As we approach the end of 2019, yields are rising around the world as the Cass Freight Shipping Index tumbles for the 12th straight month.

The End Of NIRP?
December 19 (King World News) – Peter Boockvar:  As widely expected, the Riksbank officially said good riddance to 5 years of negative interest rate policy, the first central bank who had taken the plunge of slapping a tax on its banking system expecting it to be stimulative that has decided that enough is enough. They said “Inflation has been close to the Riksbank’s target of 2% since the start of 2017, and the Riksbank assesses that conditions are good for inflation to remain close to the target going forward.” They still believe that NIRP worked, have not ruled out using it again and will stick to zero for a while however. I believe the only thing it worked to do, and successfully, was dramatically compress interest rates, their yield curve and the profits of their banks, the supposed transmission mechanism of the policy. 

Lunch is not free though. In a sequel to what the US experienced in the mid 2000’s, Europe, via NIRP, has its own bubbling housing market which is a form of inflation that doesn’t enter the minds and calculations of central bankers for some reason but could result in major pushback against the ECB at some point. https://www.nytimes.com/2019/12/17/business/europe-housing.html

So lets shift to the ripple effects of leaving the world of negative rates and to what it could potentially mean if other central banks, like the BoJ and ECB follow in their foot steps. With still $11.5 Trillion of negative yielding securities, there is a lot of potentially pain for these holders of what are now liabilities if the ECB and BoJ follow. If growth both stabilizes and then improves as global equity markets are betting on, along with fiscal stimulus from the likes of BoJ, I think that discussion picks up pace in 2020. If the case, expect higher longer term US interest rates as while the Fed will sit on its hands, the long end will tighten for them and follow the rise in rates overseas. 

Yields Rising Around The World
We have yields rising around the world today with the Japanese 10 yr JGB back above zero, albeit barely, the German 10 yr yield at the least negative since July and the US 10 yr yield matching its highest yield since late July. In a world that is addicted to low rates and leverage and with credit spreads at 2007 tights and equity multiples rich, if rates continue higher from here of note, it could be the story of 2020. I emphasize ‘IF’…


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The BoJ did meet today and did nothing as fully expected. Kuroda said “Overseas risks have improved somewhat from a while ago and it’s true that we have seen relative bright signs. Still, the risks remain very high and we need to watch them closely.” Now this is a bank that will continue with what they are doing in terms of rates and yield curve control but one that also wants higher long term interest rates in order to save their banking system. On those hopes, the Topix bank stock index is just off the highest since February. 

The BoE left rates unchanged too as expected but saw another 2 members that wanted to cut rates from .75%. What they and others think the benefit will be in cutting from this already very low rate and half the level of the inflation rate is beyond me. 

Cass Shipping Index Declines For 12th Month In A Row
The Cass Freight shipments index fell 3.3% y/o/y, marking the 12th month in a row of declines. They are hopeful though that we are close to bottoming out as the y/o/y growth rates “flatten out.” They refer to “Flat as the new up.” Considering the contraction in this index over the past year as when the manufacturing sector and global trade declines there of course are less things to ship, we’ll take it. And key will be how do things inflect on the heels of the trade deal. 

In the AAII index of individual investors, they got very bulled up over the past week after a jump last week. Bulls rose 6.5 pts after last week’s 5.9 pt rise and now stand at 44.1, the highest since early October 2018 when it printed 45.7.

Bears fell by 5.6 pts after last week’s fall of 3.1 pts. At 20.5, it’s the lowest since early May. That’s lower than where it was in October 2018 when it was at 25.

Bottom line, the bulls have been dead right on this market but with this data, along with the II yesterday and the CNN Fear/Greed in the ‘extreme greed’ category at 87, that bullish view is now widespread and the room has gotten very crowded.

Following the rise in the German IFO business confidence index seen yesterday, French business confidence in December came in better than expected at 106, unchanged with November but that was revised up by 1 pt and it was 2 pts above the estimate. It remains though in a tight range over the past 6 months.

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