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Monday, May 8, 2017

MARKET INSIGHTS: The Payrolls Report Was Good And Better Than Expected, But Not Sufficient To Restore The Trump Reflation Trade.


The dollar index fell to the lowest low since Nov on Friday (98.58) and is inching marginally higher this morning. The lowest low over the past year is 93.21 from June 23, 2016.

The payrolls report was good and better than expected, but not sufficient to restore the Trump reflation trade. Payrolls rose 211,000, more than forecast, and the unemployment rate fell to 4.4%. But nit-picking quickly set in. March was revised from 98,000 to 79,000. The April participation rate fell to 62.9% in April from 63.0% in March and February. Average hourly earnings rose 0.3%. as expected, but March was revised down to 0.1%. That takes the year-over-year down to 2.5% from 2.6%. Realistically, the numbers are not that bad, so the retreat in the dollar and yields was probably baked in the cake even before the release.

In other markets, oil is still on the defensive after a tepid recovery Friday from a crash to $46.67 (Brent) from over $50 earlier in the week last week. It didn’t help that the Baker Hughes rig count show a rise by 6 to 703 in the latest week—vs. 328 rigs a year ago. The peak was 1,609 rigs in the Oct. 10, 2014 report, implying US producers have a ton of spare capacity.



Today Russia and Saudi Arabia separately committed to extending production cuts into 2018, i.e, for longer than the expected six months that will be decided at the Opec meeting on May 25. The oil price popped up for a few minutes but then fell back. An analyst quoted by Bloomberg says “We will have to wait two years to get a stable Brent oil price at around $55.” 

In Europe, Macron beat LePen by 66.1% to 33.0%, a resounding rejection of populism and racism disguised as nationalism. It’s a vote for the eurozone, too, not to mention the polling industry, although parliamentary elections lie ahead (June 11 and 18), and then we’re on to new political risk in Italian and German elections. The UK election (June 8) is considered risk-free. Bloomberg reminds us Brazil and Mexico also vote in the next 18 months. Yesterday the excellent Zakaria predicted the next Mexican president will be wildly anti-American.


• In Australia, negative sentiment toward the AUD found a new excuse—a 19.9% y/y drop in building approvals, the most in 6 months and far more than 10% forecast. The drop is due in part to new government regs about to come online, mostly interest-only in real estate venture lending by banks.

• In China, the April trade surplus widened to $38.05 billion from $23.93. Exports rose 8% y/y (after 16.4% in March) while imports rose 11.9% (after 20.3% in March). China also reported official reserves up $20.4 billion in March for the third month in as row, due in part to a “valuation” effect (the euro rose).

• In Germany, March factory orders rose 1.0%, led by eurozone orders. We get industrial production tomorrow.

 • In the UK, the housing downturn is becoming more evident. Halifax reported ‘house prices recorded their first quarterly decline in more than four years, adding to signs that the property market is cooling. In the three months to April, prices fell 0.2 percent compared with the previous three months,” according to Bloomberg.

The euro closed on a high note on Friday at 1.0995 and managed the highest high since November at 1.1034 on the Macron victory just after the Sunday open. But then we got the classic “sell on the news” effect and the euro has slid back down to 1.0933 so far. The euro is now sitting on the old resistance line and we shall see if it becomes support. Note that European equities, including the CAC, are also down.




The Reuters 10-year yield index closed at 2.353% from 2.356% the day before. This morning it’s 2.353% from 2.357% on Friday morning. It was 2.299% last Wednesday morning.

The Bund yield is quoted higher at 0.0388% from 0.384% on Friday. Two weeks ago, it was 0.178%. And the worst level was only last July 6 at -0.2059%.

Market Outlook: 

It’s terribly confusing to have the divergence trade failing to deliver the opposite result from what you would expect. In simplistic terms, the US is hiking rates and “normalizing,” while Japan and the eurozone are still engaged in QE with no end in sight, however much wishful thinkers see tapering on the ECB agenda before the year is out. As we complained last week—and the week before—US yields are rising but only a little, while the Schatz and Bund are rising by relatively more.

Is that all it is behind the dollar’s weakness? Probably not. We’d add uncertainty about the strength of the US recovery, already getting a little long in the tooth. The first quarter was grim, with growth only 0.7%, and skeptics are not buying into forecasts of 4% in Q2—yet. And we’d also add revulsion of Trump. While the majority of Trump voters are sticking to Trump, the majority of the US population and the majority of the rest of the world see Trump as an embarrassment and a dangerous one.

A big factor is the absence of inflationary pressure. Whether we like to admit it or not, a dose of inflation can inspire a burst of activity as producers try to get in ahead of price increases. But a key driver of inflation is oil, and it’s just not happening. As noted above, an analyst quoted by Bloomberg says “We will have to wait two years to get a stable Brent oil price at around $55.”

The implication is an ever-rising euro back to the levels of September, around 1.1200, unless some deeply negative factor emerges.

It’s all too easy to imagine that now the French election is over, the eurozone can go back to recovering. But the Italian election and conditions in Italy generally are a giant bug in that ointment. Last week we asked a Reader in Italy to comment on the political situation and we got a diatribe against Grillo and Five Star. We are accustomed to confusing, messy politics in Italy—more governments than years since the War—but just watch—Italy is going to become the top item in eurozone news.



The FT has a scary story today about how Ireland and even Spain can sell distressed debt but nobody is buying it in Italy. In fact, “Italy’s financial system remains one of the unresolved weak links in a European economy finally showing signs of recovery, with the government struggling in its effort to address a long stagnation that has eroded the ability of Italian businesses and consumers to repay debts.” While the amount of nonperforming loans fell in 2016, the worst class of “never collectibles” (sofferenze) is higher. The IMF says Italian growth will not return to pre-crisis levels for another decade, in part because of the dysfunctional banking system that almost certainly needs a capital injection.




Tidbit 1: The FT reports watering down the Volcker Rule takes the form of big banks being let off the hook for not divesting illiquid hedge funds, private equity funds and other investments. Goldman got a waiver on $4.5 billion, Morgan Stanley on $1.9 billion and Citi, $416 million. If they wait long enough and lobby hard enough, they will never have to divest.

Tidbit 2: The New Yorker magazine has one of its signature articles (too long) titled “Endgame” about what it would take to get rid of Trump before his term is up. It’s a keeper. The first option is the VP and Cabinet throwing him out as unfit, either mentally or physically. There is plenty of evidence Trump is mentally unfit—repeating the same lies, for example—and even the American Psychiatric Association broke its rule against commenting and agrees, Trump suffers from mental disorders. But this is a tough row to hoe. Impeachment on the grounds of corruption (self-enrichment) is more plausible. And impeachment would be unlikely unless the Dems win the 2018 midterms. The president has to be unpopular (Nixon). The Dems need only about 25-30 votes to get control of the House and already has 20 likely, according to the Cook report.

Conflicts of interest abound. Trump son-in-law Kushner is in China selling green cards for a $500,000 investment in New Jersey real estate. The program he is exploiting is the “EB-5 visa program” that anyone can try for, with about 75% of the 10,000 investor visas last year going to Chinese, according to the NYT. The purpose of the program is to attract capital to distressed neighborhoods, not luxury skyscrapers. So, the letter but not the spirit.



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