I’m sorry but I’m not going to pontificate here on the geopolitics of North Korea and what it means. I’ll leave it to others but will say ‘China, please help’. The South Korean Kospi was lower by 1.1% but there is not a stock exchange in Guam for me to give you a response (said in jest). The Won is also having its worst day in a month and a half. The yen and Swiss franc this morning are really the only FX beneficiaries against the dollar today which led to a 2 month low in the Nikkei. The dollar is mostly higher against most other FX crosses but gold is up by $10.
Productivity in Q2 rose .9% q/o/q annualized which is a touch above the estimate of up .7%. More helpful I believe is looking at the 1.2% y/o/y gain which brings the 4 quarter average to .8% which compares to the full 2016 average of ZERO. So, some progress in this key missing piece of the economic recovery and for wages. While I believe anecdotal evidence is building that wage growth might start picking up some pace from here, unit labor costs in Q2 fell .2% y/o/y and the 4 quarter average is just up .3% y/o/y. It was up by 1% on average last year.
Bottom line, while this data point is never market moving, maybe we are seeing some light on the punk productivity story that has plagued this recovery. That said, the recovery of 1.2% y/o/y in Q1 and Q2 is on very easy comparisons as productivity fell in the same quarters last year. Also, have in perspective the 25 year average of 1.9%. Yes, some argue that these productivity stats are not accurately capturing productivity due to technological advances but we’ve been experiencing amazing gains in technology since the history of time.
25 YEAR HISTORY OF PRODUCTIVITY y/o/y
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 even in light of the inventory strains in areas of the market, most notable at the lower end (homes priced below $250k). I continue to believe that buyers are becoming more discriminating at current price levels as the medium home price is at a record high.
Consumer price inflation 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. A country with still low per capita income should be happy with modest gains in the cost of living. On the wholesale price side, PPI was up by 5.5% y/o/y, unchanged m/o/m but one tenth less than expected. What is most notable in commodity prices is the continued bid in a variety of industrial metals. I know we all want to believe that it’s due to a rise in demand, which it partly is, but I still believe much of it has been a more disciplined approach on the capital spending side. Importantly, China in fits and starts has taken excess capacity offline. This chart is the CRB raw industrials index and you can see we are approaching a key level. Will we make a double top or are we set up for a breakout? I think the latter is more likely. With the recent uptick in the overall CRB index, inflation expectations in the 5 and 10 yr TIPS are at a 2 month high.
CRB RAW INDUSTRIAL METALS
Chinese stocks were mixed with the H share index down by 1% while the Shanghai comp was lower by .2%. Notable is the continued rally in the yuan where the onshore yuan is having its best day since late May.
The Italian economy continues to show signs of life. 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%. Next week Italy is supposed to report its Q2 GDP figure and expectations are for a 1.4% y/o/y increase which doesn’t sound like much generally but for Italy it’s the best since Q2 2011. Chipping away at the bad debt problem in the banking system continues. The Italian MIB index though is down by 1.2%, caught up in the heavy selling in the entire region.