ON DECK FOR THURSDAY, OCTOBER 15th
KEY POINTS:
- Is this the great rotation back into bonds, or a mere hiccup?
- US producer prices to inform PCE tracking
- US retail sales face a tough act to follow
- US lumber tariffs raise US housing costs
- Will Fed’s Warsh say anything helpful tonight?
- Light Canadian manufacturing, wholesale data
- Aussie yields drop on lost part-time jobs
- Gilts, sterling yawned at UK data
Is this the asset allocation pivot we’ve been warning about or merely a flash in the pan?
The answer isn’t clear, but we’re set up for another day on which sovereign bonds are rallying while equities waver. US Treasury yields are down by 6–10bps across the curve in a bull flattener move. The US 10-year yield is 22bps below the peak ten days ago. Canada’s curve is also rallying by 5–8bps. European yields are performing in generally similar fashion. Aussie yields plunged post-jobs (see below). JGBs and kiwi bonds also rallied overnight. All of this is despite yesterday’s US CPI reading (recap here) but somewhat compatible with slightly lower oil prices led by a buck decline in Brent.
Meanwhile stocks are teetering toward general softness today. US equity futures are down by between ¼% (S&P) and over 1% (Nasdaq). TSX futures are holding steady. European cash markets are mixed with declines in Germany and Italy, little change in Paris and a mild gain in London. Currencies are mixed.
Interestingly it’s not the richly valued Mag7 that are weighing on the S&P (chart 1)––it’s everything else. Since stocks ex-Mag7 began softening after August 13th, only energy and health care have been up while all other sectors have been lower (chart 2).
My weekly offered numerous equity valuation charts to argue that stocks were dear relative to cheap bonds including chart 3 showing the widest spread between the US 10s yield and the S&P dividend yield in decades. It’s the Benjamin Graham or sometimes called Fed model approach.
US PPI TO FIRM UP PCE TRACKING
US producer prices will further inform estimated PCE inflation. Violent position covering subsequently reined in much of yesterday’s initial response to CPI. Total producer prices are expected to rise by 0.6% m/m SA with prices ex-food and energy up 0.3%.
Key will be the categories within PPI that are included in the Fed’s historically preferred PCE measure of inflation. They were collectively light in August’s readings and had no net influence on core PCE for that month as a sharp rise in airline passenger service prices was offset by declines in other prices like portfolio management services.
US CONSUMERS MIGHT TAKE A BREATHER
US retail sales may struggle in the wake of August’s large 1%+ gains across headline, core and control group readings. One reason is that auto sales fell by 4.7% m/m SA in September, but this could be offset by the weighted impact of higher gasoline prices since the figures are reported in nominal terms.
The US also refreshes jobless claims (8:30amET) and the Empire gauge of manufacturing activity that kicks off the regional measures on the path to the next ISM-manufacturing print (8:30amET).
FED’S WARSH––WILL HE SAY ANYTHING USEFUL?
Key could be how the day ends late at night when Chair Warsh speaks from Bangkok (11:30pmET). He says he doesn’t care about recent data, yet he’s also very backward oriented in terms of his views and refuses to offer his own forecasts. I’m doubtful he’ll provide any clarity but feel his communications have been highly erratic on core matters and therefore anything could happen.
US LUMBER TARIFFS RAISE US HOUSING COSTS
Trump’s assault on Canada was resurrected yesterday. 51st state nonsense and general political interference in Canada’s sovereign affairs were resurrected along with disparaging comments on Canada. When you steadily challenge another nation’s sovereign status, turnabout is fair play. Trump also hit Americans in the pocketbook with lumber tariffs in tone deaf fashion toward affordability challenges.
The US tariff against Canadian softwood lumber was set at 35%, down from 45% over a year ago but still absurdly protectionist. The US government is working against housing affordability in the US by a) driving up raw materials costs like tariffs on lumber, b) pursuing fiscal policies that raise bond yields and mortgage rates, and c) by pursuing overly restrictive immigration policy. Policy that is genuinely concerned about affordability challenges facing everyday Americans would a) sweep away tariffs, b) settle the botched Iran war one way or the other, and c) create a credible fiscal plan.
LIGHT CANADIAN DATA
Canada watchers face light data that may moderately enhance GDP tracking. Mixed August readings for manufacturing and wholesale are expected for the month of August (8:30amET). Manufacturing sales were previously guided to be up by over 1% m/m in nominal terms, but wholesale sales were guided to be down by over 1%, both based on partial samples.
AUSTRALIAN YIELDS PLUMMET AFTER JOB LOSS
Australia lost 39,300 jobs in September entirely in part-time positions (-73.7k) as full-time employment was up 34.4k. The participation rate fell three-tenths to 66.8% and the unemployment rate edged up a tick to 4.7%. The trade deficit sharply narrowed mainly as imports fell (-1.5% m/m) and exports were flat (0.1%) after a strong prior gain of 2%.
GILTS, STERLING YAWN AT UK DATA BEATS
The UK economy beat expectations again through a batch of August readings, but sterling and gilts had other things on their minds this morning as they largely ignored the lagging readings. GDP was up 0.1% (consensus -0.1%). Industrial output led the way (0.8%, -0.1% consensus) including manufacturing (1.2%, 0% consensus). Services were flat (consensus -0.1%). Construction output fell -0.2% (consensus 0%).
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