The Boock Report

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8/12 – Succinct Summation of Week’s Events

Positives:

  1. As measured by wholesale prices, inflation was subdued in July as headline PPI fell .4% m/o/m and .3% ex food and energy.
  2. Business inventories in June rose .2% m/o/m, one tenth more than expected and with a 1.2% sales gain, the inventory to sales ratio fell to 1.39 from 1.40. That is the lowest since November but still remains elevated and not far from the highest since 2009. Of note, retail inventories of auto’s/parts are up 10.9% y/o/y and the I/S ratio rose to 2.28 from 2.27, the 2nd highest level since January ’14.
  3. US mortgage applications rebounded after 3 weeks of declines. Purchases rose 2.6% w/o/w off the lowest level since February and are still up by 13% y/o/y. Refi applications were up by almost 10% w/o/w and 65% y/o/y.
  4. The US NFIB small business optimism index for July was 94.6, basically unchanged with the 94.5 seen in June. The components were mixed again. While I put this in the positive column because of the slight uptick, the NFIB said this: “Uncertainty is high, expectations for better business conditions are low, and future business investments look weak. Our data indicates that there is little hope for a surge in the small business sector anytime soon.”
  5. Loan growth in China slowed dramatically in July, short term pain but long term needed. Aggregate financing totaled 488b yuan, less than half the estimate of 1T and down from 1.63T in June.  It’s the slowest pace of increase since July 2014 and down 34% y/o/y. Of this total, bank loans made up 464b. Thus, the credit extension on the shadow side was essentially near zero. M2 money supply growth also slowed to a growth rate of 10.2% y/o/y vs the estimate of 11%, down from 11.8% in June and the slowest rise since May 2015.
  6. Because of the bottoming in commodity prices, particularly industrial metals, and the recycling thru of very tough comparisons, PPI fell 1.7% in China, not as much as the -2% expected and it’s the least negative since August 2014. As for consumer prices in China, CPI rose 1.8% y/o/y, in line with the estimate and down one tenth from June. Of interest though, non food prices rose 1.4% y/o/y, the most in two years.
  7. China FX reserves stood at $3.2T in July, in line with expectations and down slightly from the $3.205T seen in June. The low was $3.19T in May.
  8. Hong Kong’s economy in Q2 benefited from the stimulus driven stabilization in China as it grew 1.7% y/o/y, above the estimate of up .9%. On a q/o/q basis GDP was up by 1.6% after contracting by .5% in Q1. The estimate was for up .5%. Goods exports rebounded which offset a slowdown in retail sales.
  9. Japanese machine orders in June rose 8.3% m/o/m which was above the estimate of up 3.2%. For the quarter, orders were still down 9.2% from Q1 and on a y/o/y basis orders fell .9% y/o/y, the 3rd month in a row of declines.
  10. The euro area economy was confirmed in the revision that it grew by .3% q/o/q, in line with the estimate and the first print. The Germany economy surprised to the upside with .4% q/o/q growth, twice expectations but Italy saw no growth vs the forecast of up .2%. Italy now joins France as seeing zero growth in Q2.

 

Negatives:

  1. Retail sales ex auto’s and gasoline fell .1% instead of rising by 3 tenths as expected. Revisions netted out to no change in the two prior months. Also taking out building materials to get to the so called ‘control group’ saw sales flat m/o/m vs the estimate of up .3%. Core retail sales were not only flat m/o/m but the 3.3% y/o/y rise is the slowest in 4 months. This compares with the 5 year average of 3.6%. Going further back for perspective, core sales ran at a 5% rate in the mid 2000’s recovery and 5.5% in the late 1990’s.
  2. Productivity fell at an annualized rate of .5% in Q2. A terrible print and well below the modest estimate of up .4%. On a y/o/y basis, productivity was down by .4% and brings the last 4 quarter average to just .175%. Unit labor costs as a consequence rose 2.1% y/o/y but that was down from 2.5% in Q1 as compensation per hour moderated. Still, on a 4 quarter basis unit labor costs are averaging up by 2.5%, above the 5 year average of 1.7%.
  3. US 3 month LIBOR rose another 2 bps on the week, up now 51 bps over the last 12 months. Regardless of the reason, the cost of capital is going higher relative to the fed funds rate and 3 month t-bills.
  4. The UoM preliminary consumer confidence index for August was 90.4, about 1 pt below the estimate of 91.5 but up a touch from 90 in July. The internal components were mixed as Current Conditions fell 2.9 pts to a 5 month low but Expectations rebounded by 2.5 pts after falling by 4.6 pts in July. One year inflation expectations moderated by two tenths to 2.5% likely in response to the drop in gasoline prices as that is a high profile price point that people see every day. The main disappointment within the index was Net Income which fell 2 pts to the lowest level since December. The offset was employment expectations improved to a 3 month high.
  5. Initial jobless claims totaled 266k, about in line with the estimate of 265k and vs 267k last week which was revised down by 2k. The 4 week average did rise to 263k from 260k as a print of 254k dropped out of the average. Continuing claims, delayed by one week, rose by 14k.
  6. The number of job openings in June totaled 5.62mm, slightly less than expectations of 5.67mm but up from 5.5mm in May. Private hirings improved by 120k after May’s lowest level since December. As separations fell, the hiring rate rose one tenth to 3.6% but that is no different than what was seen one year ago. The recent high was 3.8% in February. The amount of those quitting their jobs fell back to the April level but the quit rate remained unchanged at 2%.
  7. Import prices in July surprised to the upside by .1% m/o/m vs the estimate of down .4%. Also, June was revised to a jump of .6%, 4 tenths more than the first print. On a y/o/y basis, the decline was still 3.7% but that is the least since November 2014 as the commodity/oil comparison gets easier. Prices ex petro were down by 1.3%, the least since January ’15.
  8. Chinese industrial production in July rose 6% y/o/y, two tenths less than expected. Retail sales were up by 10.2% y/o/y, three tenths below the forecast. Fixed asset investment ytd y/o/y grew by 8.1% vs expectations of up 8.9%.
  9. Chinese exports in dollar terms fell 4.4% y/o/y, slightly below the estimate of down 3.5% with declines seen to all regions of the world. Yuan weakness cushioned the soft trade data as in yuan terms exports were up. Imports in both currencies fell with fake invoices still a problem with Hong Kong as imports from there miraculously rose 123% y/o/y. The decline in imports in dollar terms of 12.5% is in part to the weaker yuan but also lessened demand for goods.
  10. German exports in June rose .3% m/o/m which was below the estimate of up 1.1% and it follows an almost 2% drop in May.
  11. Did the BoE’s inability to source all the 15+ years of bonds it wanted to buy a sign of what’s to come as the only sellers are the bond flippers and not the insurance companies and pension funds? We’ll see on Tuesday.
  12. New Zealand joins the BoJ, RBA and others in seeing a stronger currency after further easing. The yen is its own dynamic but RBNZ and AUD are higher yielding currencies still.
  13. The dangers of our modern day monetary excesses has just arrived in a new place and IF (I emphasize IF) it spreads, Mario Draghi and the ECB will have an uprising at its doors. last night Bloomberg news reported that “this week, a German cooperative savings bank in the Bavarian village of Gmund am Tegernsee, population 5,767, said it’ll start charging retail customers to hold their cash. From September, for savings in excess of 100,000 euros, the community’s Raiffeisen bank will take back .4%.” That is the same level as the ECB’s negative deposit rate. This bank has been charging business clients that same penalty and a board member of the bank said “so why should it be any different for private individuals with big balances?” I’ll take a bottom line from the story: “in principle the ECB’s negative deposit rate was meant to encourage spending and investment in the euro area’s sluggish economy, not to tax thrifty Bavarians.” I’ve called NIRP a Weapon of Mass Confiscation and this is another perfect example. NIRP is the dumbest monetary initiative the world has ever seen. Bottom line, monetary policy is damaging global growth, not facilitating it and we are seeing more and more evidence of policy back firing.