Recap 2014-09-19

Commentary:

NB: No updates thru mid week

First, a few notes on equities:

Next week is the seasonally weakest week of the year for equities, using median returns. However, the bias is up afterwards. The negative bias continues using mean returns, which are skewed by historical recessions: (numbers do not line up with YTD figures because returns are relative to the close on the last Friday of the previous year. The 2014 figure, for example, is relative to 1841.40, rather than 1848.36)

Second, the recent decline in long run inflation expectations, which was not driven by risk off, is quite positive for long duration financial assets if they hold here. That makes sense – a longer inflation premium should lower the discount rate and increase the present value. The chart below highlights the last several times 10y breakeven yields fell without a risk off move, and then stabilized:

Brent Donnelly had a good note today observing that both Kuroda and Amari (who holds cabinet-level position of Minister of State for Economic Revitalization) said overnight that they did not want abrupt moves in the currency. This suggests that they are not especially happy about the rapid move in the Yen the past few weeks. Amari made very similar comments in May 2013 which marked the high in USDJPY. This coincides with the results of a Reuters poll – ¾ of Japanese firms are concerned that the yen is hitting levels that are too low and will cause input costs to rise. 47% of companies prefer to see the yen within the 100-104 range while 28% would prefer 99 or stronger. Only 25% wanted a yen below 105.

Notable:

  • Scotland rejects independence 55% to 45%.
  • Canada CPI was stable at 2.1% YoY as exp, but the core measure jumped to 2.1% vs 1.8% exp and 1.7% prev
  • In the US more than 40% of households pay no income tax while the highest paid 1% of workers contribute 46% of all income taxes collected (that 46% number was 18% back in ’79). The Economist
  • AliBaba listed at 68, the high end of its raised range.

Upcoming:

  • Mon: US Existing Home Sales, EU Consumer Confidence, Dudley speaks, HSBC China Mfg PMI
  • Tue: EU PMI, US FHFA House Price Index, US Markit Mfg PMI, Japan Mfg PMI
  • Wed: German IFO, Italy Consumer Confidence, US New Home Sales,
  • Thu: EU Money Supply, US Jobless Claims, Durable Goods Orders, Markit Services PMI, Japan CPI

Recap 2014-09-18

Commentary:

None

Notable:

  • Philly Fed declined to 22.5 in Sept vs 23 exp and 28 prev
  • Housing Starts were weak, falling to 956k vs 1.04mm exp and 1.12mm prev, a drop of 15%. The multifamily component was a large driver – single family declined only 2.4%.
  • US Jobless Claims dropped to 280k vs 205k exp and 315k prev
  • ECB TLRTO first tender generated 82.6bn of credit, which was only about a third of expectations for the combined takeup for both tenders.
  • UK Retail Sales ex fuel rose 0.2% MoM vs 0.3% exp and 0.4% prev

Upcoming:

  • Fri: Quadruple Witching, Canada CPI
  • Mon: US Existing Home Sales, EU Consumer Confidence, Dudley speaks, HSBC China Mfg PMI
  • Tue: EU PMI, US FHFA House Price Index, US Markit Mfg PMI, Japan Mfg PMI
  • Wed: German IFO, Italy Consumer Confidence, US New Home Sales,
  • Thu: EU Money Supply, US Jobless Claims, Durable Goods Orders, Markit Services PMI, Japan CPI

Recap 2014-09-17

Commentary:

The hawkish dots on the SEP offset the retention of the ‘considerable period’ language. US 5y real yields hit the highest level since 2011, which was also a catalyst for a move in the USD. USDJPY is now up 7 figures in 2 months, with about half of that due to EURUSD. I wrote an extended piece discussing a major USD bull market on 7/31, but I’m still surprised by the strength of this move. To be sure, it isn’t all driven by the US – the recent and concurrent easing by the ECB, the ramp up of expectations for more BoJ easing, and the drop in oil prices (which has taken the US current account to its lowest level since 1998) have played a role as well. It wouldn’t be surprising to see some consolidation for a bit, but the longer term trend looks intact. The ECB will be conducting additional easing via the TLRTOs next month, markets will be looking for whether the FOMC keeps the ‘considerable period’ language at every meeting now, and unless Japanese inflation miraculously ramps up, markets will expect additional easing.

Anyway, interesting note from @IanShepherson that the dot drift higher has been going on for some time now: (although the long run dots have been coming down… as people with flatteners on have been happy to see. Also note that in 2015, the 4 regional voters will turn more dovish. Instead of Fisher/Plosser/Mester/Kocherlakota, we’ll get Lacker/Lockhart/Williams/Evans … essentially we’ll lose one hawk and get a dove to replace him)

@CSresearch notes that

Notable:

  • FOMC Statement maintained the ‘considerable period’ language, but the median dots move up notably – by 37.5bps in 2015 and 50bps in 2016. However, the long run expectation did not change. Economic projections were stable to slightly stronger.
  • US CPI declined to 1.7% vs 1.9% exp and 2.0% prev. The core measure was also weak, declining to 1.7% vs 1.9% exp and prev. There was a large 4.7% drop in airline fares that was a key driver. OER is rose 2.7% YoY.
  • NAHB Housing Index improved to 59 vs 56 exp and 55 prev. This was the highest print since 2005.
  • BoE Minutes: For most members … unit labour costs were currently growing at a rate well below that consistent with meeting the inflation target in the medium term
  • UK Employment was strong, with the ILO measure falling to 6.2% vs 6.3% exp and 6.4% prev. Jobless claims declined -37.2k vs -30k exp and -33.6k prev
  • EU inflation was revised up to 0.4% YoY from 0.3% for Aug

Upcoming:

  • Wed: NZ GDP
  • Thu: UK Retail Sales, ECT 1stTLRTO, US Jobless Claims, Housing Starts, Philly Fed
  • Fri: Quadruple Witching, Canada CPI
  • Mon: US Existing Home Sales, EU Consumer Confidence, Dudley speaks, HSBC China Mfg PMI
  • Tue: EU PMI, US FHFA House Price Index, US Markit Mfg PMI, Japan Mfg PMI

Recap 2014-09-16: BAML FMS

Commentary:

Cash levels are at 4.6%, which remains elevated, and roughly where they were through the second half of 2013. This suggests that corrections will likely continue to be shallow:

Valuation concerns continue to rise:

HY was perceived as vulnerable, although it’s not clear how stale this is given recent price action:

Note also that the respondent sample shrank. 159 people responded this month, vs 177 last month. Aggregate AUM declined sharply to 427bn vs 529bn prev.

BAML also does an EU based survey. There was a very substantial jump in the percentage of respondents expecting another recession, which may be overdone:

And unsurprisingly, short EURUSD is a very consensus view – on par with mid 2008 and early 2010 levels:

Also very popular is overweight Germany vs France in equities space:

Separately, @EU_Eurostat noted that annual hourly labor cost growth rose 1.2% in Q2, roughly unchanged over the past 4 quarters. This suggest deflation fears may be overdone:

A great post on why Hedge Funds are unlikely to cut fees much:

http://www.bloombergview.com/articles/2014-09-16/calpers-has-lost-interest-in-hedge-funds

Finally, a long but fantastic post on the James Bond movie Skyfall:

http://epicureandealmaker.blogspot.com/2014/09/some-work-of-noble-note-may-yet-be-done.html

Notable:

  • UK CPI slowed to 1.5% as exp vs 1.6% prev, but the core measure ticked higher to 1.9% vs 1.8% exp and prev. PPI Output fell to -0.3% YoY vs -0.2% exp and -0.1% prev
  • German ZEW declined to 6.9 vs 5.0 exp and 8.6 prev
  • US Core PPI rose to 1.8% as exp vs 1.6% prev
  • RBA Minutes:
  1. Housing prices were continuing to increase in the larger cities and members considered that the risks associated with this trend warranted ongoing close observation
  2. the exchange rate remained above most estimates of its fundamental value, particularly given the declines in key commodity prices

Firms are repurchasing their stock at the fastest pace since before the financial crisis; companies bought back $338B worth of stock in H1, the most since ’07. Buybacks increasingly are dominating the market – corporate repurchases were 25% of total volume at Goldman in mid-Aug, about double the long-term trend. WSJ

Upcoming:

  • Wed: BoE Minutes, UK Employment, US CPI, NAHB Housing Index, FOMC, NZ GDP
  • Thu: UK Retail Sales, ECT 1stTLRTO, US Jobless Claims, Housing Starts, Philly Fed
  • Fri: Quadruple Witching, Canada CPI
  • Mon: US Existing Home Sales, EU Consumer Confidence, Dudley speaks, HSBC China Mfg PMI
  • Tue: EU PMI, US FHFA House Price Index, US Markit Mfg PMI, Japan Mfg PMI

Recap 2014-09-13: Are Hawkish Fears Overdone?

Commentary:

Are fears of a hawkish FOMC overdone? GS argued that a shift this week would be a big hawkish surprise, given that they’d previously indicated that the first tightening would come about 6 months after the end of QE at the end of October, which is 6 weeks away. They think that the Fed may not change the considerable time language until December, which is also when they publish projections. Paul McCulley at Pimco has hypothesized that the Fed may lower its neutral real rate expectations ahead of the first hike, which is intriguing. Certainly, that’s been the trend.

Anyway, in Friday’s note I noted that higher US real rates have driven sizable moves across multiple asset classes. In the absence of significant macro data, it’s probably reasonable to assume that a fair amount of it has been driven by FOMC expectations. I also noted that many asset prices are near important support/resistance levels. That combination suggested the possibility that prices have gotten ahead of themselves. One item that I forgot to look at was inflation expectations. They are important because ultimately, if the market is not concerned about inflation, outside of macro-prudential reasons, there isn’t a strong need for the Fed to be hawkish. The chart bellows shows 5y real yields in white, and 10y inflation breakevens in orange. Note two things. First, inflation expectations are notably lower than during the last cycle. The white vertical line marks 6 months before the start of the last Fed hiking cycle – note how 10y inflation expectations then had already cleared the ~2.2% area by then. Secondly, note how we remain below that level now – and in fact are at the low end of the range that has persisted for over a year.

Also, expectations remain well above market rates. Despite the large move lower in long dated yields this year, consensus forecasts have not really kept track. 4 quarter ahead Bloomberg forecasts for the 10y rate has only moved down 20bps since year end, vs 45bps for the forwards.

In aggregate, I think there is a good chance that hawkish fears may be a bit overdone. I mean, not that much has changed from a big picture perspective, but yield sensitive assets including REITs have seen their biggest drops since last October, with almost all of it coming over the past 3 or 4 days.

The great Chinese economic rebalancing is ongoing, and so far, things are mostly playing out as Michael Pettis has predicted. The Chinese data over the weekend was unambiguously weak, with capex heavy sectors feeling the brunt of the hit. Industrial production hit the lowest level since December 2008, and Fixed Assets Investment growth is at the lowest level since 2001. All of this was foreshadowed by the weak money supply prints earlier this year. If Pettis is right, there’s still a long way to go.

The BIS did an international study of house prices. What stood out to me was this chart – the US is an anomaly!

Interesting article on Germany’s push into renewable energy, and the massive price deflation in that space:

http://www.nytimes.com/2014/09/14/science/earth/sun-and-wind-alter-german-landscape-leaving-utilities-behind.html

Notable:

  • China Retail Sales declined to 11.9% YoY vs 12.1% exp and 12.2% prev
  • China IP declined to 6.9% vs 8.8% exp and 9.0% prev
  • US Empire Manufacturing jumped to 27.5 in Sept vs 16 exp and 14.7 prev

Upcoming:

  • Tue: UK CPI, PPI, German ZEW, US PPI
  • Wed: BoE Minutes, UK Employment, US CPI, NAHB Housing Index, FOMC, NZ GDP
  • Thu: UK Retail Sales, ECT 1stTLRTO, US Jobless Claims, Housing Starts, Philly Fed
  • Fri: Quadruple Witching, Canada CPI

Recap 2014-09-12: A Cross Asset Observation

Commentary:

Concerns over a shift in Fed policy are affecting more than just yields and currencies. Precious metals and risk assets are also reacting. Silver, for example, has broken below key, multi-year support:

Gold (in white & inverted below), which lead 10y real yields (orange) higher ahead of Bernanke’s tapering comments last year, has also sold off, down about $100 since early July:

While US 10y swap yields have broken cleanly above its downtrend line:

The synchronized movements across yield sensitive assets increase the likelihood that this is the ‘real deal.’ And note that this is not just about the Fed – the perceived end to ECB easing earlier this week is also likely playing a key role. 10y bunds yields are now well above the 1.0% level, up 20bps on the month, the most since last December, and is now testing the 50dma as well as a downtrend line that started in January.

Having said that, note that both 10y Treasuries and Bund yields are close to resistance levels. The 2.75 area has been a pivot for the US 10y swap rate for over a year, as well as the current upper weekly Bollinger Band level. And 10y bund yields are, in addition to sitting at the downtrend line, are also close to the 1.11-1.13 area. The EURUSD weekly candle chart (below) shows a doji below the lower Bollinger Band. With the FOMC just a few days away, these moves may well take a breather around here until then… but the size of the moves on speculation suggests the possibility of a reversal.

The potential for higher yields, along with high leverage and weak liquidity, has been a problem for the high yield debt market. Sober Look noted that the fundamentals of middle market leveraged finance are getting frothy, though banks are not directly involved.

With spreads already tight, especially in weaker credits, there has been a sizable exodus out of the asset class. HYG has sold off quite sharply this month: (although there are early signs of stabilization)

These moves have started to impact equities as well. There is a fairly strong, intuitive relationship between credit spreads (CDX HY spread in white & inverted below) and equity valuations. (orange) The optical gap between the two series is as large as it was during the taper episode last year:

Having said that, there are some offsetting factors. @RareviewMacro noted that US equity short interest (white below) is at very high levels. Since 2012, such readings have coincided with subsequent equity bounces, but the correlation isn’t stable. In 2008, the correlation was positive.

And this isn’t the only indicator suggesting low net exposure. BAML’s August survey showed the highest net cash position since mid 2012, when people thought the Eurozone would break up. We are due to get the September survey results soon, but the net cash figure is unlikely to fall to levels coinciding with intermediate market tops.

And finally, many participants believe that QE was responsible for the stock market’s gains, and so there may be selling as the Fed nears the end of its asset purchase program. This is clearly a short term negative. But I also think that it is a longer term positive. When the stock market doesn’t fall off a cliff, those participants, along with participants who have sat out the rally due to this belief, are likely to reassess…

Separately, here is an interesting chart from the BLS, showing the change in consumer expenditures for 2013. If it wasn’t for housing, expenditure growth would’ve been much weaker. This raises the question of what inflation would’ve been had the housing recovery been much weaker.

The NSA is a bully.

http://arstechnica.com/tech-policy/2014/09/us-govt-threatened-yahoo-with-250k-daily-fine-if-it-didnt-use-prism/

Notable:

  • US Retail Sales were broadly inline, but revisions were strong. Core retail sales rose 0.4% vs 0.5% exp, but the prior print was revised from 0.1% to 0.4%.
  • U Michigan Confidence improved to 84.6 vs 83.3 exp and 82.5 prev.
  • NZ PMI improved to 56.5 vs 53 prev
  • NZ House Sales declined -16.3% YoY vs -13% prev.
  • Scotland poll data shows rising support for staying within the UK. YouGov polling numbers out overnight showed a 4-point advantage 52% to 48%.
  • Russia threatens retaliatory actions in response to Western sanctions; Moscow warned it could limit western car and clothing imports – FT. It appears Russia is willing to cut itself to spite the West.

Upcoming:

  • Mon: China Retail Sales, IP, US Empire Manufacturing,
  • Tue: UK CPI, PPI, German ZEW, US PPI
  • Wed: BoE Minutes, UK Employment, US CPI, NAHB Housing Index, FOMC, NZ GDP
  • Thu: UK Retail Sales, ECT 1stTLRTO, US Jobless Claims, Housing Starts, Philly Fed
  • Fri: Quadruple Witching, Canada CPI

Recap 2014-09-11: US yields, Buffet on Stock Market Valuation vs Bonds

Commentary:

US 5y yields have been in a rising triangle formation since mid 2013. Yesterday’s close was the highest since the one print a year ago, and today’s close seem destined to settle about multi-month resistance:

Most of the move has been driven by real yields – inflation breakevens have actually fallen 30bps from the June highs. The currency market has actually moved ahead of the rates market – the Dollar index notched up is fastest gain from early July to now since last summer, although how much of that was due to the ECB and oil prices is up for debate.

The charts certainly suggest an imminent breakout, but does the move in yields make fundamental sense? The data suggests yes, but perhaps it is a bit early. Economic surprises (white below) are at the strongest levels since early 2012, which is supportive. But a breakdown of the components shows that the strongest contributors are the survey components rather in the hard data. While the surveys are historically strong leading indicators for the data, the Fed has historically wanted to see the strength reflected in the hard data before moving.

And that segues to the crux of the issue – market expectations for the FOMC next Wed. Many participants have noted the possibility that the Fed removes the ‘considerable period’ language in the statement. Given that Yellen let slip in her first press conference as chair that ‘considerable period’ means around 6 months, such a change without further qualifiers would cause the market to price in a strong possibility of a hike by March of next year. But the price action suggests that despite the chatter, markets are actually fairly sanguine about such a shift, as the April 2015 Fed Funds future shows: (FOMC meets on 3/18/15 and 4/29/15) This suggest the possibility of an interesting, asymmetric bet.

Buffet on Market Valuation, via the Brooklyn Investor: (and why Buffet probably thinks that equity valuations should be notably higher than the historical average)

From the 1981 Berkshire Hathaway letter:

  • The economic case justifying equity investment is that, in aggregate, additional earnings above passive investment returns – interest on fixed-income securities – will be derived through the employment of managerial and entrepreneurial skills in conjunction with that equity capital.
  • Several decades back, a return on equity of as little as 10% enabled a corporation to be classified as a "good" business – i.e., one in which a dollar reinvested in the business logically could be expected to be valued by the market at more than one hundred cents. For, with long-term taxable bonds yielding 5% and long-term tax-exempt bonds 3%, a business operation that could utilize equity capital at 10% clearly was worth some premium to investors over the equity capital employed… Investment markets recognized this truth. During that earlier period, American business earned an average of 11% or so on equity capital employed and stocks, in aggregate, sold at valuations far above that equity capital (book value), averaging over 150 cents on the dollar.
  • That day is gone. But the lessons learned during its existence are difficult to discard. While investors and managers must place their feet in the future, their memories and nervous systems often remain plugged into the past. It is much easier for investors to utilize historic p/e ratios or for managers to utilize historic business valuation yardsticks than it is for either group to rethink their premises daily. When change is slow, constant rethinking is actually undesirable; it achieves little and slows response time. But when change is great, yesterday’s assumptions can be retained only at great cost. And the pace of economic change has become breathtaking.

Notable:

  • RBNZ kept policy rates unchanged but used aggressive language on the exchange rate:
  1. The exchange rate has yet to adjust materially to the lower commodity prices. Its current level remains unjustified and unsustainable. We expect a further significant depreciation, which should be reinforced as monetary policy in the US begins to normalise.
  2. In light of these uncertainties, and in order to better assess the moderating effects of the recent policy tightening and export price reductions, it is prudent to undertake a period of monitoring and assessment before considering further policy adjustment. Nevertheless, we expect some further policy tightening will be necessary to keep future average inflation near the 2 percent target

AU Employment jumped to +121k vs +15k expected, at 36 year high, driven by part time employment. This is obviously something of an outlier, but even after revisions, the results are likely to be stronger than consensus expectations.

France CPI declined to 0.5% YoY as exp vs 0.6% prev

US Jobless Claims rose to 315k vs 300k exp and 304k prev

China August CPI printed +2% y/y versus +2.2% expected, a four month low. PPI -1.2% y/y versus -1.1% expected. Vegetable and oil prices were some of the drivers.

Upcoming:

  • Thu: NZ PMI
  • Fri: Kuroda Speaks, US Retail Sales, U Michigan Confidence
  • Mon: China Retail Sales, IP, US Empire Manufacturing,
  • Tue: UK CPI, PPI, German ZEW, US PPI
  • Wed: BoE Minutes, UK Employment, US CPI, NAHB Housing Index, FOMC, NZ GDP
  • Thu: UK Retail Sales, US Jobless Claims, Housing Starts, Philly Fed