Ok, so we got through the first of two Powell testimonies, and it went ok, all things considered. The message was mildly hawkish on balance and the result for yields, the dollar and secondarily, for stocks, was predictable.
The comments that set the tone came early on when Powell suggested that his outlook on the economy had improved of late and although he said he “wouldn’t want to prejudge” anything about the rate path, he noted that for him, the data “add some confidence to the view that inflation is moving up to target.”
“We’ve also seen continued strength around the globe, and we’ve seen fiscal policy become more stimulative,” he added.
Treasurys dropped on those comments as 10Y yields quickly moved above 2.90.
Zooming in on 2Y yields just as the comments excerpted above hit, you can really see the impact:
Continue reading They’ve Done Studies You Know…
By Callum Thomas
With the end of February, China puts itself in the spotlight with the first major PMI results of all the major economies, and major economy is the key word as China’s influence across global markets only grows by the year. The February manufacturing PMI came in at 50.3 (51.2 expected, 51.3 previous), and the Non-manufacturing PMI at 54.4 (55.0 expected, 55.3 previous). So, some pretty soft results. The timing of Chinese new year no doubt played some role (taking place in the middle of February – and hence shutting things down for a couple of weeks around the 1-week national holiday), so we’d need to see March data to confirm, but it still a weak result nonetheless.
On the details, within the manufacturing PMI large firms were down -0.4pts to 52.2 vs small firms down a sharp -3.7pts to 44.8 – highlighting the pressure facing smaller firms which receive less support from the government and are generally more sensitive to changes in economic activity. Within the non-manufacturing PMI, the Services PMI was down -0.6pts to 53.8, while the Construction PMI was down -3.0pts to 57.5 – which lines up with the slowing in property price gains. So overall, within the data there was not much to get excited about. And looking at a key China-sensitive market, the outlook for copper prices is left with some looming questions…
The key takeaways from the February China PMIs are:
-The February China PMI data was materially weaker vs January and consensus expectations. Chinese New Year likely had some impact, but it was still a weak result.
-The soft data, even if it proves to be temporary, leaves question marks looming on the outlook for copper prices.
-Looking at the copper and government bond markets there are a couple of key divergences, which highlight double-edged risks in copper prices and bond yields.
1. China Manufacturing PMI: This chart shows the breadth of the components that make up the NBS China manufacturing PMI. You can clearly visualize the moment China stepped up stimulus measures in early 2016, while the rebound in global trade and commodities and weakening CNY also helped. Whereas now you can see the impact of waning stimulus tailwinds (which were already in play) and with the latest results accentuated to the downside by Chinese new year distortions.
Continue reading China PMI and Copper
By Tim Knight
One of the most frequent guests in the world of financial media is the “commodity king” Dennis Gartman. In spite of his moniker, he chimes in far more on equities than commodities, and his nearly daily appearances on Fox Business, CNBC, Bloomberg, the trade show circuit, or whoever else will have him, have made him a glowing success story. At least if you measure success by being repeatedly invited back to share market opinions.
As has been pointed out ad nauseam in the comments section of many a blog (particularly ZeroHedge), Mr. Gartman, in spite of his efforts, appears to be wrong far more often than right. Many would say his percentage of being wrong is something approaching 100%, although my own informal analysis puts the figure at a kinder 70% or so.
Oh, and allow me to say this before going further: those of you who feel it clever to comment that people should just do the opposite or whatever Gartman says, or that there should be a triple-inverse Gartman Fund – – you should know the identical comment has been made, oh, thousands of times already, so what may seem clever and saucy to you is, in fact, tired and boring. So save your typing, because the thought you just had isn’t original.
Continue reading Interview Just Like Gartman
By Joseph Calhoun
Economic Growth & Investment
We pay particular attention to broad based indicators of growth. The Chicago Fed National Activity Index and the Conference Board’s Leading Economic Indicators are examples. We watch them because we are mostly interested in identifying inflection points in the broad economy and aren’t as interested in the details. Why? Because, while bear markets do happen outside of recession, it is rare and unpredictable. Our best chance of acting in advance of a bear market is to identify the onset of recession. And concentrating on the details of the economic data can cloud one’s judgment about the overall economy which is what matters to the market as a whole.
But we also think you have to be careful in interpreting these indexes. You don’t want to overreact to noise or not react to a real warning. So it is interesting, in the case of the LEI, to see what factors are moving the index. The most recent release showed a rise of 1% in the LEI, quite a bit stronger than expected. But what drove the rise? Building permits, stock prices and ISM new orders, none of which, by themselves, are very informative about future growth. All of them are, to some degree, measures of sentiment rather than actual hard data about the economy. Building permits are not a commitment to actually build anything even if they do show intent. Stock prices, as the old Wall Street saying goes, have predicted nine of the last five recessions. And the ISM report has been showing robust growth for over a year that quite simply refuses to show up in the hard manufacturing data. So don’t get too excited about the LEI; it isn’t as strong as it appears.
And no, the positive ISM and regional Fed sentiment still hasn’t found its way into the industrial production report, down 0.1% in January with the manufacturing part of the report flat. December was revised down significantly as well. One can’t help but wonder if the Trump administration’s honeymoon period is about over; sentiment works for a while but at some point the growth has to actually show up.
One recent big bright spot was the Quarterly Services survey which showed an 8% rise in information services spending. That’s a huge improvement over last quarter which was up just 1.1%.
Continue reading Bi-Weekly Economic Review: One Down, Three to Go
By David Stockman
The Donald seems to think that the 37% gain in the stock market between election day and the January 26th high was all about him, and in one sense that’s true.
Donald Trump is all about delusional and so are the casino punters. They keep buying what the robo-machines are buying, which, in turn, persist in feasting on the dip because it’s there and because it’s worked like a charm for nine years running.
So doing, the punters have become downright reckless. After all, the market was already sky high last January—-trading at 23X earnings on the S&P 500 and resting precariously on a record $554 billion of margin debt . Yet in order to load up on even more of these ultra risky shares, punters have since added $112 billion to their already staggering margin accounts, thereby helping to propel the S&P index to a truly ludicrous 27X by the end of January 2o18.
Continue reading The Albatross Of Debt: The Stock Market’s $67 Trillion Nightmare, Part 4
By Kevin Muir
First of all, sorry for the lack of posts lately. Long story, but rest assured, I am back on track and the old ‘tourist regular postings have resumed.
Next up, today I will write about Canadian real estate. I know, many of you find that about as exciting as watching Winter Olympic curling, but give me a chance – after all, we Canadians have a way to make even curling entertaining.
The Canadian real estate bubble
As most everyone knows, over the past decade, Canada has experienced a massive real estate boom.
Continue reading The Pricking of the Canadian Real Estate Bubble?
By Callum Thomas
Since the September low point last year US 10-Year bond yields have risen 90bps, this compares to 125bps from the low point in July 2016 through to March 2017, or if you count it as one big move they’ve gone up 158bps. What ever way you put it the move in bonds has been substantial, so a logical question to ask is “have bond yields gone too far too fast?”
I talked about the tactical outlook bond yields a couple of weeks ago in the Weekly Macro Themes report, and a key chart from that was the one below – bond market sentiment.
The chart shows our composite treasuries sentiment index. The index derives signals from bond market implied volatility, bond fund flows, speculative futures positioning, and sovereign bond market breadth. The combined signal has provided some truly insightful leads on the market, particularly when it reaches an extreme. I have lined it up with the US 10 year bond yield to give an intuitive display of the swings in investor sentiment.
When it comes to sentiment indicators and incorporating them into a broader process, my view is that sentiment indicators typically contain ‘momentum information’ through the range, and ‘contrarian information’ at extremes. Thus I would say at this point we are swiftly transitioning from momentum to contrarian information, and the risk of a stabilization or pullback in yields is elevated at this point.
My medium term view remains that bond yields go higher. This view is informed by bond valuations still being at expensive levels, a positive growth/inflation outlook (strong cyclical picture), and a turning of the tides in monetary policy (specifically, with quantitative easing being gradually phased out globally and the Fed starting QT). Short-term, seasonality is also consistent with higher bond yields (through until about May-June).
So if I had to guess, I would say there is a decent risk of a short-term pull back in bond yields (i.e. rebound in bond prices), but that this will be a brief interlude as the medium-term trend will likely resume shortly thereafter.
By Anthony B. Sanders
Federal Reserve Chair Jay (Thurston) Powell (III) essentially said today that the economy is back to normal and The Fed has to get policy back to normal. That is, he hinted at 4 rate hikes this year.
The odds are now at 50-50 of a Q4 rate hike.
On that speech, the Treasury 30y-5y curve flattened to near 50 bps.
Here is Thurston Powell III conferring with Janet Yellen (aka, “Lovey”) about monetary policy.
By Michael Ashton
[biiwii comment: trying to ignore the imagery conjured up by the title, Mike… :-( ]
I feel like I am falling behind in my articles and commenting on other articles that people have recently written about inflation. After years – literally, years – in which almost no one wrote anything about inflation, suddenly everyone wants to opine on the new shiny object they just found. At the same time, interest in the solutions that we offer – investment strategies, consulting, bespoke inflation hedges, etc – has abruptly picked up, so it feels like the demand for these articles is rising at the same time that my time to write them is shrinking…
But I try.
I want to quickly respond to an article that came out over the weekend, by widely-read author John Mauldin. I’ve corresponded over the years from time to time about inflation, especially when he got way out on the crazy-person “CPI is made up” conspiracy theory limb. To be fair, I think he considers me the crazy person, which is why he’s never referred to me as the inflation expert in his articles. C’est la vie.
Continue reading John Mauldin and Long Soapy Showers
By Jeffrey Snider
In October 2006, the Communist Party of China unveiled a landmark new policy aimed at easing social and societal unrest in the country. The Chinese leadership would strive for a “harmonious society”, reaching this goal no later than 2020. As one of the final works for 16th Party Congress convened in 2002, it would stand as the template for how the 17th Party Congress would attempt to rule.
A year later, in October 2007, Communist Party leader Hu Jintao built further upon that foundation, stressing harmony if in the background of all the Party’s major initiatives. In many ways, he said, the Chinese were fortunate in being given the opportunity to address any issues from the position “of this new historical point.” Rapid economic expansion had radically transformed the country.
Economic strength increased substantially. The economy sustained steady and rapid growth. The GDP expanded by an annual average of over 10%. Economic performance improved significantly, national revenue rose markedly year by year, and prices were basically stable. Efforts to build a new socialist countryside yielded solid results, and development among regions became more balanced.
The key pieces of the harmonious society were to be democracy, rule of law, equality, and environmental stewardship.
Continue reading Yeah, About This Boom
Ok, here come Powell’s prepared remarks.
If you need to know what to look for here, you can peruse some of the color on today’s closely-watched hearing here, but basically, it’s the same old thing.
People want clues about the outlook and about how fiscal stimulus plays into the committee’s decision calculus and about inflation and, ultimately, about whether we’re likely to get four rate hikes this year.
Powell needs to learn the art of obfuscation and fine-tune his skills at employing euphemisms in the service of not sounding too dovish or too hawkish. Basically, he needs to master the art of using a whole bunch of words to say nothing.
Well speaking of a whole bunch of words, his testimony is out. Here are some (seemingly hawkish) bullet points :
- POWELL: SOME HEADWINDS FACING U.S. ECONOMY ARE NOW TAILWINDS
- POWELL SEES FURTHER GRADUAL RATE HIKES, OUTLOOK REMAINS STRONG
- POWELL: U.S. ECONOMIC OUTLOOK STRONG, INFLATION TO RISE TO 2%
- POWELL: FOMC SEES RISKS ROUGHLY BALANCED, MONITORING INFLATION
And here are some excerpts from the testimony:
Continue reading Jerome Powell ‘Is Pleased’ To Offer You This Half-Assed Janet Yellen Impression
By Callum Thomas
With the rather volatile action in global equities over the past few weeks, it’s worth checking in on where market breadth is tracking. We take a unique approach in breadth analysis for global equities in that we look across a country-level rather than individual stock level. The benefit of this is that you can pickup early warning signs e.g. as certain groups of countries start to come under pressure e.g. as a result of some underlying macro issues. Aside from warning signs and risk management, it can also be useful in identifying opportunities, and this is well highlighted in today’s blog.
The key conclusions and observations are:
-50DMA country breadth looks to be giving an oversold signal.
-On the “Death Watch” the proportion of countries with ‘death cross’ has tapered off after a previous steady increase.
-On the bear market monitor, of the 70 countries we track, none have entered into a bear market’.
-The lack of red flags lines up with our constructive macro/earnings outlook, so the oversold signal looks like a buying opportunity.
1. 50-day Moving Average Breadth: 50DMA breadth for global equities (across 70 countries) collapsed to oversold levels in the wake of the stockmarket correction (which sent the MSCI All Countries World Index in local currency terms down just over -8% top to bottom), and has since rebounded – usually a bullish signal. Interestingly this comes off the back of a classic bearish divergence which was initially resolved through a blow-off top.
Continue reading Global Equities Breadth Check