The Boock Report

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8/19 – A Succinct Summation of the Week’s Events

Positives:

  1. Initial jobless claims totaled 262k, 3k less than expected and down 4k from last week. As a print of 252k comes out of the 4 week average, the new average rose to 265k, the most in 6 weeks from 263k but it’s still very low.
  2. July CPI was flat headline as expected and rose .1% core which was one tenth less than expected. On a y/o/y basis, prices were up .8% headline and 2.2% core, both one tenth less than expected. That core rate though is the 9th month in a row above 2% but nothing to see here because the Fed says they only look at PCE. Rent and medical care remain major cost issues.
  3. Industrial production in July rose by .7% m/o/m, three tenths more than expected but partially offset by a two tenths downward revision to June. May was revised up by one tenth. Manufacturing production was up by .5%, two tenths more than expected and driven by a 1.9% m/o/m gain in auto production. The production of machinery and computer/electronics also rose. Weather related utility output also boosted the headline figure. Mining production rose too by .7% but remains down by 10% y/o/y. Capacity utilization improved to 75.9%.
  4. Housing starts totaled 1.211mm, 31k more than expected and up from 1.186mm in June. Most of the upside, again, was in multi family as starts there rose by 21k m/o/m to 441k vs 387k one year ago. Single family starts were up by just 4k to 770k. They totaled 760k in July 2015. The same story was seen in permits where single family permits fell by 27k to the lowest level since September 2015 while multi family permits were higher by 26k to the most in six months.
  5. The NAHB home builder sentiment index for August rose to 60 from 58 in July (revised from 59). That was in line with expectations. Present conditions rose 2 pts to 65, the best since March while the Future component was up by 1 pt after falling by 3 pts in July. Prospective Buyers Traffic remained below 50, down by 1 pt to 44, matching a 5 month low. It was October 2005 the last time that this component was above 50. The NAR is optimistic housing, saying “Builder confidence remains solid in the aftermath of weak GDP reports that were offset by positive job growth in July. Historically low mortgage rates, increased household formations and a firming labor market will help keep housing on an upward path during the rest of the year.”
  6. UK consumers were seemingly not bothered by the vote to Leave as July retail sales ex auto fuel jumped 1.5% m/o/m and 5.4% y/o/y, well above the estimate of up .3% m/o/m and 3.9% y/o/y.
  7. Pre UK vote, the unemployment rate for the 3 months ended June held at 4.9% as expected, matching the lowest since 2005 while more jobs than forecasted were created.  On the wage side thru June, weekly earnings ex bonus’ rose 2.3% y/o/y as expected and up from 2.2% in May. That matches the most since September. With the post vote data, July jobless claims FELL 8.6k instead of rising by 9k. That’s the first decline since February.

 

Negatives:

  1. While nothing matters until we hear from Janet Yellen next Friday, the Fed’s credibility continues to fall with this constant maybe or maybe not commentary on whether rates will rise again and when. The 3rd in command, Bill Dudley, tells us the market is under pricing the possibility of rate hikes and that he wants to go again soon. Rate hike odds for the September meeting goes from 16% to 24% on the week which while an adjustment, at just 24% its basically saying to Dudley and the Fed, “we’ve heard this too many times before so I dare you.”
  2. Continuing claims, delayed by a week, rose 15k after a 19k increase last week. It’s quietly at the highest level since late March.
  3. For the 3rd straight month in June there was large net foreign selling of US Treasury notes and bonds. In June, foreigners sold $33b worth of notes and bonds after selling $18.3b in May and $75B in April. This brings the year to date selling to $143b, the most on record in any 6 month time frame. This compares to full year net selling of $20b in 2015 and purchases of $165b in 2014, $41b in 2013 and over $400b in both 2011 and 2012. Maybe it’s the rising cost of hedging the currency and at least for Japan, the massive yen rally for those that don’t want to hedge.
  4. The August Philly manufacturing index was 2.0, exactly in line with the estimate and up from -2.9 in July but the important internals were very weak. New orders fell 19 pts to -7.2. That’s the worst level since December. Backlogs fell by 17 pts to -15.0, the weakest also since December. Employment plunged by 18.5 pts to -20, the lowest since July 2009. The average workweek fell 8 pts to -11.5. Inventories were negative for the 14th straight month. Prices paid rose 10 pts while those received was up by 7. The only positive was in the 6 month outlook which rose to the best level since January 2015.
  5. The NY manufacturing index in August fell back into contraction at -4.2 from +.6 in July. The estimate was +2.0. The internals were weak but not as much as the headline figure.
  6. Japanese exports fell 14% y/o/y, a touch more than expectations of a 13.7% drop and the biggest drop since ‘09. While some of this was certainly soft global trade, much of this was due to the stronger yen however as actual volumes were down by 2.5%. The stronger yen though didn’t help imports as they plunged by 24.7% y/o/y vs the estimate of down 20%. Lower oil prices were a key factor. Import volumes were down by 4%.
  7. Chinese apartment price changes in 70 cities, both new and existing units, in July were little changed both m/o/m and y/o/y. Price increases in the major cities however are still out of control. Prices in Shenzhen were up 41% y/o/y but a moderation from the almost 47% y/o/y increase in June. Prices in Shanghai were up 27.3% y/o/y and 20.7% in Beijing. Prices in the aggregate up 6.1% y/o/y for the average new home vs 5.5% in June.
  8. Australia reported a much better than expected job’s report for July with a 26.2k increase in employment (est was up 10k) BUT it was all due to a 71.6k jump in part time workers as full time employment fell by 45.4k (biggest since October ’13). Many of these part timers were hired for the national election and census count. Their unemployment rate ticked down by one tenth to 5.7% to match the lowest level since 2013.
  9. The most insane comment of the week comes from Abe advisor Etsuro Honda in an interview with the WSJ, “Effects of QE may be diminishing compared with a few years ago, but ‘what we should say is, Effects are diminishing so let’s do more.’ This is the spirit of Abenomics.” Scary.
  10. Japan’s economy did not grow in Q2 q/o/q (estimate was up .2%) and was up a slight .6% y/o/y. The q/o/q annualized rate saw a slight increase of .2% vs the .7% estimate. Weakness in capital investment, exports and barely any household spending were the three main factors.
  11. UK input prices in July rose 3.3% m/o/m and 4.3% y/o/y, well above the estimate of up 1% and 2% respectively. The almost 4% increase m/o/m in the price of materials purchased was the main catalyst. Output prices didn’t come close to offsetting this as they only rose .3% m/o/m and the same y/o/y. As for consumer prices, it will take some more time for the weak pound to filter through but if the PPI figure is any indication, it certainly will and possibly in a sharp way. July CPI rose .6% m/o/m, one tenth more than expected and the quickest since November 2014 as commodity prices have bottomed. The core rate was up by 1.3%, one tenth less than the forecast. The 10 yr Gilt yield is up almost 10 bps on the week after last week’s 15 bps drop. In fact, interest rates around the world rose this week. The bottom in rates is in I believe.
  12. The August ZEW economic confidence index of investors for Germany rose to .5 from -6.8. The July print was the initial reaction to the UK vote and the estimate for August was 2.0. The current conditions component improved to 57.6 from 49.8 in July and that was about 7 pts above the forecast. The ZEW said this about the survey, “The ZEW indicator of Economic Sentiment has partly recovered from the Brexit shock. Political risks within and outside the European Union however, continue to inhibit a more optimistic economic outlook for Germany. Furthermore, uncertainty about the resilience of the EU banking sector persists.”