Steve Massocca’s Things I Saw Today 1/9/18

Things I Saw Today

The yield on the 10 year reached its highest level since March of last year and here is why (you will notice that Utilities are down sharply in an up tape)…

The benchmark U.S. yield rose as much as six basis points to 2.54 percent, a level last seen in March, and the Treasury curve steepened the most in three weeks, as a looming glut of bond supply from the U.S., the U.K., Japan and Germany coincided with a surprise cut in purchases of long-dated Japanese government bonds by the Bank of Japan.

Even though central bank watchers said the BOJ’s actions aren’t interpreted as an imminent shift from ultra-accommodative policy by Japan’s monetary authority, it’s yet another sign of central banks stepping back from global bond markets — just as the U.S. is about to sell the most debt in eight years. Add to that rising market expectations around inflation, and traders are starting to wager that Treasuries are about to break out of their tightest range in a half-century.

If in Fact BOJ policy were changing, that in my opinion would be bad news for markets worldwide.

 

Here though are stories leading one to believe that monetary policy will be little changed in Japan and beyond..

PM Abe urges central bank’s Kuroda to keep up efforts on economy: Reuters reported Prime Minister Shinzo Abe on Sunday called on BoJ Governor Haruhiko Kuroda to keep up efforts to reflate the economy, but added he was undecided on whether to reappoint Kuroda for another five-year term. Abe also said the government would continue to work with the central bank to boost growth, so that he could declare an official end to deflation at the earliest date possible.

Internal pressure on Fed to rethink its inflation framework – Reuters

  • Reuters reported that incoming Fed Chair Powell is facing growing internal pressure to consider a new approach to inflation targeting. The push for a rethink gained momentum last week following separate comments by Cleveland Fed President Mester (2018 FOMC voter) and St. Louis President Bullard.
  • The article noted that price-level targeting is one alternative, whereby policymakers over or under-shoot the target to make up for years when inflation is below or above 2%. Nominal GDP targeting is a related concept that has also been the subject of discussion.

However the article pointed out level-targeting regimes rely on an assessment of past shortfalls, meaning the Fed could tolerate excessive inflation if it depended on the frequently revised GDP estimates. Mester herself conceded that alternative frameworks are not without their challenges

And here are some that would indicate policies are about to tighten…

ECB’s Weidmann says central bank should set concrete QE end date – Reuters

  • Reuters cited the ECB’s Weidmann (also head of the Bundesbank), who told Spanish newspaper El Mundo that in his opinion the central bank should set a concrete date for ending its QE program. Weidmann pointed to signs for inflation to return to a level that is sufficient to maintain price stability.
  • Weidmann is one of the more hawkish members of the ECB and is considered a leading candidate to succeed current President Mario Draghi.

If Weidman replaces Draghi, that will not be good news. The one thing holding hawks back is the possibility of Italy et.al. threatening to leave the Euro if policy tightens, which makes this story somewhat troubling…

Leader of Italy’s 5-Star Movement says it is no longer the right time to leave the euro – Reuters

  • Headlines only. Reuters cites leader of Italy’s 5-Star Movement Luigi Di Maio.
  • The 5-Star Movement, which started as a anti-establishment party, has recently softened its anti-euro stance and its willingness to serve in a coalition.
  • Recall that in December, Di Maio said on Italian television that a referendum on Italy’s membership of the euro was only a last resort.

Finally, surprising to read that many have not benefited from this massive bull market…

Retail investors have not benefited from doubling of stock markets since 2012 – WSJ

  • WSJ reported that nearly $1T has been pulled from retail-investor mutual funds since the beginning of 2012. Over the same period, the S&P 500 has risen 116%. It added that while a chunk of that money has likely been recycled back into lower cost ETFs, on net, US stock funds have seen outflows for each of the past three years.
  • The article discussed how the flow dynamics fit with analysts’ longstanding assertions about the extent to which the multi-year has been “unloved” or even “hated.” It attributed some of this mentality to the lingering mistrust from the financial crisis and demographics.
  • At the other end of the spectrum, the paper highlighted support for stocks from institutional investors, pension funds and foreign buyers.
  • The skepticism highlighted in the article has been a theme in the press for some time. It has also been cited as supportive for the market in terms of helping to dampen concerns about complacency and euphoria.

Steve Massocca |
Wedbush Securities | 2 Embarcadero Center, 6th Floor | San Francisco | CA | 94111
Steve.Massocca@wedbush.com | www.wedbush.com | Member: NYSE / FINRA / SIPC

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