If Only the Curve Could Talk

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Originally published at The Boock Report

If only the curve could talk and tell us what it's thinking. The US 2s/10s spread is down to 42 bps, a fresh 11 year low. This after a slew of economic data was seen overseas and before key data in the US later today.

Ahead of the US ISM services index at 10am, we saw some more PMI's overseas. The private sector weighted services PMI in China was unchanged in May with April at 52.9 as expected. The internals were somewhat mixed. Caixin said, "The employment index continued to rise, while the new business index slipped slightly, indicating a positive change on the supply side and marginally weaker demand across the service sector. The changes led to a softer rise in prices charged, easing the upward pressure on service prices. However, input costs rose at a faster pace after slowing for 3 consecutive months, suggesting that the upward pressure on costs has not completely eased."

Hong Kong's PMI softened to 47.8 from 49.1 and that's the weakest since July 2016. The report did not read well. "The weaker headline reading reflected a faster decline in inflows of new business. New work not only fell for a 2nd month running in May but at the steepest rate since August 2016. Anecdotal evidence suggested that weak demand conditions, high competition, and client losses were reasons for decreased sales. Furthermore, export orders from mainland China fell sharply in May after a 6 month period of growth." Employment also fell. While input prices eased, "A range of reasons were cited for inflation, including higher prices of raw materials, suppliers' price hikes, and salary adjustments."

HONG KONG PMI
hong kong pmi

On the other hand, Singapore's PMI improved to 56.8 from 55.6 and that is the best in this survey's history dating back to 2012. It did though come with rising inflationary pressures. "The strength of the upturn is pulling prices in general upwards. Overall input prices rose at a survey record rate, suggesting that wider inflationary pressures may intensify in coming months" according to Markit. 

The services PMI in Japan softened by 1.5 pts m/o/m to 51 and dropped below 50 in India. In Japan, Markit said, "There were worrying signs of deteriorating demand conditions, with new sales increasing at the softest rate in 20 months."

Overall, a mixed economic picture was seen in Asia in May. Stock markets there overnight were as well. 

The Eurozone services PMI in May was 53.8 vs the initial print of 53.9 and is the lowest level since January 2017. The high number of holidays in May was cited as a reason "but many other companies reported that demand has softened compared to earlier in the year." Markit also said, "Crisis torn Italy has meanwhile reported the weakest expansion of the four largest euro member states for the 4th month running." Price pressures for the regions also picked up in May. 

The services PMI in the UK improved to 54 from 52.8 and 1 pt better than expected. The comments here were also mixed. "new business volumes continued to rise at a relatively subdued rate, with survey respondents noting that Brexit related uncertainty remained a key factor holding back decision making among clients. At the same time, tight labor market conditions placed upward pressure on staff wages and difficulties recruiting suitably skilled staff in May." It's not just an issue in the US. The pound is higher on the headline beat but who knows when the BoE will hike rates. The odds out to September are 50-50. 

The bottom line on the European data is not clear in that some of the softness is holiday related but we also know that there has been some moderation otherwise. I still expect a good economic year in 2018 but a slower rate of growth than in 2017. 

Italian bonds are selling off after a 4-day rebound. It will be most interesting what Mario Draghi has to say next Thursday at the ECB press conference on the situation. The new Italian PM Conte spoke today and reiterated exactly what the Italian bond market is most worried about, budget-busting policies, particularly a universal income for the poor. I am supportive of the proposed 2 tier flat tax as it would be growth stimulative and would reduce tax evasion, a big problem in Italy that has a large underground economy. The euro is down and is now moving in the direction of Italian bond yields. 

The Reserve Bank of Australia kept rates unchanged at 1.5% as expected and doesn't seem ready to raise rates anytime soon. They were optimistic on growth as they expect about 3% growth but remained concerned about consumer spending as "Household income has been growing slowly and debt levels are high." They also have a massive housing bubble they are trying to quietly deflate. The Aussie$ is lower as there will be no rate hike coming just yet.

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