Here is a quick update on the FOMC, inflation, China, extreme fear, plus this just hit a 10 1/2 year high.
November 8 (King World News) – Here is a portion of what Peter Boockvar wrote today as the world awaits the next round of monetary madness: What I’m watching out for in today’s FOMC statement that I believe will have the most relevance is what they say on inflation and housing. The labor market comments will be solid as will other references to the economy. I mention housing because we know it’s slowing but will it matter enough for them to alter the rate hike/QT path…
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On inflation, just about every single CEO talked about raising prices on their quarterly conference calls to offset rising cost pressures. On the other hand, the Fed likes to mention market based inflation expectations which have moderated coincident with the drop in oil prices and they cite the inflation expectation figures from the consumer confidence numbers which have also fallen. I’d be focusing on what CEO’s are actually saying because it is a precursor of what’s to come.
10 1/2 Year High
While we wait, the 2 yr yield has quietly risen to a fresh 10 1/2 yr high (see chart below).
3 month LIBOR has as well. As a reminder, about 40% of Russell 2000 companies have floating rate debt that is most likely priced off LIBOR. The ratio for S&P 500 companies is about 25%. The 10 yr yield yesterday closed at 7 1/2 yr high on a closing basis at 3.235%, just off the intraday high this year of 3.25%. Today that is down by 1 bp to 3.22%.
Nothing like a market bounce to bring out the Bulls. AAII’s index of individuals said Bulls rose 3.4 pts after jumping by 10 pts last week. At 41.3 it’s the most in 2 months. Bears fell by 3.3 pts after dropping by 6.5 pts last week. It numbers 31.2, the least in 5 weeks. I don’t believe this is at all extreme enough to matter much but its certainly a change from just a few weeks ago when Bulls were 28 and Bears were 41. Also, just a few weeks ago the CNN Fear/Greed index fell to 5. Yesterday it was at 25 (still reflecting Extreme Fear).
China, Trump & Xi
The trade data out of China overnight reflected a lot of front loading that is likely going on in many places ahead of the tariff rate hike in two months. Chinese exports in dollars jumped by 15.6% y/o/y, more than the forecast of up 11.7%. Exports rose 13.2% to the US in particular but also did rise 15% to the EU and were pretty strong to the rest of Asia. Imports spiked by 21.4%, well above the estimate of up 14.5% but they fell 1.8% from the US. As the data is distorted by the trade issues, we won’t make much of it. The yuan is little changed but Chinese A shares sat out the global rally as it fell by .2%.
Even if this gets resolved by year end if Trump and Xi have a productive meeting in a few weeks, there will be some trade hangover in Q1 in both China and the US and for those that supply product in between.
Global Trade & Japan
In Japan, they reported a pretty disappointing machinery orders figure. In September they fell by 18.3% m/o/m, double the estimate of down 9%. This happens to be the biggest monthly drop ever in data I have back to 1987. There were certainly natural disasters that impacted the data but analysts knew that already. I have to believe that the slowdown in global trade (outside of the tariff induced front loading of goods) is having an impact on corporate decision making in terms of capital investments. I believe we are seeing that in the US too. Southern Company CEO Tom Fanning said as much on CNBC yesterday that customers they see in the Southeast are focusing on existing projects rather than ways to add investment to new ones. After the US rally, the Nikkei shrugged off the economic # and rallied by 1.8%, along with most other markets.
Also reflecting the challenges in global trade, German exports in September fell by .8% m/o/m. The estimate was for a rise of .4%.
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