Yields Plunging in Europe (excerpt)

More surprising than the rally in US Treasury bonds is the plunge in Eurozone government bond yields, especially in the peripheral countries. The German and French yields are both back below 2.00% at 1.37% and 1.94%, respectively. The Italian and Spanish yields are at 3.02% and 2.98%, respectively, with the Italian yield down 108bps ytd and 140bps since the start of last year; the Spanish yield is down 116bps and 220bps over the comparable time periods. They were both around 7.00% during the summer of 2012. To global bond investors, US Treasury yields of 2.50%-3.00% must be very attractive given how low rates have fallen in the Eurozone.

The plunge in Eurozone yields reflects mounting concerns about deflation in the region. The Eurozone’s core CPI inflation rate has dropped from a recent high of 1.7% y/y during July 2012 to 1.0% during April of this year. Inflation is also low in the US with the core PCED up 1.2% y/y during March, down from a recent high of 2.0% two years ago. Interestingly, the expected inflation rate implied by the 10-year TIPs yield has remained remarkably stable around 2.2% since mid-2013.

Today's Morning Briefing: Vagabonds & Vigilantes. (1) QE tapering: Bonds were sold on the chatter, bought on the news. (2) A range-bound forecast. (3) Bond Vigilantes want to know: “Who are those masked vagabonds buying bonds?" (4) New pension fund rules in Budget Act of 2013. (5) Portfolio rebalancers. (6) Individuals are back. (7) Fed isn’t done buying just yet. (8) Yields plunging in Eurozone. (9) Inflation remains subdued, and global growth is slow. (10) NZIRP for the foreseeable future. (11) Yellen is watching “disappointing” housing activity. (12) Bonds displacing gold as the new safe haven. (More for subscribers.)

Fed Is Stepping on Accelerator and Brakes (excerpt)

Bad weather may be a poor excuse for the recent stalling of the housing recovery. On Monday, Jeff Gundlach, the CEO of DoubleLine Capital, recommended shorting homebuilders. He did so at the Sohn Investment Conference, the annual gathering of big-name investors. I have noted that the weakness in new and existing home sales in recent months might reflect declining affordability, as home prices and mortgage rates have risen sharply.

The Fed’s senior loan officer survey released Monday showed that banks are not making it easier for potential homebuyers. The survey of 74 domestic and 23 foreign banks operating in the US shows that banks are holding loan standards steady for prime mortgages and have raised them for nontraditional and subprime loans over the past three months.

Fed officials have frequently stated that their ultra-easy monetary policy is aimed at keeping mortgage rates low to revive home sales. Their tapering talk last spring caused the 30-year mortgage rate to jump by about 100bps. It is still 82bps above the May 2, 2013 low. Meanwhile, the Fed is subjecting the banks to regular stress tests, which discourages them from making risky loans to would-be homeowners. In other words, the Fed is tapping on the mortgage-lending brakes and the monetary accelerator at the same time. This hasn’t stopped banks from making lots of business loans secured by inventories and other working capital.

Today's Morning Briefing: Train Spotting. (1) Stocks, the economy, and the weather. (2) Exports rising very slowly. (3) Homegrown growth. (4) Are railroads too busy hauling oil to ship autos? (5) Gundlach shorts housing. (6) Fed stepping on brakes and accelerator. (7) Transportation stocks rising along with business inventories. (8) Focus on overweight-rated S&P 500 Transportation stocks. (More for subscribers.)

Emerging Markets Aren’t All the Same (excerpt)

Emerging Markets have been mostly underperforming other stock markets since 2011. Over the same period, the forward earnings of the EM MSCI has been mostly falling after rebounding rapidly during 2009 and 2010. That might explain why the index’s valuation multiple is low.

However, forward earnings have also been falling for the EMU MSCI and UK MSCI since 2011, and they both have higher P/Es of 13.9 and 13.4, respectively. So EMs still look cheap relative to Europe. They are especially cheap relative to the 15.3 multiple in the US, which is clearly discounting that the index’s forward earnings continues to rise into record territory, as discussed below.

What about the forward earnings of individual EMs? India, Indonesia, and South Africa have relatively expensive P/Es because their forward earnings are making new highs. On the other hand, Mexico’s forward earnings is declining. China seems cheap, especially since its forward earnings is also in record-high territory, but it’s been falling recently. Brazil’s forward earnings looks terrible, continuing to flat-line as it has been doing since 2006! Turkey has been flat-lining since mid-2011, but may be starting to move to new highs again.

Today's Morning Briefing: Urge to Emerge. (1) Rotating in Chicago. (2) A year of living less dangerously. (3) Hunting for value among EMs. (4) Some EMs are cheaper than others. (5) Forward earnings rising to record highs in India, Indonesia, and South Africa. (6) China looking toppy. (7) Mexico isn’t cheap. (8) Brazil’s earnings in a coma. (9) Fragile Five leading the EM rally. (10) As expected, Q1 earnings season showing typical better-than-expected results. (11) No sign of profit margin reverting to the mean. (More for subscribers.)

Falling Unemployment Rate Isn’t Boosting Wage Inflation (excerpt)

I am inclined to believe that the unemployment rate remains a relatively accurate measure of the labor market. It continues to be very highly correlated with the jobs-hard-to-get series in the monthly Survey of Consumer Confidence. If the labor market has gotten tighter as suggested by the unemployment rate, why aren’t wages rising at a faster rate? During Q1-2014, the Employment Cost Index showed wages and salaries up just 1.7% y/y. Average hourly earnings for all workers increased just 1.9% y/y during April. I believe that employers won’t respond to tightening labor markets by bidding up wages. Instead, they will use technology, when possible, to keep a lid on their labor costs.

Today's Morning Briefing: Field of Dreams. (1) A nonpartisan question. (2) Conservatives and liberals split on extended unemployment benefits. (3) Termination of such benefits may be boosting employment and reducing unemployment. (4) Not much chill in winter employment. (5) Earned Income Proxy at yet another record high. (6) Incentives not to work. (7) Lots of dropouts. (8) Are baby boomers hogging jobs? (9) Yellen’s Dashboard still showing distress in labor market. (10) Wage inflation subdued despite low short-term jobless rate. (11) Focus on market-weight-rated S&P 500 auto-related industries. (More for subscribers.)

No Confidence In Abenomics (excerpt)

Abenomics had a very fleeting positive impact on consumer confidence in Japan. The index compiled by the Cabinet Office of Japan jumped from 39.9 at the end of 2012 to 45.7 during May of last year. By March of this year, it was down to 37.5, the lowest since August 2011. Abenomics has actually managed to depress consumer confidence!

Japanese consumers may be depressed that the weak yen has boosted price inflation, while wage gains remain slim and certainly aren’t enough to offset the April 1 sales tax hike. Not surprisingly, retail sales soared 11.0% y/y in March in advance of the tax increase. It’s the fastest gain since the government raised the sales tax in 1997. Undoubtedly, sales fell sharply during April.

Yesterday, Markit reported: “Japanese manufacturing firms saw a decline in output for the first time in 14 months in April. Alongside this fall in output was a deterioration in new orders which also decreased for the first time in 14 months. In both cases, firms linked the reductions to the rise in the sales tax. In contrast, April saw the highest rate of growth in payroll numbers since February 2007. Both prices charged and input prices rose in April, with selling prices increasing marginally following a decline in March.” The overall M-PMI dropped from 53.9 during March to 49.4 during April.

Today's Morning Briefing: Around the World. (1) On balance, global growth is slow. (2) Industrial commodity index is surprisingly strong. (3) What’s weighing on global growth? (4) US auto and housing recoveries stalling. (5) Euro is too strong. (6) Japanese consumers are depressed by tax hike. (7) China is polluted. (More for subscribers.)