The Boock Report

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9/23 – Succinct Summation of the Week’s Events

Positives:

  1. Initial jobless claims fell 8k to 252k which was 9k less than expected. The 4 week average fell to 259k from 261k and that is an eight week low. Continuing claims, delayed by a week, fell by 36k to the lowest since May.
  2. Builder confidence jumped 6 pts in September to 65 which matches the best level since October 2005 (although of course the level of activity is quite different than in 2005).  Present conditions also rose 6 pts to 71 and the Future outlook also printed 71, up 5 pts from August. Prospective Buyers Traffic was higher by 4 pts at 48 but still has not gotten above 50 in this recovery. The NAHB said “As household incomes rise, builders in many markets across the nation are reporting they are seeing more serious buyers…With the inventory of new and existing homes remaining tight, builders are confident that if they can build more homes they can sell them.” Here was the key caveat, “Though solid job creation and low interest rates are also fueling demand, builders continue to be hampered by supply side constraints that include shortages of labor and lots.”
  3. The KC manufacturing index rose to +6 from -4. That was better than the estimate of -3 and follows below zero prints in 17 in the prior 18 months.
  4. French business confidence in September rose 1 pt to 102 vs the estimate of no change. That matches a 5 yr high but it’s been between 100-102 since last year.
  5. The Japanese manufacturing PMI got back above 50 at 50.3 after six months in a row below it.
  6. The Bank of Indonesia cut rates by 25 bps but at 5% they certainly have plenty of room to do as they choose.

 

Negatives:

  1. The Fed continues to have Monetary Constipation as they struggle with the flow and stock of the economic data. The flow has been the recent run of soft data (payrolls, retail and specifically auto sales, ISM services, ISM manufacturing, capital spending, mixed housing data, productivity, wage growth). The stock is the U3 unemployment rate at just 4.9% (U6 however almost twice that), core CPI is above 2% for 10 straight months and core PCE is expected to print 1.7% y/o/y for August next week, which would match the highest in two years and thus be barely below their target. Again, the current flow of data certainly does not auger for a hike but the stock says how can the fed funds rate be at just .375% almost eight years into a recovery. Either way, the Fed is deluded if they think they can reverse policy without having a sharp fall in asset prices and thus a recession. The only question is to get it over now or later.
  2. I applaud the BoJ for not going deeper into NIRP and their acknowledgement that the destruction of their banking system is not really a good trade off in the desire for 2% inflation. However, ”yield curve control” is just another gimmick from the BoJ. Their version of a yield steepener is 10 bps, the spread between their negative rate and the goal of a zero percent yield 10 yrs out! I guess they want yields further out to rise but can that be controlled? The 20 yr yield was down 5 bps overnight and by 8 bps this week to .37%. The 40 yr yield was down by almost 6 bps and 10 bps on the week. Their 2s/10s spread has compressed to 16 bps from almost 22 bps last Friday. The BoJ already lost control of the yen and the Nikkei. Can they now control the curve?
  3. The ECB Vice President Vitor Constancio sounded frustrated with the pace of economic growth and called out governments to do something about it. “We all hoped that the reaction of the economy would have been much quicker as a result of the expansionary monetary policies that were put in place. It’s taking longer than anyone expected…It would be nice if monetary policy would be helped by other policies.” Wreck the profitability of one’s banking system and expect quicker economic growth? Huh? And then blame the politicians which are clearly not innocent either?
  4. August US housing starts totaled 1.142mm annualized, 48k less than expected and compares with 1.212mm in July. Single family starts fell to 722k from 768k in July and it’s the lowest since October 2015 due to a sharp slowdown in the South. Multi family starts fell 24k m/o/m but at 420k is still good. Permits for single family construction rose by 26k m/o/m but only after falling by 27k in the month prior. At 737k, it’s about in line with the average year to date of 730k. This is near the highs of this recovery but still remains 25% below the 25 year average. Permits for multi family building fell by 31k m/o/m but is still above 400k for the 4th straight month.
  5. Existing home sales in August totaled 5.33mm, 120k less than expected and down from 5.38mm in July. This is the slowest pace of closings since February. Months’ supply fell to 4.6 from 4.7 as the number of homes for sale fell. After rising to 33% in June, the level of 1st time households fell to 31% in August. The NAR again is blaming the dearth of supply and “affordability restrictions” that “continue to keep too many would be buyers on the sidelines.”
  6. Mortgage applications to buy a home fell by 6.8% w/o/w after rising by 8.6% last week. The y/o/y gain slowed to 3.3%. Refi applications fell by 7.6% to a 12 week low but are still up 26% y/o/y.
  7. Markit’s measure of US manufacturing in September fell to 51.4 from 52 in August. It’s a 3 month low and puts it slightly below the six month average of 51.5. The average in 2015 was 53.7. Markit said “Manufacturers indicated the slowest overall rise in new business intakes so far this year, which contributed to relatively subdued job hiring (although rose slightly from a four month low) and ongoing efforts to reduce inventory levels…while there were also reports that the strong dollar had dampened export sales.” Backlogs were the lowest since May.
  8. The manufacturing and services PMI in the Eurozone for September fell to 52.6 from 52.9 in August. It’s the slowest pace of gain since January 2015 and a touch below the estimate of 52.8. A moderation in Germany (to a 16 month low) offset a surprising gain in France. Overall for the region, “service sector business activity increased at the weakest rate since the end of 2014, whereas manufacturing production expanded at the quickest pace since December of last year” according to Markit. Markit estimates Q3 GDP for the region at .3% q/o/q.
  9. The UK CBI industrial orders figure was -5, in line with the estimate and unchanged with August. While still negative, it has barely moved post Brexit.
  10. While good for existing home owners, the housing bubbles continue in China and this data reflects another pick up in household bank lending. Home prices for both new and existing apartments rose both m/o/m and y/o/y. The home price gains in the large cities continue to be extraordinary and scary. Prices in Beijing rose 23.5% y/o/y, 31.2% in Shanghai and 37% in Shenzhen.
  11. Japanese exports in August fell 9.6% y/o/y, about double what was expected. Imports dropped by 17.3% y/o/y, a touch more than forecasted and mostly due to energy price falls. Volumes for both actually rose y/o/y as the export figure certainly was hurt by the stronger yen.
  12. I’ll include this today as it came out late last Friday: the Treasury International Capital flow data for July saw for a 4th straight month foreigners were net sellers of US notes and bonds. They sold a net $13.1b in July which brings the year to date level of selling to $156b which compares to net selling of $20b in 2015, net buying of $165b in 2014, $41b in 2013 and $400b in both 2011 and 2012. This level of selling is unprecedented going back to when data collection started on this in 1977. The recent selling has been from foreign central banks while foreign private buying has been positive. Our largest holder, China, was a net seller of $21b of notes and bonds after selling $28b worth in June. They of course are slowly bleeding reserves. Japan, our 2nd largest holder was a net buyer of $3.6b after selling $13.2b in June.