The Boock Report

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9/16 – Succinct Summation of the Week’s Events

Positives:

  1. Initial jobless claims totaled 260k, little changed with the 259k seen last week and was 5k below the estimate. The 4 week average was little changed at 261k. Continuing claims, delayed by a week, were also little changed.
  2. The September Philly manufacturing index rebounded to +12.8 from +2.0 and vs the estimate of +1.0. The internals were mixed with shipments, backlogs, delivery times, inventories, employment and the workweek all negative and new orders barely positive at 1.4. The six month outlook fell 8 pts but after rising by 12 pts in August. Capital ex plans fell.
  3. Purchase applications to buy a home saw a nice 8.6% w/o/w rebound and is up for a 3rd straight week which comes off the lowest level since February. The y/o/y gain was 7.7%, a touch better than the 6.9% gain seen last week. Refi’s were up 1.7% w/o/w and 43% y/o/y. It’s still very low but the average 30 yr mortgage rate is at a two month high at 3.58% according to Bankrate.com and is up 20 bps in just the past two weeks coincident with the rise in Treasury yields.
  4. Wholesale prices in August were benign with headline PPI zero y/o/y while the core rate was up 1%. Same story with pressure on goods prices and price gains in services.
  5. August import price pressures remained nonexistent but less so as they fell 2.2% y/o/y and that is the least negative in about two years as we recycle out the decline in energy prices. Prices were down .9% y/o/y ex fuels.
  6. UK Retail sales in August ex fuel fell .3% m/o/m but that was better than the expected drop of .7% and July was revised up by six tenths. The y/o/y gain was 5.9%, the best since November 2014. A weaker pound helped the sales of watches and jewelry vs the same month last year thanks to tourists. An official from the ONS that released the number said “The underlying pattern in retail sales remains one of solid growth…overall the figures do not suggest any major fall in post referendum consumer confidence.”
  7. UK July unemployment rate for the 3 months ended July (and thus captures one month of post Brexit) was unchanged at 4.9% and in line with the estimate. The job growth of 174k was also as expected. Wage growth ex bonus’ grew by 2.1% y/o/y which is a modest slowdown but is still above the .6% headline CPI trend. August jobless claims rose a bit more than expected and July saw a less than expected initial drop.
  8. Eurozone car registrations rose 10% y/o/y in August.
  9. Chinese industrial production, retail sales and foreign direct investment all improved in August from July and all were above the estimates.
  10. Japanese machinery orders in July rose 4.9% m/o/m, well better than the forecast of down 2.9% and follows a 8.3% rise in June.

 

Negatives:

  1. US Retail sales ex volatile auto’s and gasoline fell .1% for a 2nd straight month and that was below the estimate of up .3%. Core sales also fell by .1%, well below the estimate of up .4% and July was revised down by .1%. As for auto sales, they fell by .9% m/o/m but are still up 3.9% y/o/y. The sales of building materials fell for a 2nd month. The latter two we know are interest rate sensitive. Online retailing fell .3% m/o/m but were up a robust 16% y/o/y.
  2. The NFIB small business optimism index for August fell a touch to 94.4 from 94.6 in July and vs 94.5 in June. The average year to date is 93.8 but compares with 96.1 in 2015.  There was weakness in key categories of Plans to Hire, those that Expect a Better Economy, those that Expect Higher Sales and Profit trends. Capital spending plans was a positive and Plan to Increase Inventory went positive for 1st time since December. Bill Dunkelberg said “Once again, the NFIB survey showed no signs of strength in the small business sector. Uncertainty seems to be the major enemy of economic progress and the political climate is a major contributor to the high levels of uncertainty that we’ve seen.”
  3. Consumer price inflation grew by .2% headline and .3% core m/o/m, both one tenth more than expected. The y/o/y headline gain was 1.1%, the most since January and the core rate was up by 2.3%, the 10th month in a row above 2% and matches the highest level in 8 years. Services ex energy continues to drive the higher cost of living as it rose 3.2% y/o/y due to higher rents and medical care. Rent of Primary Residence was up 3.8% y/o/y and medical care was up a large 1% m/o/m and 4.9% y/o/y. But, don’t worry, the Fed says core PCE is below their 2% target. You can drive a truck now between core CPI and core PCE with the difference at 7 tenths. PCE has a higher component of medical care where its measurement is price fixed by the government via Medicare and Medicaid. CPI measures actual out of pocket expenses. Housing is bigger component in CPI vs PCE. $10 Trillion of money sitting in essentially zero yielding bank accounts and CD’s continues to bleed REAL purchasing power.
  4. After the Q2 inventory de-stocking seen in the GDP data, July started with no m/o/m change in business inventories. The estimate was for a one tenth gain. The y/o/y rise was just .5% vs the five year average of 4.2%. Sales fell by .2% but the inventory to sales ratio held at 1.39, not far from the highest level since 2009.
  5. The NY manufacturing index stayed in contraction at  -2.0 vs -4.2 in August, about in line with the estimate of -1.0. The internals though were even worse. New orders fell to -7.5 from +1.0. That is the weakest since February. Backlogs fell to -11.6 from -9.3. Employment was very weak at -14.3, near a 7 yr low. The six month outlook was more positive for business conditions as this component rose to 34.5 from 23.7 with capital spending plans rebounding after August weakness.
  6. US industrial production in August fell .4% m/o/m, double the estimate and July was revised down by one tenth. Manufacturing production in particular fell .4%, one tenth more than expected. Capacity utilization fell and at 75.5% remains well below the 25 year average of 78.8%. No wonder cap ex is punk.
  7. Aggregate financing in August in China totaled 1.47T yuan, almost 600b yuan more than expected and up from 488b in July which was a two year low. Of the total, 950b came from banks, 200b more than forecasted. Yuan denominated loans (mostly to households, aka property loans) led the lending increase. The credit spigot just keeps on flowing.
  8. Germany’s ZEW economic investor expectations index for September was flat with July and remains barely above zero at .5. This was 2 pts below the estimate. The figure is below the average year to date of 5.2 and well less than the average seen in 2015 of 31.5. The Current Conditions component at 55.1 was down 2.5 pts but after jumping by 7.8 pts in August. The ZEW said “The current ambiguity of economic impulses from Germany and abroad means that forecasts for the next few months are difficult.”
  9. After the dramatic increase seen in input prices in July in the UK related to the sharp drop in the pound, August PPI rose less than expected but is still up big y/o/y. It was up .2% m/o/m after July’s 3.1% spike. It though is up a whopping 7.6% y/o/y.
  10. Eurozone industrial production fell 1.1% m/o/m in July, a hair worse than the estimate but was offset by a June upward revision.
  11. Australia unexpectedly shed jobs in August where a drop in part time employment offset a rise in full time.
  12. Expect to see this more often in coming years and the diversion of free cash flow: Associated British Foods PLC stock fell almost 14% this week after reporting earnings because they said this: “The last quarter has seen a marked decline in UK long-term bond yields which are used to value defined benefit pension obligations for accounting purposes.  At these levels we expect a year end deficit on the group’s UK pension scheme of some £200m compared to last year’s small surplus.  This will result in an increased service cost and a higher interest charge next year.”