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Succinct Summation of the Week’s Events
- Best of luck to Jerome Powell, you get to preside over shrinking the Fed balance sheet by a few trillion dollars in coming years and let’s hope this is one of the rare instances that a rate hike cycle doesn’t put us into a recession.
- The FOMC statement was a non event as expected. Again, because of their focus on the flawed PCE inflation gauge they can include the word “soft” referring to non energy inflation because core CPI is running 4 tenths higher at 1.7%.
- October payrolls grew by 261k, well below the forecast of 313k but that was completely offset by a 51k person increase to September and also, August was revised up by 39k. After the 102k jobs ‘lost’ in leisure/hospitality in September, 106k were added back in October. After a bizarre spike of 906k in September in the household survey, this month it was down by 484k and combined with the drop of 765k in the size of the labor force (after a large 575k increase in October) saw the unemployment rate fall another one tenth to 4.1%. The all in U6 fell a large 4 tenths to 7.9% and that matches the low in the previous expansion. Disappointingly, the participation rate fell by 4 tenths to 62.7% which is just 3 tenths from matching the lowest since the 1970’s. The employment to population ratio was down by 2 tenths. Also missing the mark was the wage data where after a .5% rise in September, there was no m/o/m change in October. Last month was certainly lifted by the low wage jobs that were temporarily lost after the hurricanes. Versus one year ago, wages were up by 2.4%. Hours worked stayed the same at 34.4. Positively, there was a sharp drop in those working part time for economic reasons and also a fall in the number of people unemployed for more than 27 weeks. Negatively, there was an almost 100k person rise in those not in the labor force with about all of them considered ‘discouraged workers.’ A fair assessment of today’s data has to average the last two months because of the storms. Job growth averaged 140k which brings the 6 month average to 163k and the year to date average to 169k vs 187k in 2016, 226k in 2015 and vs 250k in 2014. The slowing trend is clear but that is in large part due to the shrinking pool of available workers which happens in the 9th year of an economic expansion. Averaging out the average hourly earnings figure has it up by .4% over the last 2 months so two tenths per month, the same as the recent trend with still no sign of acceleration in this figure. Average weekly earnings has a similar trend.
- Initial jobless claims fell to 229k from 234k last week. That is below the estimate of 235k and brings the 4 week average to 233k from 240k. Processing claims in Puerto Rico and the US Virgin Islands is still an issue but ex this has firing’s at a very modest rate still. Continuing claims fell by 15k to a fresh 44 year low.
- The ISM services index for October rose a touch to 60.1 from 59.8 but that was 1.6 pts above the estimate. It is also the best level since August 2005. The internals however were somewhat mixed. New orders fell slightly to a still high 62.8 from 63 last month. Backlogs fell 2.5 pts after rising by 2.5 pts in September. Employment was up .7 pts to a 5 month high while export orders (only a few service companies report export orders) grew by 4 pts. Prices paid fell by 3.6 pts after jumping by 8.4 pts in September. Of the 18 industries surveyed, 16 saw growth vs 15 last month. The ISM summed up the report by simply saying “Respondent comments continue to indicate a positive outlook for business conditions and the economy as we begin the fourth quarter.”
- The headline PCE gain was up .4% m/o/m and 1.6% y/o/y. The core rate was higher by .1% m/o/m and 1.3% y/o/y.
- Productivity in Q3 was a better than expected 3% q/o/q annualized vs the estimate of 2.6%. On a y/o/y basis it was higher by 1.5% which is a better way of analyzing this. This brings the 4 quarter average to 1.2% which is still very modest but the best since 2015. Unit labor costs remained very modest as they fell .1% y/o/y after a .2% drop in Q2. Compensation per hour did rise 1.4% y/o/y vs 1.1% last quarter but more output helped to limit unit labor costs.
- The Q3 Employment Cost Index was higher by .7% q/o/q as expected and is vs .5% growth in Q2 and .8% in Q1. Versus last year, the ECI was up by 2.5% which happens to be the quickest since Q1 2015 vs 2.4% last quarter. Private sector wages/salaries grew by 2.6% y/o/y which matches the best also since Q1 2015. Private sector wage growth was particular good in manufacturing and professional services q/o/q.
- The Conference Board Consumer confidence index for October rose 5.1 pts to 125.9 and that is the highest since December 2000. Both main components contributed to the rise. Also, the answers to the labor market questions improved further. Notwithstanding the headline jump in confidence, spending intentions were mixed. Those that plan to buy an auto rose 1 pt after falling by .8 pts last month. Those that plan to buy a home fell 1.4 pt to match an 8 month low. Those that plan on buying a major appliance dropped 5 pts to a 3 month low. What stood out was those that plan on taking a vacation within 6 months spiked by 11.3 pts to the best level on record dating back to 1978. One year inflation expectations fell 2 tenths to 4.7% after rising by 4 tenths last month. There was a bifurcation in the confidence breakdown amongst ages. Those under the age of 35 saw confidence fall to the lowest level since February. Those aged between 35-54 rose to the best since November 2000.
- Personal income saw a 3.4% y/o/y gain in private sector wages, the quickest since March. Nominal spending was up by 1% and was goosed by a jump in durable goods, most likely influenced by the sharp rise in auto sales post Harvey. Spending on services also picked up as well as nondurable goods spending (likely helped by higher gasoline prices).
- China’s Caixin private sector weighted services PMI rose to 51.2 from 50.6 but vs 52.7 in August.
- Japanese consumer confidence for October rose .6 pts to 44.5 and that was about 1 pt above the estimate. It is also the best level since September 2013. Its recent peak was 45.4 in the heart of the Abenomics enthusiasm back in September 2013. Importantly the Income Growth component rose .7 pts, the highest since May 2007.
- Japan’s unemployment rate in September held at a 24 year low at 2.8% (a drop in the number of employed was almost matched by the fall in those in the labor force) and the jobs to applicant ratio was unchanged at 1.52, a 43 ½ year high.
- Japan’s industrial production in September fell by 1.1% m/o/m but that wasn’t as much as the 1.6% fall that was expected.
- Eurozone Q3 GDP grew by 2.5% y/o/y, one tenth more than expected, up from 2.3% in Q2, and that is the strongest quarter since Q1 2011.
- The Eurozone September unemployment rate for the region fell to 8.9% from 9% in August and that is the lowest since January 2009.
- Eurozone October CPI was up 1.4% y/o/y, one tenth less than expected and down one tenth from September. The core rate slowed to a .9% gain, down from 1.1% last month and that was 2 tenths below the forecast.
- The eurozone manufacturing PMI from Markit for October was basically left unrevised at 58.5 with the first print of 58.6. It is at an 80 month high with every single country in the region reporting “increases in output, new orders and employment.” Here is the commentary on inflation: “Capacity pressures also impacted on supply chains during October, as reflected by a further substantial lengthening in vendor lead times. Delivery times increased to the greatest extent in 6 ½ years, with especially severe lengthening signaled in Germany, France, Austria and the Netherlands. Robust demand for raw materials and associated shortages of certain inputs both contributed to the latest increase in vendor lead times. The development of sellers’ markets for a number of purchased items also led to an increase in their cost. Average input prices rose at the fastest pace in 6 months, with stronger inflation signaled in almost all of the nations covered (the exception being Ireland). Part of the increase in purchasing costs was passed on to clients in the form of higher selling prices. Output charges rose for the 13th successive month, with the rate of inflation rising to its highest since June 2011.”
- The European economic confidence index for October rose to 114 from 113.1 and that is the best level since January 2001. The estimate was 113.3. All 5 components were up m/o/m.
- In Germany, the number of unemployed fell by 11k in October, about as expected and their unemployment rate held at 5.6%, the lowest since reunification.
- The manufacturing PMI for the UK in October rose to 56.3 from 56 and that was a touch above the estimate of 55.9. Markit said “Production and new order volumes continued to rise at robust rates, as companies benefited from strong domestic market conditions and rising inflows of new export business.” This though came with rising inflation. “Price pressures remained elevated, however, with rates of inflation in input costs and output charges both accelerating and staying well above historical series averages.” Coincident with the UK unemployment rate at the lowest level since 1975, “Job creation was registered for the 15th successive month, with the pace of growth improving to a 40 month high.”
- The UK services PMI in October was up 2 pts to 55.6 and better than the forecast of 53.3. New orders rebounded from last month’s 13 month low. Employment growth slowed. Input prices “eased to its lowest in over a year” although “continued to rise sharply” which “was linked to a variety of expenses, including higher food prices, energy bills, transport costs and staff salaries.” Also, “prices charged inflation continued to rise in October, reaching a 6 month high.”
- The ISM manufacturing index for October was 58.7, slightly less than the forecast of 59.5 and down from 60.8 in September which was the highest since 2004. Of the 18 industries surveyed, 16 saw growth vs 17 last month. Of note, just 12 of the 18 saw new order growth which matches the lowest since November. Those that reported growth in export orders was only in 8 industries and just half of industries surveyed saw growth in backlogs. Positively, more industries are hiring as 15 of the 18 saw an increase, matching the most since 2011.
- Private sector construction in September fell m/o/m for the 3rd straight month. Nonresidential private construction was down for the 4th straight month and weaker for the 8th month in the past 9. It is lower by 3.8% y/o/y. Specifically, private commercial real estate construction fell for the 4th straight month. The CRE industry has peaked in this cycle. There was no change m/o/m in private sector residential construction but is still up 9.6% y/o/y.
- The average 30 yr mortgage rate rose 4 bps m/o/m to 4.22%, the highest in 3 months and that drove refi applications down by 4.5%. It’s lower for the 6th week in the past 7 and sits at a 16 week low. It’s down by 38% y/o/y. Purchases fell .8% w/o/w after a 6.1% drop last week. They are still though up almost 10% y/o/y.
- The US savings rate in September fell a sharp 5 tenths to 3.1%, the lowest since December 2007. It’s averaged 5.2% over the past 25 years.
- Having little faith in the ability of the UK economy to adjust to Brexit, the BoE delivered a dovish hike of 25 bps, just putting their benchmark rate to where it was pre Brexit even though the cost of living in the UK has risen from .3% to 3% y/o/y over the past 12 months. They also barely came around to say maybe they will hike two more times in coming years.
- We saw manufacturing PMI declines in September in Taiwan, South Korea (barely above 50 at 50.2), Vietnam, Thailand (below 50), Indonesia (barely above 50 at 50.1) , India and Malaysia (below 50). Japan’s also fell but was revised slightly higher from the first October print. The Hong Kong PMI is basically flat line at 50.3 vs 51.2 in September.
- The Chinese manufacturing PMI index fell to 51.6 in October from 52.4. The estimate was 52 but part of this is purposeful as for pollution and capacity reasons, some production is taken offline. The National Bureau of Statistics specifically said “some regions intensified their efforts to clean up the environment with firms adjusting, halting or staggering production.” Services weakened as well and that is not on purpose. This index was 54.3 vs 55.4 in September. New orders, employment, business expectations, backlogs and both prices paid and received all fell.
- The Caixin private sector weighted Chinese manufacturing PMI held at 51 as expected which is growth described as “marginal improvement.” Caixin said “While new orders rose at a slightly quicker pace, production increased at the softest rate for four months. At the same time, companies continued to shed staff amid reports of company downsizing policies and efforts to raise efficiency.”
- South Korean exports in October grew by 7.1% y/o/y but that was much worse than the estimate of a gain of 15.6%. The comparison was also easy as last October they fell by 3.2% y/o/y. We can blame in part a week of holidays in the beginning of October for the miss in numbers but I wonder why the estimates were so high anyway. Imports also badly missed the forecast with a 7.4% rise vs the forecast of up 14.8%.
- The BoJ did nothing as expected but there remains no honest self introspection of their policies in that institution.
- Japanese household spending continues to be very mediocre and the September figure printed down .3% y/o/y vs the forecast of up .6%.
- Investors Intelligence said Bulls rose 1.2 pts to 63.5, that is the highest in about 30 years. It peaked at 65 in 1987. Bears fell to 14.4 from 15.1 and that is the lowest since May 2015. The spread between the two of 49.1, is just below the 1987 peak of 50.5. II said “new quotes supporting the bearish or correction views were non-existent this week.”
- Notwithstanding all the enthusiasm over the US economy and finally getting a House tax bill, the US 2s/10s spread narrowed a large 10 bps on the week to just 72 bps, a fresh 10 yr low.
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