Thursday, May 24, 2018
Contributors: J.Price, C.Basinger, D.Benedet, C.Kerlow, D.Mak, S.Obata


Yesterday’s release of the FOMC meeting minutes marked a turning point for the day and equities moved higher once news was out.  That momentum doesn’t seem to have carried overseas though, as markets in the A-Pac closed mixed and the morning is Europe is unchanged.  Futures point to a mixed open with the S&P 500 sits almost exactly halfway between its Jan 26 high and its Feb 9 low for the year.

Bonds are doing nothing after their miniscule retreat from the steady march higher in yields.  Our 5 year sits at 2.27% after hitting 2.35% last week.  Rate hub tells us that fixed mortgage rates keep moving higher, ever so slowly putting more pressure on indebted households.  This happens at the speed of grass growing though, and is typically why the adage of rate hikes taking 6-12 months to “work their way into the economy” is a thing.  Meanwhile lenders are more aggressive on variable mortgages, which now offered at prime less 1% at many institutions.
It's a meme world
Long form read:  Ben Hunt, who writes the Epsilon Theory blog, discusses the presence of memes in the markets and media, and how the perception of harm often leads to outcomes that are far worse than the harm itself – especially once those harms are adjusted for probability. I urge you to read This is Why We Can’t Have Nice Things.
Growth update
Growth of eurozone economy slowing, surveys find but all appears well in the U.S. The eurozone economy is strong, but growth is falling, according to IHS Markit purchasing managers' surveys. Expansion of the German economy has declined to the lowest rate in 20 months, while French growth has slipped to the lowest rate in 1½ years. U.S. PMI results were better than expected for both services and manufacturing.
More on Turkey
To stem the losses for the Lira, the Turkish Central Bank raised interest rates by 300bps in defiance of President Erdogan. In response, the Lira abruptly reversed, halting the devaluation for more than a few hours. If you’re not the Fed or maybe the ECB, history has proven its hard for central banks to control the markets. As we write the Lira has retraced about 60% of what it gained back yesterday, weakening about 4 percent, hitting the lows of the day just before an election speech by Erdogan. While most Canadians won’t have much direct investment exposure to Turkey, what is happening there directly impacts the general risk on/off attitude of the overall market and can be seen as a proxy of the struggles vulnerable emerging markets are facing. 
Blasting tunnels
After some recent tensions between the US and North Korea, North Korea has followed through on a pledge to destroy tunnels at its nuclear test site earlier today.  North Korea remains offended that Trump’s government drew a comparison to Gaddafi’s Libya, with North Korean officials saying they paid a heavy price to build their powerful and reliable strength to defend themselves. The destruction of the sites is being viewed positively, though some doubt its remaining structural integrity after a previous failed test.

For those that will have the time, Barry Ritholz published his summer reading list for 2018.

DiversionVery cool visual of immigration to the USA since 1820.  Pretty sure we will be seeing more from this Youtube channel.


The Canadian government has blocked the take over attempt of Aecon Group by a unit of China Communications Construction. The Chinese firm was blacklisted by the World Bank from 2009 to 2017 for fraudulent practices. Royal Bank saw their business lending surge 22% in the fiscal second quarter. That combined with strong wealth management results helped them beat street expectations. TD also had strong business loan growth and saw their net income rise by 17% in the quarter, which was ahead of expectations. Exxon CEO Darren Woods outlined a plan yesterday of how the company will spend billions on mega-projects to dominate the natural gas market for decades to come. Unlike other major integrated oil and gas companies they will not focus on returning capital to shareholders and only do share buybacks if there is excess cash. Best Buy reported 7.1% same store sales growth last quarter but that was not enough for the street as shares are trading lower in premarket trading as concerns mount about 2018 not being as strong as last year.


Oil is down -1.32% to $70.89 . The fundamentals continue to improve; however, the market is looking forward. Russia’s energy minister “reiterated that OPEC and its partners will discuss phasing out supply curbs when they meet next month”, according to BNN Bloomberg.

Gold is up 0.48% to $1,301.00 . Precious metals are holding up as the USD retreats. Rates are also near the lows for the week, with 10s sitting <3.00%.

In other commodities news…

NEB approves TransCanada’s $1.4B North Montney Mainline project” – BNN BBG

Distraction or disaster? Freeport’s giant Indonesian mine haunted by audit report” – RTS

Exclusive: Rusal resumes shipments of aluminum to some customers” - RTS

The geopolitics of electric cars will be messy” - $FT



Ten year Treasury yields are back below the 3.00% level this morning and continuing the grind lower after yesterday’s dovish Fed minutes release. Generally speaking, the world prefers to look forward than backward so paying too much attention to the details of an event that happened three weeks ago isn’t commonplace (unless you have a DeLorean). We already know that the dot plots are more important now than ever (according to Chair Powell who said as much) so barring any market catastrophes, there will definitely be at least two more rate hikes in 2018. What was noteworthy in the minutes however was the notion of “most participants judged” that it is likely soon “to take another step in removing policy accommodation” and for being comfortable in having “a temporary period of inflation modestly above 2%”. Translation? Not every voter in the FOMC is ready to firmly put their foot down on the tightening gas pedal just yet, and that they don’t mind having inflation runner hotter than target before deciding to hike rates. That was enough to bring the doves back to the market which led to the overall yield curve steepening a couple basis points and the aforementioned belly retracing recent losses.
Further supporting the bias for a pullback in bond yields, the BCA published a short analysis prior to the minutes release that postulated how the market has already priced in future hikes on its near-term path and that further upside is likely limited from here. They added that the below-benchmark duration trade has become crowded (“net speculative short positions in 10-year Treasury futures have rarely been greater”) and that a potential catalyst for the reversal is the rolling over of the U.S. economic surprise index. The latter is “mean reverting by its very nature” and that a “long period of positive data surprises will certainly be followed by an upward revision to investors’ economic expectations”. Supporting the thesis is the trading pattern of benchmark Treasuries --- since the financial crisis, “large net short positions have correlated quite strongly with a decline in the 10-year yield during the subsequent three months”. BCA’s metrics currently show that the 12 week yield change on the 10 year is approaching zero, and that if previous patterns repeat, we should see the nominal rate approach 2.80% before a reversal.



Tradition is the illusion of permanence.

 - Woody Allen

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