Is it a demand side issue or are standards being tightened? What is the credit outlook for commercial real estate where activity and pricing seems to be topping out?
Janet Yellen speaks today at 4pm and will actually take questions via twitter. That should be interesting. If Bill Dudley’s recent comments are any indication of the thinking of Yellen too, we’ll get a rate hike in June, another in September and some form of reinvestment taper in December and then Yellen can sail off into the sunset or darkness depending on how things go. With the full exit process then underway, the Bernanke/Yellen monetary policy experiment will be put to another test. The true efficacy of everything that was done since 2007 can only be fully measured when all or most of the easing has been reversed. Like the question I posed last week, if the final result ends up being a recession and a bear market at some point in the years to come, was it all worth it?
Shifting overseas and reflecting the improved economic data, calmed political worries and positive performance in their stock markets, the Sentix Euro area economic survey of private and institutional investors rose to the best level since August 2007. There was an implicit warning however to the ECB that the German economy was getting too hot. Sentix said “The strength of Euroland, not least also fired by an extremely expansive central bank policy, is not without a trace of the strongest national economy of Euroland. On the contrary: the current situation assessment is approaching the 60-point mark, absolute boom level. Expectations remain stable, which again underlines the fact that the German economy is doing well – but overheating is now threatening.” The ECB is flying very close to the sun.
With respect to European investor sentiment of the US economy, there was a 7 pt m/o/m drop. Sentix said “While Trump is trying to make “America great again” with his verbal acrobatics, Euroland and Asia seem to be clearly better at present than the US economy. The president is talking a lot here, but the messages are getting less and less attractive among investors.”
Data wise in Europe, there wasn’t much except industrial production in Italy which slightly missed expectations. Quietly, the Italian 10 yr yield spread to German bunds is just 2 bps shy of the widest since February 2014. The next election there is not until next year but 5 Star Movement political worries are a growing issue.
The French 10 yr yield is at its widest level vs the German bund since February as the Far left candidate Jean-Luc Melenchon gained ground in a new poll vs Macron, Le Pen and Fillon. This same poll also has Macron, Melenchon and Fillon all beating Le Pen individually. The CAC is lower by .6% and the euro is down slightly after breaking below $1.06 last week. I continue to expect a Macron presidency which would be bullish for France in that a business minded politician would take power but we have to be reminded that in a land of many socialists, any crack pot economic idea can still be believed.
In Asia, of note was the almost 1% decline in the South Korean Kospi in response to the US decision to send an aircraft carrier and other war ships to the Korean peninsula. This of course follows the Trump/Xi get together but China is the one that must deal with this. I’ve been bullish on South Korean stocks as one of my favorite markets due to the political changes that hopefully will bring corporate governance changes to the chaebol’s in a market that is cheap. I remain so but hopefully China calms things down and that the US is not unilaterally inclined to take action. That would be a scary potential scenario.