The Boock Report

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2/17 – Succinct Summation of the Week’s Events

Positives

  1. FINALLY (but a few years too late), Janet Yellen realizes that “waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession.”
  2. FINALLY, BoJ Governor Haruhiko Kuroda publicly acknowledges that “a new challenge has emerged in the form of low profitability at financial institutions” as Reuters reports he was “offering his strongest warning to date of the demerits of aggressive monetary easing pursued by major central banks.”
  3. January US housing starts totaled 1.246mm, 20k more than expected and December was revised up by 53k to 1.279mm. Single family starts were up by 15k to 823k after falling by 18k in December. Multi family starts were 423k, down about 50k but after jumping by 150k in the month prior. Permits grew m/o/m but it was all in multi family. Starts there jumped by 79k to 477k, near the recent high of 486k. Single family permits fell by 22k to 808k but is still the 2nd best in the recovery.
  4. Retail sales in January were better than expected. The core rate taking out auto’s, gasoline and building materials saw sales rise by .4% m/o/m vs the estimate of up .3% and December was revised up by two tenths. The key caveat is these are nominal figures so please combine with the inflation stats below. At the headline level, REAL sales fell .2%.
  5. Initial jobless claims totaled 239k, 6k less than expected but up from a very low 234k last week. The 4 week average was unchanged at 245k, the lowest since 1973. Continuing claims, delayed by a week, fell by 3k.
  6. The February Philly manufacturing index skyrocketed to 43, up 20 pts m/o/m and well above the estimate of 18. 1984 is the last time we saw a level this high. The internals though were more mixed. New orders and shipments rose but backlogs were unchanged and employment fell slightly. The overall 6 month average fell 3 pts after prior month jump and capital spending plans are little changed since October. Prices paid and received both fell off high levels.
  7. The February NY manufacturing index jumped to 18.7 from 6.5 in January. That’s well above the estimate of 7.0 and at the best level since September 2014. New orders, backlogs and shipments led the gains. Employment rose to 3.7 pts to +2 which doesn’t sound like much but it’s the first positive print since May 2016. Prices paid rose 1.7 pts to the highest level since 2012 and prices received was up almost 2 pts to also the most since 2012. Six month expectations which fell 8 pts and capital spending plans fell by almost 3.
  8. Business inventories grew by .4% m/o/m as expected in December but because sales rose 2%, the inventory to sales ratio fell to 1.35 from 1.38. That’s the lowest since December 2014 and while its well off the post recession low of 1.24, it has come off its January 2016 high of 1.41 which was a 7 yr high.
  9. The NFIB small business optimism index held its recent sturdy gains at 105.9 for January vs 105.8 in December. It’s at the best level since December 2004. Employment and wages improved while expectations for the economy and sales cooled off the spike levels last month. Capital spending plans was the disappointment. “Small business owners like what they see so far in Washington” said the NFIB CEO. Bill Dunkelberg added “The continued surge in optimism is a welcome sign that economic growth is coming. The very positive expectations that we see in our data have already begun translating into hiring and spending in the small business sector.”
  10. For the 3 months ended December in the UK, employment rose by 37k, 15k more than expected and the unemployment rate held at 4.8%, the lowest since 2005. Also reflecting strength, January jobless claims fell by 42.4k, well more than the forecast of up .5k and December was revised down by 10k. The ONS said “Overall, the labour market appears to be edging towards full capacity.” That said, wage growth was a bit below expectations as they rose 2.6% y/o/y ex bonus’ for the 3 months ended December, down from 2.7% in the month prior and vs the estimate of 2.7%.
  11. The new administration would want this to be on the negative side but I’ll stick it here because exports have helped the region’s economy: the December Eurozone trade surplus rose 2.3b euros m/o/m to just shy of a record high in any one month. For the full year, the trade surplus rose to 274b euros, up 15% from 2015. That is the most since the euro was created in 1999.

 

Negatives

  1. Potentially for asset prices, 2017 could be the first year since monetary extremism began post recession that we see all 4 major central banks walk back from policy with the comments from Yellen and Kuroda lending evidence on their part, accelerating inflation in the UK causing problems for the BoE and with the ECB cutting monthly QE by 25% starting April 1st.
  2. US Headline CPI rose .6% m/o/m in January, double expectations and brings the y/o/y gain to 2.5%, the highest level in almost 5 years. Yes, energy was a main factor (up 4% m/o/m and 11% y/o/y) but the rate ex energy and food jumped .3% m/o/m and 2.3% y/o/y, also above expectations. The core rate pace matches the most since September 2008 as services inflation ex energy was up .3% m/o/m and 3.1% y/o/y. The core rate has been 2%+ for 15 straight months.
  3. Headline PPI in January was up .6% and the core rate was higher by .4%, both also twice the estimate. The y/o/y gain held at 1.6%, the most since 2014. The y/o/y core rate was up by 1.2%, down from 1.6% in December but because of a tough .7% comparison last year.
  4. Foreign selling of US Treasury notes and bonds totaled $21.8b in December to finish the year with net selling of $343B, an unprecedented amount. This compares with net selling of $20.3b in 2015, and net buying of $165B in 2014, $40.9B in 2013 and over $400b in each of the two prior years.
  5. While it’s only one survey, the Atlanta Fed GDPNow Q1 forecast fell to 2.4% from 2.7% last week and vs 3.4% in the week prior. The Street is closer to 2%.
  6. The NAHB home builder survey for February fell 2 pts to 65. The estimate was for no change. This index has now given back 4 of the 6 pt post election jump over the past two months but still remains well above the breakeven of 50. Present conditions fell 1 pt to 71. It touched 75 in December vs 69 in October. Future expectations fell 3 pts to 73. It was 78 in December and 71 in October. Disappointingly, Prospective Buyers Traffic fell 5 pts to back below 50 at 46. It was also 46 in October before the election.
  7. Mortgage applications slipped almost 4% w/o/w with purchases down by 4.5% to a 13 week low but remains up by 3% y/o/y. Refi’s fell 2.9% w/o/w and have been cut in half y/o/y.
  8. US Industrial production fell .3% m/o/m in January instead of seeing no change as expected and December was revised down by 2 tenths. Weather was a main factor as utility output fell by 5.7% m/o/m but auto production fell by 2.9% and brings the y/o/y gain to barely above zero at .9%. Mining is finally getting out of its multiyear funk with a 2.8% m/o/m rise and up .4% y/o/y. That’s the first y/o/y gain in years. Capacity utilization came in at 75.3%, a still punk number at this stage of the economic cycle. It’s near the lowest since November 2010 and is well below the 25 year average of 78.7%.
  9. The New York Fed said auto delinquencies in Q4 rose 14% y/o/y to a dollar level that is just shy of the most since Q3 2008. These are loans 30 days+ overdue. Those 90 days + delinquent saw a rise of 19% y/o/y.
  10. The MBA said mortgage delinquencies in Q4 rose for the first time since 2013 but off the lowest level since 2006 in Q3.
  11. UK input price pressures continue to skyrocket but it is still only slowly filtering into consumer prices. January input prices rose 20.5% y/o/y, above the estimate of up 18.5%. Something last seen in 2008. Output prices were up just 3.5%. Hello margin squeeze. Headline CPI was up by 1.8% y/o/y with a core rise of 1.6% and both were one tenth less than expected. The headline gain is the most since June 2014 and the core rate holds at the most since August 2014.
  12. For a 2nd straight month in the UK retail sales ex fuel fell .2% m/o/m in January vs the estimate of up .7%. Also, December sales were revised to a 2.2% m/o/m decline from -2% and vs the initial forecast last month of down .4%.  The y/o/y rise in January of 2.6% is the slowest in 13 months.
  13. The German ZEW economic expectations index on their economy fell to 10.4 from 16.6 vs the estimate of 15 and that’s a 4 month low. Current conditions held in better and were little changed. The ZEW said, “The downturn in expectations is likely to be the result of the recently published unfavourable figures for industrial production, retail sales and exports. Political uncertainty regarding Brexit, the future US economic policy as well as the considerable number of upcoming elections in Europe further depresses expectations. Nevertheless, the economic environment in Germany has not significantly worsened.”
  14. German wholesale inflation which measures the costs for food retailers rose 4% y/o/y, the fastest pace since October 2011.
  15. In China, aggregate financing growth further spirals out of control. In January it totaled 3.74T yuan, well above the estimate of 3T, up more than 2x from December and higher by 8% y/o/y. The one caveat though is because of the January holiday, a lot of lending is front loaded. Thus, it’s better to see February and combine with January to get the true picture. Bank loans made up 2.03T of this which was actually below the estimate of 2.44T and therefore non banks provided the balance.
  16. Chinese CPI jumped by 2.5% y/o/y in January from 2.1% in December and matches the quickest pace of gain since November 2013. That was one tenth more than estimated and higher by 2.2% ex food and energy, also the most in years. PPI jumped by 6.9% y/o/y as comparisons are easy and commodity prices rise. That is up from 5.5% last month and compares with the estimate of 6.5%.
  17. Japan’s economy grew a bit less than expected in Q4. GDP was higher by 1%, one tenth less than forecasted but Q3 was revised up by one tenth so combined it’s about in line. Exports and capital investment drove all of the rise as private consumption saw no growth.