Originally published at The Boock Report
Yesterday’s 1.7% rise in the CRB index matched the 2nd biggest in about a year. The highest level in 9 months is being met by mostly yawns in conventional yields. Looking specifically at the epicenter of the biggest bubble, that being the European bond market, there is an uptick in inflation expectations as the German 10-year inflation breakeven is up 3 bps to 1.24% and that is the most in 8 months. The French 10 yr breakeven is up by 2 bps and the UK 10 yr inflation breakeven is higher by 2.5 bps. Just read again the rising inflation commentary in the Markit press release on eurozone services and manufacturing and combine with this the rise in commodity prices and I have to believe that higher inflation is one of the most underappreciated risks in the European bond market. Putting aside sovereign yields for a second, if you didn’t see last week the yield to worst on the ICE Bank of America Merrill Lynch euro high yield index fell to 2%. Repeat that back a few times, this European junk bond yield index is yielding 2%. The US 5 yr Treasury yield is yielding 2%. The US 5 yr inflation breakeven closed at a 5 month high yesterday but is highly correlated too to the CRB index.
German 10 Year Inflation Breakeven
Another anecdotal commentary on inflation out of Europe, Markit reported its German construction figure for October which was little changed at 53.3 but they said “intense supply chain constraints contribute to a sharp rise in input costs…The incidence of delivery delays was one of the greatest seen for over a decade, while purchase price inflation was pushed to a 6 ½ year high.” Also, the demand for labor is getting heated as the “rate of job creation was among the fastest seen since data collection began in late 1999.” The German 10 yr bund yield sits there at just .34%.
Here is another from Markit on retail sales in the eurozone where its index fell 1.2 pts in October: “Gross margins facing eurozone retailers continued to be squeezed at the start of the fourth quarter. The rate of decline remained marked despite easing marginally from September…Contributing to falling margins was another rise in average input prices. Moreover, the rate of inflation quickened to a 57 month high and remained substantially greater than the long-run series average.”
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Actual retail sales in September for the eurozone was better than expected, up .7% m/o/m vs the estimate of up .6% and August was revised up by 4 tenths. The y/o/y gain of 3.7% was the best since July 2015.
Mario Draghi is speaking today and the most noteworthy thing he said was “There is little evidence that negative rates are undermining banking profitability.” This is nonsense but what he is doing is deflecting the criticism he is receiving from the European banking sector whose stocks as I mentioned again yesterday are still below the peak of 3 ½ years ago. He is telling them to cut their operating costs to raise profits.
Not surprisingly, another German ECB member is expressing her difference of opinion with Mario Draghi and the majority in their decision to not officially mark September 2018 as the end of QE. Sabine Lautenschlaeger said, “I would have liked a clear exit and a different decision.”
After a strong factory order report from September in Germany yesterday, industrial production today missed expectations. It fell 1.6% m/o/m vs the estimate of down .9% but were still up 3.6% y/o/y. Also, for the 3rd quarter as a whole, production was up by .8%. The Economic Ministry said, “Overall, industrial production should expand further in the coming months.” The euro did, however, weaken around the time of this release and sits at the lowest level since mid-July. The Dollar, in fact, is higher across the board. The bearish sentiment on the dollar over the past month got extreme and this rally was due but I believe it’s nothing more than a counter-trend rally.
Speaking of inflation, is the worm about to turn in Japan? Regular base pay in September jumped .7% y/o/y. It doesn’t sound like much but it does match the fastest pace since March 2000. There was also a sharp 11.6% y/o/y increase in bonus’ payments. Hopefully, this is the beginning of something but JGB yields were flat overnight while the Nikkei ripped higher by another 1.7% on the weaker yen.
In China, its FX reserves in October rose a touch m/o/m to .109T but that was a hair below the forecast of .11T. It’s the 9th month in a row of gains but the smallest increase of the 9. A combination of factors such as the squashing of large overseas deals, the general weakness in the US dollar this year and decent economic data over the past few quarters are the main reasons. The yuan is lower but the dollar is mostly higher across all currencies. Chinese stocks traded higher while bonds were down.
For more reports by the Lindsey Group, see boockreport.com and bookmarkadvisors.com.
