United States
As we all try to figure out what the profit and growth implications are of the upcoming passage of a tax bill, the only analysis from Wall Street I’ve seen so far on earnings per share is an all else equal calculation of a lower tax rate. We need to widen the analysis. In Q3, companies paid out $7 Trillion of wages and salaries to the private sector. Thus, in the context of tight labor markets that will get tighter, a 1% raise would be an additional $70b of costs. With respect to the prospect of higher interest rates and quicker economic growth, US companies have $13.5 Trillion of total debt and thus a 100 bp increase in the cost of interest expense is $135b. On the top line revenue side, we’ll see how companies immediately respond to the encouragement to ramp up capital spending. The decision on where to locate plant and equipment on a lower tax rate will take years to play out in its impact. On the individual side, we’ll see how high income earners and spenders in 1/3 of the US economy (California, New York, New Jersey, Connecticut, ILLINOIS and Massachusetts) respond to higher taxes and how many move out.
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Seen late Friday, US vehicle sales in November finished at 17.35mm, 150k less than expected but the aftermath of the hurricane and the 600,000 cars that needed to be replaced are still all over the data. To smooth this out, for the year to date vehicle sales have averaged 17.1mm vs 17.46mm in 2016, 17.4mm in 2015 and 16.5mm in 2014. The cycle has topped out as many sales were pulled forward over the years in response to generous lending terms and I think the extent of the digestion is the only thing that is in question. The NY Fed a few weeks ago said about 9.7% of subprime car loans issued by non banks turned 90 or more days past due in Q3, the most in more than 7 years. The rate for bank made subprime auto loans though was about half that at 4.4% in Q3.
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As for C&I loan growth reported late Friday for the week ended November 22nd, they rose by .8% y/o/y and that is similar to the continued weakened pace of one week prior. Hopefully this changes with the tax bill finally close to being complete. As for total loans and leases, they rose 3.7% y/o/y vs almost twice that one year ago.
Japan
November consumer confidence in Japan rose .4 pts to 44.9 as expected but that is the best level since September 2013, about a year after Abenomics began. It is the Income Growth component in particular that I always watch within this data point and it rose .5 pt to 43, the best since May 2007. Higher incomes and eventual inflation might actually come to Japan. Imagine that but fear it too considering where interest rates are. In case you missed this WSJ article over the weekend, it was titled “Japan Firms End Yearslong Price Freezes.” In the first paragraph, “Even in deflation racked Japan, some companies believe conditions are strong enough to raise prices. Torikizoku Co, a budget restaurant chain offering sticks of yakitori grilled chicken, lifted prices for the first time in nearly 30 years in October. It now charges the equivalent of $2.65 for a two skewer plate, up from $2.49 before. It was egged on by a shortage of part time staff, which forced it to pay higher wages, a spokesman said.” A $.16 increase doesn’t sound like much but that’s a 6.4% increase in a country that has seen true price stability, aka no change in prices, over the past 20 years. There was no response in JGB yields or inflation breakevens. The yen is weaker along with most currencies against the dollar but the Nikkei closed down by .5%. I repeat my belief that embers of cyclical inflation are bubbling up in many parts of the world and the global level of interest rates are wholly unprepared if I’m right.
Europe
The producer price index in Europe rose .4% m/o/m and 2.5% y/o/y, about in line with expectations. Higher energy prices were a key contributor but even ex energy prices grew by 2.3% y/o/y. Europe is facing supplier constraints, higher commodity prices and a much better labor market. Don’t be so sanguine on inflation trends here I repeat. Here is a 2 yr chart on German 10 yr inflation breakevens. The 10 yr German bund yield is up by 3 bps to .33% but that is also after 4 out of 5 days of declines last week. I continue to view European bonds as a major short. As an example of risk happening fast, the Credit Suisse European HY overall yield in November went from 2.03% to 2.57%. The DAX today is getting back what it lost last week.
GERMAN 10 yr INFLATION BREAKEVENS
Peter is the Chief Investment Officer at Bleakley Advisory Group and is a CNBC contributor.