The Boock Report

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Succinct Summation of the Week’s Events – 8/11

In case you missed it, the latest update to my investment ideas is here (members only).

Positives

  1. Consumer prices rose .1% m/o/m at both the headline and core levels in July. That was one tenth less than expected for each. Versus last year, prices were up by 1.7% for both and that was up from 1.6% for the headline last month and unchanged at the core. Services ex energy was up by .2% for a 3rd straight month and up by 2.4% y/o/y, a continued moderation from the 3%+ pace seen last year. Rent of Primary Residence was up by .2% m/o/m which is the first time it wasn’t up .3%+ since December 2014. On a y/o/y basis, they are still up by 3.8%. The fake rent number Owners’ Equivalent Rent was up by .3% m/o/m and 3.2% y/o/y. As this makes up 25% of CPI, if the BLS used actual rents instead of this faux figure, CPI would be higher than stated. Medical care costs (measuring what consumers actually spend as opposed to the PCE measure which includes medicare and Medicaid reimbursement rates), rose .4% m/o/m and are up by 2.6% y/o/y. Expectedly, new and used car prices fell, each by .5% m/o/m. For used cars, prices are now down 4.1% y/o/y with obvious implications for new car sales and leases. Overall on the goods side, prices fell .1% m/o/m and .6% y/o/y.
  2. Headline PPI fell .1% m/o/m vs the estimate of up .1%. The core rate also fell .1% m/o/m while the forecast was for a rise of .2%. Also taking out trade (measures change in margins received by wholesalers and retailers) in addition to food and energy saw prices flat m/o/m. Relative to last year, prices rose 1.9% headline, 1.8% core and 1.9% core and ex trade. It was declines in both goods and services that was a drag. With services, the BLS said about 60% of the decline was due to a 5.8% fall “in margins for chemicals and allied products wholesaling.” With goods, the headline drag was mostly due to a fall in gasoline, natural gas, cars/trucks, beef and veal and basic chemicals.
  3. Productivity in Q2 rose .9% q/o/q annualized which is a touch above the estimate of up .7%. The 1.2% y/o/y gain on an easy comparison brings the 4 quarter average to .8% which compares to the full 2016 average of ZERO.
  4. In likely response to a 6 week low in the average 30 yr mortgage rate to 4.14%, refi applications rose 5.3% w/o/w but they still remain down by 44% y/o/y. Purchase applications were little changed, up by .8% w/o/w after declines in 3 of the last 4 weeks. They are up by 7% y/o/y.
  5. Job openings in June totaled a record high of 6.163mm up from 5.702mm in May. Notwithstanding this, hiring’s fell by 103k m/o/m but this is very volatile month to month as it rose by 416k in the month prior. The hiring rate did hold steady at 3.7%. There was a 72k person decline in the number of quitters and the quit rate fell one tenth to 2.1%.
  6. The NFIB small business optimism index for July rose 1.6 pts to 105.2 and is a touch above the year to date average of 104.8. The post election optimism is holding up as this index printed 94.9 in October and 98.4 in November. The Plans to Hire component which rose 4 pts to 19% and matches the best level since December 2003. There remains however difficulty in finding those hires as Positions Not Able To Fill rose 5 pts to 35%, the most since November 2000. This led to a 3 pt rise in current Compensation but Compensation Plans in the future fell 2 pts. The NFIB said simply, “Main Street was buoyed by stronger customer demand despite the dysfunction in Washington, DC.” While healthcare and tax reform have not yet come to fruition, “many important changes have occurred to the regulatory structure with few if any new rules showing up in the Congressional Register. These changes will seep into the regulatory structure with little fanfare, but will have significant impacts on regulation costs paid by small businesses going forward.”
  7. Do I hear a sane monetary policy viewpoint in the Land of the Rising Sun? Reuters reported that Kazumasa Iwata, the ex Deputy BoJ Governor and possible Kuroda replacement said “The Bank of Japan should dial back its massive stimulus before inflation hits its 2% target.” In this interview, “Iwata criticized the central bank’s price forecasts as too optimistic and warned that even hitting 1% inflation could be challenging.” Iwata also said “The BoJ should slow its annual bond buying to around 40T yen from the current 80T yen. That would make its policy more sustainable.” He also wants a slowdown in the pace of ETF buying, “given the distortions it is creating in the market.” He also thinks that ‘yield curve control’ should go out 5 years and not 10 so the yield curve can steepen.
  8. Hong Kong’s economy grew 1% q/o/q SAAR which is up 3.8% y/o/y, above the estimates of up .6% and 3.3% respectively. Exports and consumption in particular helped. The Hong Kong government said “In view of the likely positive developments on both the external and domestic fronts, the Hong Kong economy is expected to attain further solid growth in the rest of the year.”
  9. The Singapore economy was up by 2.2% q/o/q SAAR and 2.9% y/o/y, higher than the forecasts of up .5% and 2.2%. They were also helped by exports and services and manufacturing too.
  10. CPI in July in China rose 1.4% y/o/y, one tenth less than expected and down from a 1.5% pace in June. It was a moderation in non food costs to 2% y/o/y, matching the lowest since November, that was the main reason for the most downtick in headline CPI. The 1.1% m/o/m drop in food prices was the smallest decline in 6 months. On the wholesale price side, PPI was up by 5.5% y/o/y, unchanged m/o/m but one tenth less than expected.
  11. China said its FX reserves in July totaled $3.081T, higher for a 6th straight month, up from $3.057T in June and higher than the estimate of $3.075T. BUT, a broadly weaker US dollar helped offset more outflows.
  12. Industrial production in the UK was better than expected, rising by .5% m/o/m vs the forecast of up .1% but it was all resource related, particularly oil/gas. Manufacturing production saw no m/o/m change as vehicle production puked by 6.7%.
  13. In Italy, industrial production in June jumped 1.1% m/o/m from .7% gain in May and well above the estimate of up .2%. The y/o/y gain was 5.4%.

 

Negatives

  1. Maybe this guy should be our chief negotiator, //i.telegraph.co.uk/multimedia/archive/02772/Kim-and-Rodman_2772852b.jpg. We can blame Un for this week’s stock market selloff but the growing divergences in this market ever since earnings reports began was the set up. Sorry to repeat for the umpteenth time but assuming no bombs are dropped, Janet Yellen and Mario Draghi are the two biggest risks to the level of current asset prices.
  2. Initial jobless claims totaled 244k, 4k more than expected and up from 241k last week (revised from 240k). The 4 week average fell by 1k to 241k and that’s the lowest since late May as a 248k print drops out. Continuing claims, delayed by a week, fell by 16k to a 4 week low.
  3. Revolving consumer credit (mostly credit cards) outstanding in June finally exceeded its April 2008 high. The 4.6% annual percentage change in Q2 compares with a savings rate that is at 3.8%, not far from the lowest level since December 2007. A reminder, core retail sales slowed to a 2.4% y/o/y growth rate, matching the slowest since January 2014. The pace of non-revolving consumer debt outstanding did slow to a 3.5% annual percentage change as the pace of gains in student loans and auto loans (for obvious reasons) moderated but the level of student debt is alarming and the auto sector is now in a recession.
  4. Japanese machine orders in June fell 1.9% m/o/m vs the estimate of up 3.6%. This marks 3 straight months of declines. The 5.2% y/o/y drop is the worst in 5 months.
  5. Chinese exports rose 7.2% y/o/y in dollar terms which was below the forecast of up 11%. Exports to the US were up by 8.9% y/o/y, a slowdown from the nearly 20% jump in June as the two countries dance around trade issues. Exports to the EU were up by 9.5% y/o/y. Imports were up by 11% but that was well below the estimate of up 18%.
  6. German exports fell 2.8% m/o/m, well worse than the estimate of up .2%. Also reflecting weakness was the 4.5% m/o/m drop in imports, a sharp deviation from the forecast of up .2%.
  7. German industrial production in June fell 1.1% m/o/m instead of rising by .2% as forecasted. This is the first decline since December. The German Economic Ministry didn’t sound worried as they said “Factory orders as well as indicators for business climate point to the upward trend in industrial production continuing.”
  8. France said its IP index fell 1.1% m/o/m vs the forecast of down .6%. It does though come off a good gain in May and the .9% manufacturing production decline was as expected.

 

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