Republicans, Rates & Nominal US GDP To 10-Year Bond Yields
Republicans, Rates & Nominal US GDP To 10-Year Bond Yields – Today
Small losses from yesterday echoed through Asian markets to end the week, but Europe has started the final session on the positive side this morning, with indications for the same here when we open. Markets are looking lazy for a summer Friday; however, we have some reasonably important data due out (see below for details) that could move the bond and FX markets in particular.
Loonies are weak ahead of that data on the back of a stronger greenback. Gold is trading lower as well, still around $50 below its July 11 peak. Outside of further weakness in the GBP, the currency markets are relatively quiet as well. We do find it interesting that bond yields and pound sterling are far closer to their post-Brexit lows, whereas stocks have made full recoveries to their pre-Brexit levels. Something amiss?
Something has to give here. We have Trump rolling on about how terrible things are in America, yet their economy appears to be growing at a 2.4% clip, at 144 million the US has NEVER employed this many people, rates are low, the Atlanta Fed has wages growing 3.6%, everyone likes Pokemon, the list goes on. The economic data continues to improve and yet inflation expectations are at multi decade lows. The implied break even inflation rate is at 1.38% based on how various bonds are currently priced. That seems to low all things considered. Put another way into the chart of the day, we show nominal US GDP over the past 50 years vs 10-year bond yields. The Red triangle is the latest reading. Certainly this can persist, we just wonder how long.
Where’s the beef? Today was CPI day in Canada, and we note that fresh or frozen beef fell by 3.3%. Can’t honestly say that a big difference has been noted at the grocery store though. Core CPI came in a hair above expectations at 2.1% vs 2.0%. The segment which contributed the most to CPI was Transportation, which rose 0.23%.
Media attention is on the Republican Convention, of course, so some may be drawing action in the markets to the increasingly likely prospect that Donald Trump becomes the POTUS.
Bank of Amazon? Amazon prime members can now get discounted student loans through the online retailer. Really, these are Wells Fargo loans, with a discount provided to Prime members. WFC sees it as a marketing opportunity (and likely a good one)
Nice short and sweet article from the irrelevant investor on the importance between separating how we feel about major macro events and emotional response. For market history buffs, there are some historical facts that are interesting to read. Did you know that the best year ever for the Dow was the year WWI broke out?
100 inches, with its own floor stand, this Sony 4K TV is meant to be the centerpiece of your living room, not an innocuous flush mount on the wall. We would remind everyone, that these will become a whole lot more expensive if Trump decides to reverse all the so called “bad trade deals” he has been alluding to over the past few days.
General Electric beat expectations on the back of a surge in energy related sales. GE Power advanced 31% and the renewable energy division grew 28%.The majority of the gains are related to closing the $10bb Alstom deal last year. They also received approval last month to drop their SIFI designation. American Airlines beat after lower fuel prices offset soft global growth. They are reducing their capital spending plans by delaying plane orders from Boeing from 2018 to 2022. Husky Energy has shut down a pipeline that was responsible for a 1,570 barrel oil spill that liked into the North Saskatchewan River.
Oil prices are flat this morning but down meaningfully for the week trading below $45 a barrel after stockpiles grew this week despite being in the heart of driving season in the U.S. Supplies are at the highest level for this time of year in over two years. Oil prices have been range bound between $44 and $52 since May; a break of this threshold would be technically negative for stocks. Nickel prices are weakening this morning after a strong two week rally. Chinese buying and falling global inventories helped boost the price close to a one year high.
Fixed Income And Economics
Bond markets rallied yesterday, wiping out most of the losses for the week. Equities, the yen, and energy prices continue to be the key drivers of rate markets – weakening crude and strengthening of the yen yesterday seemed to have a higher correlation to the fall in yields than any comments from European Central Bank (ECB) President Draghi. The ECB did after all make no changes in policy or in its €80 billion monthly bond purchase program yesterday, and at the press conference Draghi offered little in terms of future stimulus plans other than vague support for a non-performing loan facility to shore up the banking sector. As such, next week’s Bank of Japan meeting, which may contain additional stimulus, could be the key even for markets.
Overnight, yields have risen, reversing much of yesterday’s drop, as focus is also now turning towards next week’s FOMC meeting. Markets are pricing in almost a zero chance of a hike, and no chance of a cut, and the market is not set up for any surprises. We are looking for general consensus among Fed members that the inflation and employment outlook are supportive of tighter policy in the coming months, but global risks, including the impact of the UK referendum to leave the EU will stay their hand for now.
Domestically, we had two key data releases today. Retail sales rose 0.2% in May, and 0.9% ex-autos, much stronger than expected. This also comes off a solid reading for April. Perhaps more important for Bank of Canada policy, CPI rose 0.2% in June, to put the annual rate of inflation at 1.5%, while core inflation was flat, leaving the annual rate of core inflation (which excludes the 8 most volatile components and indirect taxes) at 2.1%. In our view, this should further reduce the possibility of a rate cut – at the time of writing, markets are only pricing in a 1 in 10 chance of such a Bank of Canada move this year.
Finally, we would point out that credit spreads continue to narrow. This is in part being driven by the ECB expanding its bond purchase program to include corporate bonds, but there continues to be strong demand from real money accounts for yield. Yesterday, Keyera Corp. issued $300 million in a private placement in two tranches, consisting of $200 million of 10-year senior unsecured notes at 3.96%, and $100 million of