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What if I told you…?

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The Days Ahead: ECB and BoJ meet. No change expected.

We had a run of good earnings last week. On Friday, the big three banks (JPM, WFC and C) reported solid numbers. We were glad to see that they all reported decent loan growth and lower loss provisions. In recent years, earnings have come more from FICC (basically trading), which is a lower quality of earnings. So, these reports are in line with the recent successful stress tests that the Fed announced and clear the way for returning capital to shareholders. In a classic reminder of “buy the rumor, sell the fact” all three sold off on Friday.


1. What if I told you...?
In January this year, that we would have relentless political instability, stocks at the top end of their valuation range and a Fed raising rates? High volatility, no? But take a look at this:

It shows monthly change of the S&P 500 for the last 20 years. The smaller the columns around the 0% line, the lower the volatility. The recent clustering of the bars around the zero line shows just how quiet the market has been. We haven’t seen a correction of 5% since July 2016 or one of 10% since January 2016, and that lasted less than a month. So, investors have had an easy time over the last couple of years. It could change quickly and there are always reasons for why the market should fall. Ten minutes on CNBC will probably have you rushing to gold and tinned food. But to us, it's an absence of bad news for the corporate sector, low rates and a decent earnings recovery (h/t The irrelevant investor).


2. Oh dear… hard data:
It was another week of explaining away the weak hard data numbers. Producer prices and services costs were weak. So too was the NFIB, or small business survey, albeit from quite high levels. Industrial production was up 2% with strong showing from mining. Here it is:

Mind you, a lot of this was simply recovering from the string of declines over nearly two years. This is not any sort of return to big mining as the sector includes not just ores, coal and metals but also oil and gas. Finally, retail sales were flat, so won't be helping Q2 GDP growth much and consumer sentiment fell to pre-election levels. Which is what you would expect given the legislative gridlock and concern that health spending is about to drop 35%.


3. Yellen and Congress.
You can read the talk here. Our takeaway is that she has no real answer as to why inflation and wages remain low. Yes, there are lots of temporary factors like wireless programs, energy and airlines prices, but core sustained, long term inflation remains well below expectations. She’s certainly not alone in this so full credit to keeping it honest. She’s also worried about what the government may do which sounds sensible. There were no hints on timing of the next move but Friday’s inflation numbers suggest to us that December may be more likely than September. It won't be July.

Here’s inflation rolling over again with all the core numbers down and special items like wireless costs (down 13% YOY), used cars (down 9% annualized) and airline fares (down 37% annualized but that won't last). Ten-Year Treasury yields fell but overall there was very real new news.


4. There is low volatility but this is ridiculous:
The trading ranges for major asset classes have been historically very quiet. Consider:

  • Ten-Year Treasuries have traded between 1.5% and 3% for six years
  • German government bonds have traded between 0.2% and 0.6% for two years
  • The U.S. dollar index has traded between 95 and 100 for two years
  • VIX has traded between 10 and 25 for five years
  • Yen-U.S. Dollar has traded between 100 and 120 for four years

It's all to do with the economic cycle locked into lowish growth with no real momentum to any major story. Still, could be worse (h/t BAML).


Bottom Line:
Major earnings in U.S. and Europe. Housing starts is the only major news data. So we’re on the sidelines.

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--Christian Thwaites, Brouwer & Janachowski, LLC


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