What The Markets Didn’t Do!
What they did not do was listen to Trump in the first instance, because if they did then markets should have sold off, well at least the bonds should have sold. Once again, the U.S. consumer has provided an insight to the thinking of the masses and sat put and done nothing. Consumer confidence appears to be waning, the retail spend is falling. Housing, long seen as a barometer of confidence is suffering still, remaining below historical levels. U.S. job creation, low interest rates, tight housing supply have failed to accelerate an otherwise complacent economy. Demand for pork bellies has increased dramatically as the U.S’s consumer for pork and pork products such as bacon is far from being sated.
What the economy has not been doing in this rather benign environment is accelerate growth. Yellen’s cautious comments last week appear to be playing out as June retail sales fell 0.2%. This is the second straight month and the first back to back fall since August 2016. Is a pattern developing? The University Of Michigan on Friday announced the read for its consumer sentiment index for July of 93.1 down from a June figure of 95.1 and a May reading of 97.1. For those unfamiliar with the index, the index is a measure of consumers expectations and a solid decline of 4.1% over three months is a not a favourable trend.
The gauge is important because not only does it drive consumer expectations but it also highlights what market analysts fear most, that is a slowing economy.
The equity market rallied Friday, partly because the big three financials released pretty good results and because rates will remain low and that the Fed won’t be in any hurry to hike rates. The Merton model persists. However, at some point if the trend continues to develop with the majority of earnings results weakening rather than strengthening, then the equity market will sell. That certainly is Jamie Dimond’s (of JPM) concern. Jamie had a nag at the press over the weekend for not reporting enough good things, I am not sure exactly what he meant by that comment but he is right to some extent that there is too much negative news however that is not the press’s fault that is the current administrations fault for being too inept in not even being able to employ the necessary people in over six months and not being able to get anything through Congress unless it’s an Executive Order.
Markets are too complacent and are in danger of overreacting one day. Growth will remain slow. Industrial output 0.4% from May to June, production rose 2% yoy. Most of the rebound is mining which grew by 1.6%.
Equities rallied as JPM posted the highest annual profit for a US. Bank over the last 12 months, proving that not all Banks are heavily reliant on trading in the Fixed Income Department. Citibank topped the earnings estimates and saw it close in on its rival because of a stunning result in its Fixed Income Department. Equities were the underperforming trading division. Both banks proved there was still money to be made despite operating in a low volatility environment. The S&P powered to an all-time high and closed up 0.5%, the Dow gained 0.4% and the Stoxx 600 was up 0.2%.
The Bloomberg Dollar Index declined 0.7% its lowest read since September.
Bonds had a better week and closed 2bp down in yield (prices higher). The U.S. 10-year closed at 2.32%. The yield curve steepened a point. The closes were 2/10 97.2 bp, the 2/30 156bp and 10/30 58.6bp. The benchmark 10-year bonds in Europe were slightly tighter with the Bund closing at 0.528%, the OAT closing at 0.858% and the Gilt slightly weaker to close at 1.31%.
WTI rose 1.1% to gain 5% for the week. Interestingly U.S. drilling costs are increasing as drillers are paying more to drill than idle their rigs. The Saudis are curbing oil shipments to the U.S. in an attempt to lower inventory. Energy traders are moving their inventory from storage tanks as prices have soared, and Glencore has announced that it is in talks to sell global storage oil stakes. South Korea increased its oil imports from Iran by 10.5% yoy.
The Aussie Market Today
The positive trend for the Aussie market should continue. Both the equity markets and bond markets should see some interest today.