By Sober Look The yield spread between US treasuries and German government bonds hit a new high last week (see chart). Was this divergence in rates simply a response to the ECB action last month (see post) in combination with stronger jobs data in the US or is there more […]
Author: Sober Look
Sober Look’s received a number of e-mails regarding the recent post on the possibility that rising CAPEX spending in the US is driving corporations to tap their credit facilities, thus increasing loan growth. Most were highly critical of this line of thinking in their comments, using words such as “bogus”, “propaganda”, “head fake”, “delusional”, etc. But let’s just look at 4 key data points.
We are seeing signs of significant improvements in US labor markets. The ADP report today was certainly an indication of recovery from the winter slowdown. One area to watch in the ADP report is construction, as construction payrolls have consistently increased each month over the past year. With demand for rental units remaining high, this sector could pick up quickly.
For years mortgage rates on “jumbo” loans have been higher than for traditional (conforming) mortgages. Since jumbo loans were larger than the upper limit permitted to be packaged and sold to Fannie and Freddie, banks would typically charge a premium for “illiquidity” on these products. But starting last year conforming mortgages became more expensive for borrowers than jumbo loans.
Private loan balances in the euro area continue to decline. Last month’s drop of 2.2% from the previous year was worse than had been expected by economists.
Many continue to argue that the rate normalization taking place now will slow business activity in the US. Good luck betting on that however. There is no question that corporate America had benefited tremendously from extraordinarily low rates. Many US firms have locked in these rates over the past couple of years by refinancing – interest expense savings that go directly to the bottom line. But what will happen now as rates “normalize”?
Treasuries once again experienced what amounts to a sharp curve flattening in recent days. The market action resembled what took place after the initial announcement of taper back in December. The yields in the “belly” of the curve have risen sharply as the market prepares for rate “normalization”.
Credit growth in the US seems to have stabilized and may be on the rise. It’s worth mentioning that the bottom in loan growth just happened to correspond to the start of Fed’s taper. Coincidence? Maybe. But why is corporate America increasing its borrowing all of a sudden? The most likely answer is the improvement in capital expenditures (capex), which is evidenced by firmer capital goods spending by US companies.
As a confirmation of a significant downward adjustment to China’s growth, a battery of economic reports yesterday morning all came in materially below expectations.
Here is a chart showing the number of transactions that involve acquisitions of an asset management business by year. It tells us about a couple of trends developing in recent years.
Capital outflows from Russia seem to be picking up steam. These outflows – combined with the central bank’s “weaker ruble” policies and the Ukrainian tensions – are all fueling the ruble sell-off. The ruble resumed its slide this week, hitting another post-devaluation low against the euro.
In trying to assess the trajectory of the US economy, one is struck by the recent divergence between the manufacturing and the services sectors. Most analysts blame the weakness in the service sector and the resulting softness in the labor markets on the weather. If that is indeed the case, as temperatures cimb, we should see a material rebound in service oriented businesses and therefore some big improvements in the jobs picture later this spring. That would mean more Fed taper and higher yields.