The Boock Report

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12/23 – Succinct Summation of the Week’s Events

Positives

  1. November new home sales totaled 592k annualized, 17k more than expected and up from 563k as likely a jump in interest rates unfroze decision making. Smoothing out this volatile number has the 3 month average at 575k, the 6 month average at 578k and the year to date average at 563k. The industry is still depressed though relatively speaking as the 25 year average is 716k. Months’ supply fell one tenth to 5.1, in a steady range the past 4 months. The median price fell 3.7% but jumps around month to month as opposed to the price of existing homes.
  2. Closings of existing homes (and thus contracts were likely signed August thru October and before the mortgage rate jump) totaled 5.61mm, about 100k more than expected and up from a revised 5.57mm in October (from 5.60mm). Single family closings fell a touch m/o/m but was offset by a pick up in condos/co-ops. Overall, this is the best level of the recovery but is also at a level that was seen in 2002, pre bubble. As the number of homes for sale shrunk, months’ supply fell to just 4 from 4.3 in October. That matches the lowest level since March 2005. Home prices rose a robust 6.8% y/o/y. The missing link however to a healthier industry is still missing. After rising to 34% in September from 31% in August, first time buyers made up 32% of purchases vs the historical average of about 40%.
  3. The highest 30 yr mortgage rate since May 2014 at 4.41% brought the fence sitters off the fence this week. Purchase applications to buy a home rose by 2.7% w/o/w after falling by 3.3% last week. Versus last year purchases are about flat.
  4. Core durable goods orders in November jumped by .9% m/o/m which was well more than the estimate of up .4% and comes after a .2% gain in October. On a y/o/y basis though it is still negative by 1.9%.
  5. The final UoM consumer confidence index ended December at 98.2 vs the first print of 98 and vs the estimate of 98. We close the year at the best level since 2004 and a hair above the level seen in January 2015. One year inflation expectations fell another tenth to 2.2%, the lowest since 2010 and is a clear difference from the rising inflation expectations in the bond market. The UoM said “An all time record number of consumers (18%) spontaneously mentioned the expected favorable impact of Trump’s policies on the economy. This was twice as high as the prior peak recorded in 1981 when Reagan took office. To be sure, nearly as many consumers referred unfavorably to anticipated changes in economic policies, but those references were less than half as frequent as the peak level recorded just 3 years ago.” Reflecting the rise in interest rates, “consumers did not express more positive attitudes toward vehicle and home buying conditions.”
  6. The November headline PCE deflator was flat m/o/m but after a .3% rise in October. On a y/o/y basis, the headline held at 1.4% growth. The core rate was also unchanged instead of rising by .1% that was forecasted and the y/o/y gain moderated to 1.6% from a 1.8% read in October (revised from 1.7%).
  7. Q3 GDP was revised up again, this time to 3.5% from 3.2% in the last read and vs the estimate of 3.3%. Full year growth though should be around 2% again.
  8. French consumer spending grew by .4% m/o/m and 3.3% y/o/y, above the estimate of up .1% and 2.4%. The y/o/y gain is the best since 2007. Message to Mario Draghi: consumers like low inflation.
  9. While due to another state bailout, Italy puts out their banking fire, for now.
  10. Another QE and NIRP experiment seems to be on its last legs as the Riksbank saw 2 of 6 dissent against more QE purchases and one wanted it cut in half. When it does end though, same with the ECB and BoE, I’m afraid for their bond markets and the Swedish housing sector.
  11. The UK CBI retail sales index jumped to 35 from 26 and that was 15 pts above the estimate. It’s also the best since September 2015 and CBI said “the growth of retail sales volume was broad based, with sales of clothing continuing to perform strongly and grocers reporting the best results since January 2016. Internet sales volume continued to rise at a robust pace…with the survey balance at its highest since November 2014.” The question is sustainability as CBI also said, “With higher inflation beginning to weigh on households’ purchasing power, consumption patterns are likely to shift, creating winners and losers across the retail landscape.”
  12. The German IFO December business confidence index rose .6 pts to 111 which was a touch above the estimate of 110.6 and at the best level since February 2014. Current conditions led the gain because the expectations component was little changed. The confidence boost was driven by manufacturing and construction which “continues to break records.” Thank you Mario Draghi. The IFO said “The German economy is in a festive mood.”
  13. Euro area consumer confidence in December rose 1 pt to -5.1 which is the best level since April 2015.
  14. In response to another round of attempts to slow the persistent rise in home prices, the number of Chinese cities that reported gains in the sales price of new and existing apartments in November fell m/o/m. For new apartments, 55 of 70 cities saw price increases, matching the lowest since February while those for existing ones saw 47 of 70 cities up, the lowest of the year. The number of cities that reported home price declines for both new and existing apartments rose. On a y/o/y basis, the problem remains in the big cities although the out of control price gains are moderating to the slowest in about a year and a half.
  15. Japanese exports in November fell by .4% y/o/y which wasn’t as much as the 2.3% decline that was expected. Exports have fallen by 14 straight months on a y/o/y basis but this decline was the least of them as the yen fell 9% in November. Looking straight at volume, exports rose by 7.4% y/o/y with particular strength to China of 16% vs last year.

Negatives

  1. Jobless claims totaled 275k, 18k more than expected and up by 21k w/o/w. It’s the highest print since June and brings up the 4 week average to 264k from 258k. Continuing claims, delayed by a week, rose by 15k to a 3 week high.
  2. November wages and salaries for private sector workers fell .2% m/o/m and grew by just 3.6% y/o/y, well down from the 4.5% print in October and 4.9% in September.
  3. Personal spending grew by .2% m/o/m, one tenth less than the estimate but October was revised up by one tenth. Whether it’s due to more income going to healthcare costs and/or housing, consumer spending remains mediocre.
  4. No fence sitter effect apparent with refi’s as applications dropped by 3% after rising by 3.6% last week and are down 18% y/o/y.
  5. Markit’s measure of the US services sector saw its December index fall by 1.2 pts m/o/m to 53.4. It touched a one year high at 54.8 in October and averaged 55.9 in 2015. The internals were mixed. Markit said there was “a stronger degree of optimism about the year ahead business outlook.” This did come though with higher inflation expectations as “cost pressures intensified in December, with the latest rise in input prices one of the fastest seen since mid 2015.”
  6. The inflation stats are moving higher in Germany. November PPI went positive for the first time since June 2013 y/o/y. November import prices jumped by .7% m/o/m after a .9% spike in October. That was well above the estimate of up .2% and the y/o/y gain of .3% was five tenths more than expected and was the first rise in 4 years. The 5 yr 5 yr euro inflation swap rose 5 bps on the week to just off the highest level in a year. Draghi’s wish for higher inflation may be coming true.
  7. While the BoJ did nothing as expected, they continue to squeeze the banks by giving them basically no net interest margin for loans out 10 years. Kuroda will be tested throughout 2017 with his ‘yield curve control’ experiment.
  8. I’m out next week. Have a great holiday of whichever you celebrate and see you in 2017.