One of the greats is worried that a “poison” for the entire global financial system is spreading.
Taking Preemptive Action
September 4 (King World News) – Peter Boockvar – Hong Kong CEO Carrie Lam finally did what she should have done months ago. As the genesis of this entire episode was the extradition bill and combined with back to school, I’m hopeful and expect this movement to now flame out, for now. While the initial response to Lam’s speech was a thumbs down, with the main dispute taken off the table things should calm down, again for now. The big picture issues though remain between the two and will only intensify further in coming years as we approach the 2047 handover but for now, move on.
Just a week after one BoJ member expressed concern that they were approaching the ‘reversal rate’ where the level of monetary policy would be detrimental rather than stimulative, BoJ member Goushi Kataoka said “It’s important to take preemptive action, rather than waiting to confirm a changing trend in prices, which are a lagging indicator of the economy.” Rather than stop buying longer term JGB’s, this banker thinks they should further lower short rates below zero in order to steepen the curve. The only two words that come to mind about a central banker that currently believes the right thing to do is go even more negative with rates is intellectually bankrupt…
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For years I’ve called negative interest rates as poison and it’s certainly been the case to the financial system of Japan and Europe. Also, those who believe in ‘forward guidance’, another way of saying lets keep rates low for a very long time, are also bankrupt as it stimulates nothing to happen today that would have happened tomorrow and does the exact opposite.
While incoming ECB chief Christine Lagarde said “A highly accommodative policy is warranted for a prolonged period of time”, we have another ECB member that is questioning the need for more changes in policy to further below zero. French central banker Villeroy didn’t come out and endorse more QE when asked but he also didn’t disagree for the need for more easing and possibly more lower rates.
Most importantly with comments I’m seeing from some ECB and BoJ members is that the deteriorating condition of their banks is becoming more obvious to even them. I’ll say this, if we are on the cusp of seeing the end to this push to lower interest rates, I’ll argue that this extraordinary move lower in global bond yields is about to end and that what we’ve seen over the past month was the final blow off. Whether in response to the pivot in Hong Kong or something else, bond yields are rising today.
Finally in central bank land, not long after St. Louis Fed President and voting member Bullard said let’s cut 50 bps, voting member and Boston Fed President Rosengren again questioned the need for more easing. Bullard’s case was typical of him, getting dragged around by the markets. He argued that they should cut only to respond to the yield curve. In October 2015 when the stock market was down only 10% from its peak at the time and with barely any QE left he wanted to stop the end of QE because stocks were falling. No other reason.
After declines seen in 6 of the past 7 weeks in mortgage applications to buy a home, notwithstanding this sharp drop in rates, purchases did rise 3.6% w/o/w. The y/o/y gain remains a modest 5.1% in light of that mortgage rate drop. The refi momentum has slowed over the past two weeks as it fell 7% for a 2nd straight week. However, it is up a quite robust 152% y/o/y. Bottom line again, refi’s have been the biggest beneficiary of the plunge in rates while home purchases have been more muted for a variety of reasons we all know. Thus, Fed rate cuts won’t matter much.
Looking at the overseas data, the protests in Hong Kong on top of an already slowing economy resulted in a further plunge in its PMI in August. It fell 3 pts to 40.8 and thus is well below the breakeven of 50. Hopefully with the news seen today we’ve seen the worst of this downturn but as long as growth in China continues to slow, Hong Kong won’t be able to separate itself from that.
With respect to China, the private sector Caixin services PMI for August did improve by .5 pt to 52.1 vs the estimate of 51.7 and does follow the better than expected manufacturing figure. How much of this was the encouragement to banks to pick up its lending pace to small and medium sized businesses is impossible to say.
Singapore’s August PMI fell below 50 at 48.7 from 51. Markit said “Demand was impacted by softer conditions in domestic and overseas markets, leading firms to reduce output at the sharpest rate in 7 years. Global economic uncertainty and sluggish demand weighed on sentiment towards year ahead, with confidence at an historical subdued level.” This is sounding all too familiar.
In Europe, the Eurozone services PMI was revised to 53.5 from 53.4 from 53.2 in July. New orders though fell to a 3 month low and employment dropped to the lowest since January. Bottom line, while the services sector has well outperformed manufacturing, Markit said this: “A sharp drop in business optimism about the coming year in the service sector, down to the lowest for 6 years, suggests that companies are already braced for tougher times ahead.”
Also of importance…
A portion of today’s note from legend Art Cashin: Overnight And Overseas – Terrible Tuesday looks like it may be fading fast. Asian equity markets are generally higher with Japan and India seeing marginal gains. Shanghai had a sharp rally and stocks in Hong Kong soared the equivalent of over a thousand Dow points as the infamous extradition bill is apparently fully withdrawn.
There’s a little spillover into Europe. Frankfurt and Paris are seeing solid gains, while gains in London are more muted as Brexit strains intensify.
Among other assets, Bitcoin has rallied and is trading just under $10,600. Gold is a bit weaker after yesterday’s sharp rally. Crude has rebounded with WTI trading near $54.50. The euro is firmer against the dollar and yields are a bit higher after Tuesday’s drop.
Consensus – The bulls may be overreacting a bit to the dropping of the proposed Hong Kong extradition law. History suggests that Xi will need to take a stand in another area to avoid looking soft by having backed down.
Traders will also keep an eye on London to see if we are heading to a snap election. They will also follow Lagarde’s testimony.
As usual keep an eye out for a Presidential tweet with all this going on.
Stick with the drill – stay wary, alert and very, very nimble.
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