economy Markets stocks

Potpourri! 9% Premiums, Weak Business Investment And Undersubscribed Repos

Here are some notables that may fly under the radar.

The business news cycle on Monday looks set to be dominated by Boeing (Muilenburg is out) and China (tariff cuts), but we wanted to highlight a couple of other notables that are likely to fly under the radar.

Before getting to that, though, consider that the S&P is now trading 9% above its 200-day moving average.

Since the start of the bull market, that’s only been the case some 15% of the time (h/t BBG’s Andrew Cinko), perhaps arguing for a pullback, at least in the near- to medium-term.

On the data front, business spending remains subdued. The headline print on capital goods orders for November was God-awful (-2% versus consensus of +1.5%), but that probably overstates the case (planes weighed).

Non-defense capital goods orders ex-aircraft ticked 0.1% last month, which was in-line with estimates, but down markedly from October’s 1.1% gain, which itself came on the heels of two consecutive down months (bottom pane in the visual). Core shipments ex- aircraft dropped 0.3%.

Stripped of any attempt to parse the release for nuance, the big picture is that capex is weak. That, in turn, is a reflection of persistent uncertainty reflected in, among other measures, falling CEO confidence.

As Nordea quipped last month, equities clearly do not care. Neither do consumers. “The dichotomy for a long time has been that manufacturing and corporate confidence has been unusually weak while consumer confidence has been rather robust”, Goldman wrote in October, adding that this is largely a function of “falling unemployment and, in the case of the US, very low unemployment”.

But what we wanted to drive home on Monday is that weak business spending and slumping C-suite confidence in the face of rampant uncertainty is not something that’s unique to the current circumstances. In other words, it’s not as if this is some meme that critics are rolling out in a conspiratorial effort to malign the Trump administration for anti-globalist trade policies. Rather, this is just what happens when you engineer chaos.

Consider the following passage:

Any uncertainty about economic policy, and especially political or military instability so great that it creates skepticism about whether any investment in durable capital goods will be protected, will tend to reduce productive investment. Of course, businessmen have a political incentive to exaggerate their need for stable and predictable public policies, but there can be no doubt that their insecurities can have some effect on both the level and the type of investment in new capital goods.

That must be from a recent analyst note bemoaning uncertainty tied to the trade tiff, right?

Wrong. It’s from Mancur Olson’s 1982 classic The Rise and Decline of Nations. The point: Irrespective of whether stocks and consumers are inclined to ignore the deleterious effects of policy choices which create instability, at some point, those policy choices and the skepticism they create will be detrimental to society as a whole.

Now, for a complete non sequitur, another term repo operation covering year-end was undersubscribed. The New York Fed took $28.8 billion of securities in its 15-day term repo on Monday, below the $35 billion on offer.

There are two possibilities here. One is that folks now have the funding they need to carry them over the turn. The other is that dealer balance sheets have hit capacity. “While there remains some risk of this being the calm before the year-end storm, it looks like the Fed’s repo operations and bill purchases have injected enough liquidity into the market to keep year-end funding in control”, a note from Oxford Economics reads.

If it turns out that undersubscribed operations are a canary, remember that we suggested as much last month when some folks were still fretting over the oversubscriptions…

Read more: First ‘Ultra-Long’ Term Repo Covering Year-End Is Twice Oversubscribed (Cue Alarmists)

4 comments on “Potpourri! 9% Premiums, Weak Business Investment And Undersubscribed Repos

  1. Tom says:

    So in other words… funding secured?

  2. The overnight repo under-subscription is likely due to the ‘term’ repo facilities put in place. With the option to borrow longer-term, that is what they take.

    • these are term repos. both of the most recent term repos covering the turn have been undersubscribed. O/N repos are conducted each day. and yes, they are undersubscribed in part because of the term facilities. but, again, what I’m talking about here are two-week operations. they are now coming in undersubscribed as well. which means either 1) folks have run out of balance sheet, or 2) they have enough funding.

  3. Anonymous says:

    I am so glad this is the Greatest Economy EVER!!! I guess I didn’t miss much then.

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