The Boock Report

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Succinct Summation of the Week’s Events – 9/22/17

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Positives

  1. The Fed finally decided that they should monetize US debts and deficits and the subsidization of the US housing market just a bit less but that reduction will progress every quarter. On the former, it has no longer been ‘temporary.’ On the latter, with the median home price at just about a record high and rents rising 4% persistently for 35% of US households, owning 30% of the MBS market when people are literally getting priced out of shelter optically doesn’t look very good.
  2. The September Philly manufacturing index rose 5 pts m/o/m to 23.8 and that was above the estimate of 17.1. The year to date average is now 27.8 and after the election it got as high as 43.3 back in February. New orders, backlogs and inventories were higher. So were the inflation stats. The disappointment was in the employment components. As for the outlook, the business activity 6 month view rose 13 pts to a 6 month high at 55.2. The capital spending component though was down a touch.
  3. Initial jobless claims totaled 259k vs 282k last week and vs the estimate of 302k. There was a fall in the number of claims in Texas after the spike in the prior weeks. Of course the aftermath of the hurricanes are all over this figure. Using a 4 week average to smooth out the data has it at 269k from 263k last week.
  4. Housing starts in August totaled 1.18mm, about in line with the estimate of 1.174mm. That though was off a better than expected base as July was revised up by 35k to 1.19mm. For perspective, the average year to date is 1.198mm. Single family starts totaled 851k vs 838k in July and 857k in June. Multi family starts fell by 23k m/o/m to 329k which happens to be the slowest pace of building since last November. As we look to future building via permits, the moderation in multi family is about to be reversed as permits jumped by 82k to 500k, the highest since October. Single family permits fell by 12k m/o/m to 800k which keeps it about smack at the year to date average.
  5. Core US import prices in August remained modest with a .8% y/o/y rise ex food and fuel notwithstanding the weaker US dollar. The headline gain of 2.1% y/o/y was driven by an almost 5% m/o/m rise in petro prices.
  6. The eurozone manufacturing and services composite index rose 1 pt m/o/m to 56.7, a 4 month high and that was 1.1 pts above the forecast as both components were higher vs August. There was bifurcation though in terms of geography as Germany and France led the gains while “elsewhere, growth of business activity waned to a 6 month low.” Manufacturing was a particular bright spot in spite of the higher euro “with export sales playing an important role in pushing order books higher and encouraging further investment in capacity expansion” according to Markit. Employment was also good, especially on the manufacturing side. Along with the better economic growth, which Markit estimates to be higher by .7% q/o/q annualized in Q3, have come greater price pressures. “Input cost and selling price inflation gathered pace for a 2nd successive month, with both reaching the highest rates since April. Prices charged for services rose to the greatest extent since May, while the increase in factory gate prices was the highest since June 2011.”
  7. There was no revision as expected to the eurozone August CPI report. It was left at up 1.5% y/o/y headline and 1.2% at the core. As a reminder, while 1.2% is modest, that core gain matches the most since March 2013. Also of note, last Friday Eurostat said eurozone labor costs rose 1.8% y/o/y in Q2, that is the fastest pace of gain since Q1 2015.
  8. Portugal got their IG rating back from S&P. They went from BB+ to BBB-. “The upgrade reflects our improved forecast for Portugal’s growth during 2017-2020, as well as the solid progress it has made in reducing its budget deficit and the receded risk of a marked deterioration in external financing conditions.” Fitch and Moody’s both have them at junk.
  9. The German ZEW index which measures investor expectations of the German economy rose to 17 from 10. The estimate was 12 and comes after falling by 7.5 pts in September. The current outlook was up slightly at 87.9 from 86.7 and that is just below the best level in 6 years. The ZEW said “The solid growth figures in the second quarter of 2017 in combination with a steep rise in bank lending and increasing investment activities by both the government and private firms are likely reasons for the financial market experts’ significantly more positive outlook compared to that of last month. Their expectations are further corroborated by stable global economic development. The German federal elections do not seem to have been a source of uncertainty. The worries about the recent strengthening of the euro has, for now, also faded into the background.”
  10. China reported that the pace of home price gains in August slowed down. Versus July, prices rose in 46 of 70 cities surveyed, down from 56 and vs 60 in June. Compared with last year, 68 cities saw gains vs 70 in the two months prior. For existing apartments, prices though held steady in 54 cities vs July and went to 69 vs last year vs 67 last month that saw gains. Price gains slowed in particular in Beijing, Shanghai and Shenzhen.
  11. The UK consumer sucked up the drop in real wages with a 1% m/o/m rise in retail sales ex auto fuel, well more than the estimate of up .1%. Online sales helped with a 5% m/o/m rise and internet sales make up about 15% of total sales. This figure is a nominal number so it does reflect “strong price increases” according to ONS. But they also said “we are still seeing underlying growth in sales volume, and with strong growth in non essential purchases.” That said, they said there needs to be a strong rise in sales in September in order to see Q3 growth in consumer spending from Q2.
  12. Japan said exports jumped by 18.1% y/o/y in August, above the forecast of up 14.3% and that is the fastest pace of gain in almost 4 years (it was though off an easy comparison of down 9.6% last year). Volumes were also pretty solid as they were higher by 10.4% y/o/y with an 18.1% rise in exports to the US (led by a 28% rise in autos just as the US market had too much inventory and right before the hurricanes) and almost 16% gain to China (driven by electronics). Volume exports to the EU were a more modest 2.9%. Imports were higher by 15.2% y/o/y vs the estimate of 11.6%. Most of this though was FX and price as volumes were up just 2.4% y/o/y.

 

Negatives

  1. See the attached two charts which reflect the new Flow of Funds statement data from the Federal Reserve this week. The first chart reflects the all asset price bubble (measuring net worth relative to disposable income at a fresh record high) and the second is total business debt as a percent of GDP (within 150 bps of a record high).
  2. After an encouraging 10.9% jump in mortgage applications to buy a home last week, it gave it all back and then some this week with a 10.8% w/o/w drop. It’s higher by just 1.9% y/o/y and the index sits just above the weakest level since February. Refi applications fell by 8.5% w/o/w, also giving back last week’s 8.9% rise and remains down 35% y/o/y. Mortgage rates were little changed w/o/w.
  3. Existing home sales in August, measuring mostly contracts signed in the April thru July time frame, totaled 5.35mm annualized, 100k below expectations. It’s down from 5.44mm in July and it’s the slowest pace of closings in a year. Single family closings have now fallen in 4 of the past 5 months. Inventories remain modest as the number of homes for sale fell to a 5 month low and are down 6.5% y/o/y but with the decline in sales, months’ supply held at 4.2. Home prices gains remained robust at 5.6% y/o/y. Discouragingly, first time buyers totaled just 31% of overall purchases, a one year low and down from 33% in July. High prices led by “inadequate levels of available inventory” according to the NAR are creating two problems, the lack of choice and expensive prices. The NAR summed up this dilemma by saying “The ongoing rise in home prices is straining the budgets of some of these would be buyers, and what is available for sale is moving off the market quickly because supply remains minimal in the lower and mid price ranges.”
  4. The NAHB home builder index for September fell 3 pts m/o/m to 64 and that was 3 pts below expectations. That matches the lowest level since November with all 3 components lower m/o/m. The NAHB said “The recent hurricanes have intensified our members’ concerns about the availability of labor and the cost of building materials.”
  5. The US manufacturing and services PMI composite index from Markit for September fell to 54.6 from 55.3 and which compares to the year to date average of 54.2. The services component was the reason as it fell by .9 pts while manufacturing was up a hair, higher by .2 pts m/o/m. Within services, “providers are the least optimistic about the business outlook since September 2016.” Off the 26 month high in August, input price inflation moderated but “average prices charged by service sector firms increased at one of the fastest rates seen over the past 3 years.” With manufacturing, notwithstanding the headline print, new orders rose “at one of the slowest rates seen over the past year” while “new export sales remain close to stagnation.” Backlogs improved though and “employment growth was the fastest so far in 2017.” Also of note, “input price inflation was the steepest since December 2012. A number of manufacturers linked rising raw material prices to higher transportation costs and supply disruptions from Hurricane Harvey. Latest data revealed intense pressure on supply chains, with vendor delivery times lengthening to the greatest extent since February 2015.” The bottom line according to Markit is that this level of activity (inclusive of the aftermath of the Hurricane) equates to about 2% growth in Q3 which is about where the Atlanta Fed estimates at 2.2% while the NY Fed is at 1.3%.
  6. After two months of purchases, foreigners were net sellers of notes and bonds in July but by a very modest $490mm. It brings the year to date amount of buying to $46.8b vs net selling of $326b last year. China and Japan, the two largest holders, were modest sellers of notes and bonds but were swamped by a large pick up in the buying of short term t-bills.
  7. After the 2nd highest print since 1995, the CBI UK industrial orders index fell by 6 pts in September to 7 vs the estimate of no change at 13. CBI said “Both total order books and export order books remained strong, although total order books softened somewhat in August. The deterioration was relatively broad based with 9 of 17 sub sectors reporting a decline relative to August.” Price inflation remained high “but have eased compared with the first half of 2017.”
  8. While S&P is just playing catch up to Moody’s and Fitch, their downgrade of China should remind all of the large debt accumulation that has occurred in that country both at the corporate/banking level and with local governments and the need to deal with it.
  9. The BoJ’s continued obsession with achieving 2% inflation, something that hasn’t been achieved in about 20 years not including the VAT influence a few yrs ago, just continues to deepen the hole they are putting themselves in.

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