With the pound moving lower this morning, so are equities and commodity prices while bonds are well bid (trader lingo for higher). Futures are pointed to a lower open after the July 4th festivities. Bond yields are lower including the US 10 year dipping below 1.40% and Canada 10 year sitting at 1.0%. In the chart to lower right, we can see how yields around the world are locked to the low end of their three month trading range. Oil is lower after OPEC production rose in June. Nigeria saw an increase after multiple months of decline. But then again, can you trust the data, Iran apparently has been producing exactly 3.5m barrels per day for 3 months in a row.
The chart of the day is one of our many Canadian dollar currency charts. Yes, the C$ moves on the price of oil, certainly helped by the rise back to $45-50/barrel. But it is the economic data that drives shorter term bond yields which in turn drive currencies. We could start talking interest rate parity, but I know you would stop reading. Instead we will talk relative economic data to expectations and between Canada and the US. The Citigroup eco surprise index tracks eco data relative to expectations, with a higher score for better results and a lower score for missing forecasts. We then take Canada’s score and subtract the US score (blue line in the chart). Peaks and troughs in this measure have roughly coincided with peaks and troughs for the C$ to US$. Canada had a great run of eco data while the US hit a soft patch during Q1 but since May the US data has been improving while Canada has been starting to show softer data. So the question is will the C$ follow the data down? We think so.
Another Italian bank bailout, both in terms of another bank, namely Banca Monte die Paschi di Siena, and another bailout as this is the 3rd one since 2009. The ECB stress tests resulted in the request the bank offload more than 14 billion euros of non-performing loans. Apparently this would reduce non-performing loans to 20% of total loans…..what?
Bloomberg has a good article this morning on bond trading, and the newfound political uncertainty. No longer is the game primarily based on fundamentals such as economic growth and inflation expectations. Black Swans and Game Theory: A Post-Brexit Guide to Bond Trading. The political arena has rarely been as important, as the Brexit event exemplifies.
Leading the race lower for now in terms of pace, are British bond yields. UK 10 year yields are trading near a record low again this morning, trading 81bps. These were at 2% at the beginning of the year. There is now a 66% chance of a rate cut in July, and 88% chance that one happens before the end of the year. With the current rate at 0.5%, the U.K. could be at zero after just a few meetings. All eyes will be on Carney to see what he does to stabilize the UK financial system.
Mentioned yesterday we saw a decent uptick in U.S. PMI data last week, which leaves us encouraged that the manufacturing recession is nearing an end. PMI grew at the fastest pace in 15 months. Up today are factory orders and durable goods orders. Both are expected to be negative in June, mixed signals continue to make reading the economy a difficult job. A flattening yield curve also adds to the complication. The 2y10y yield spread is the narrowest it’s been since 2007. At 82bps, it’s a ways from being inverted but the trend is certainly lower. We would add, that the curve has been manipulated by central banks with unconventional monetary policy.
Diversion: An Honest Commercial For Coffee Is A Reminder You’re Addicted To Hot Brown Bean Juice. Reminds me that I need a refill of this black stimulant laced liquid since I spilled half my coffee this morning on the way to work.
Mazda is initiating a massive recall of 75,000 Mazda2 sedans in China to replace faulty Takata airbags. This follows major recalls in the U.S. and Japan bringing the total Takata airbag recall to 100mm globally. U.S. company’s corporate bonds have been pushed well below zero after the Brexit vote. Bonds issued by P&G, Apple, GE, Johnson and Johnson are all trading well below -0.10%. Tahoe Resources is buying a net smelter royalty return from Goldcorp for $12.5mm cash.
Silver prices are trading lower today after the best two day rally since 2011. Gold is down slightly as well but mitigating earlier losses from overnight trading. Oil prices are off meaningfully this morning with WTI falling below $48 a barrel as repairs to Nigerian infrastructure are going along ahead of schedule. Gasoline inventories on the east coast have reached a record high this month, crimping demand from refiners.
Fixed Income And Economics
Traders in the U.S. are back to work after celebrating their independence and gazing upon yet another record low in the Treasury market. Ten year U.S. yields touched 1.375% earlier this morning to set the lowest all-time nominal return ever for the benchmark. Similarly, 30 year Treasuries slid to 2.14% to set another low in its yield. That has the overall curve flatter (2-30’s down to +158.9 bps) and underscoring the various risks being priced into the market. Worries about deflation? Check. Concerns that global uncertainty from Brexit remains? Likely. The Fed shifting to an easing bias? Probably. Investors clamoring for yield and thus pushing their term further into the future? You bet. Whatever reason you think it is, Treasury yields are dropping and following in the footsteps of their European and Japanese counterparts from months earlier. The only difference here is that the FOMC does not yet officially employ negative interest rates (might be time to revisit this idiom). One year EUR-denominated Proctor and Gamble bonds are yielding below 0% this morning — meaning that investors are now willing to lose money to own the American-domiciled corporate issuer. Wow.
The Bank of Canada’s Business Outlook Survey that came out yesterday had little new developments. In sum, stronger foreign demand is reported but the persisting pull from commodity-related activity suppresses the overall effect. Domestic demand remains modest. The balance of opinion on 12-month ahead sales have fallen to its lowest level since 2014 and investment intentions remain at their soft, even if positive level of Q1. Capex sentiment is reported more upbeat in services industries. But exporters have little spending appetite, including in non-commodity related industries. This ought to be a concern for the Bank of Canada and its long-awaited rotation sequence. Hiring intentions weaken but marginally. Not much change on the inflation expectation front. Both input and output price expectations are close to flat and two thirds of firms expect inflation in the 1%-2% range over the next year.
You’re probably all Brexit-ed out at this point