Here is a quick update on the US, Japan, Italy & the EU, China, and Brexit.
November 12 (King World News) – Here is what Peter Boockvar wrote today as the world awaits the next round of monetary madness: The key economic news in the US this week will be on the consumer. We see consumer price inflation on Wednesday, retail sales on Thursday and earnings from HD, GPS, M, WMT, JWN and WSM. With softness in trade, a squishy cap ex figure in Q3 (why would US business commit to large scale cap ex projects in the face of what could be a massive increase in the tariff tax in a few months, irrespective of the tax incentive to do so….
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What’s wrong with waiting until the tariff situation becomes more clear?), weakness in housing and a peak in auto sales, the US consumer is the firewall against an economic downturn (spending on things outside of housing and auto’s). They are certainly benefiting from a strong labor market and rising wages but I remain of the belief that the direction of asset prices will end up determining how much life is left in this 10 year economic recovery. In other words, rising rates raising the cost of financing a credit dependent economy and the direction of the stock market influencing consumer and business confidence will be the ultimate arbiters.
Thanks to energy prices predominantly, October PPI in Japan rose 2.9% y/o/y, one tenth more than expected but down from a 3% pace in September. This marks the 19th straight month of 2%+ PPI prints that of course hasn’t filtered into a greater pace of consumer prices to the chagrin of the BoJ. As the market only seems to focus on CPI, it hasn’t mattered much for JGB’s as the main factor influencing JGB’s in 2018 has been yield curve control. Also, with the recent fall in oil prices, Japanese 10 yr inflation breakevens has recently fallen to the lower end of the range this year at .45%.
Italy and The EU
Italy, which saw no economic growth in Q3 from Q2, did report industrial production in September that didn’t fall as much as first estimated. It was down two tenths instead of the 5 tenths that was forecasted and follows a 1.7% gain in August and a 1.6% drop in July. Overall, IP did fall in Q3 from Q2. In terms of what comes next for Italy and the EU, Italy has until tomorrow to respond to the EU concerns with their budget. As I see Italy with the negotiating leverage here because there is not much the EU can do, Italian bonds are weaker again with the 10 yr yield up for the 5th day in 6 and the euro is breaking below $1.13 to the weakest since June 2017. Most Italian banks are in the red as is the MIB index.
In response to the news on Friday that the Chinese government wants to impose lending quota’s for banks to increase lending to the private sector, the tech and private company dominated Shenzhen index rose 2.5% and is quietly at a one month high. It remains down 28% on the year though and 56% below its 2015 peak but with a valuation of 12.8x next years earnings, multiples have become much more attractive.
Of course though if the economy continues to weaken, anything is possible with those 2019 estimates. By the way, the numbers out of Alibaba were impressive but doesn’t take away from the short term overhangs in the Chinese economy. With an enormous debt load in the private sector you’re going to hear a lot about rising bankruptcies next year but that is what you want to hear because it’s an important part of the cleansing process. What you don’t want to see are constant bailouts that establishes a zombie situation for Corporate China.
The British pound is back to trading poorly again with it down a full dollar today as Theresa May’s own party seems to be digging in against her Brexit plans. On the other hand, her own spokesman said they hope to have a deal done in coming weeks. What an incredible distraction this has been for now 2 1/2 years but regardless of the outcome, life and business will go on in the UK.
***KWN has now released the remarkable audio interview with London whistleblower Andrew Maguire and you can listen to it by CLICKING HERE OR ON THE IMAGE BELOW.
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