Positives
1) The Fed validated the pricing in the bond market that rate hikes are likely coming in response to mostly the manufacturing slowdown and weakness in overseas economies. They are trying to get ahead of any more pronounced slowdown and broader spillover to the services sector which has just begun.
2) Negotiations are back on with China and it’s been confirmed that Trump and Xi will have a coffee talk.
3) Initial jobless claims fell 6k w/o/w to 216k and that was 4k below the forecast. The 4 week average though did tick up by 1k to 219k. Continuing claims, delayed by a week, fell by 37k.
4) Existing home sales in May totaled 5.34mm, a bit above the estimate of 5.30mm and up from 5.21mm in April (revised up from 5.19mm). This brings the year to date average to 5.23mm which compares to the 2018 average of 5.34mm.
5) Housing starts in May totaled 1.269mm, 30k more than expected and April was revised up by 45k to 1.281mm. The upside was all in the multi family category as single family starts fell by 56k to 820k, a 3 month low. Multi family starts jumped by 44k to 449k, the most since January 2018. As for permits, single family permits rebounded but just got back what it lost in April and is still the 2nd lowest print since August 2017. Multi family permits receded by 25k m/o/m but after jumping by 32k last month.
6) Thanks solely to private buying (as there was central bank selling), foreigners resumed buying US notes and bonds in April, totaling $16.9b. China though continued its selling.
7) Australia’s manufacturing and services composite index rose to 53.1 from 51.5 in June helped by a lift in sentiment post election.
8) Needing very low inflation with modest wage gains and disappearing bond yields, Japanese Core CPI (ex food) rose .8% y/o/y vs .9% in April. That though was one tenth more than expected but the core/core (ex food and energy) was up by just .5% as forecasted and down one tenth from the month prior.
9) Also in need of low inflation, CPI in the Eurozone for May was left unrevised at up 1.2% with a core rate of up .8%.
10) The June Eurozone manufacturing and services composite index did slightly improve to 52.1 from 51.8 mostly due to the rise in services. The services index rose to 53.4 from 52.9 and that was better than the estimate of 53. Manufacturing remained below 50 at 47.8 vs 47.7 in May and that was a touch less than the forecast of a modest rise to 48. The figures out of Germany were only slightly higher while France saw more improvement. Markit’s bottom line was this: “a further deterioration in business confidence about the year ahead suggests the pace of expansion will continue to be restrained by uncertainty and risk aversion. Concerns about weaker economic growth at home and in export markets, rising geopolitical risks and trade wars continue to dominate the picture and dampen business spending, investment and sentiment.”
11) After 8 months in a row of y/o/y car sales declines, EU car registrations rose .1% y/o/y in May.
12) The Hong Kong extradition bill has been suspended but still not canceled.
Negatives
1) The Fed is thinking about cutting interest rates with the unemployment rate at 50 yr lows, every metric of inflation ex core PCE at 2%, GDP growth likely averaging 2.5% thru June and with financial conditions near record easy. Their cuts risk not helping economic growth as rates are already so low and instead they further inflate asset prices, encourage more corporate debt borrowing on top of already overleveraged balance sheets, damage the profitability of the US banking system, hurt savers especially the ever growing population of baby boomers and further price out Millennials and first time home buyers as cheap money all over again inflates home prices. See page 1 of today’s WSJ, “Investors Buy Homes at Unparalleled Rate.” And lastly, I fear they are not taking any lessons from the experience of the ECB and BOJ if they think, as Powell has stated, that going back to zero rates is inevitable. The Fed got away with it in terms of getting off zero but all we’ve seen over the last 30 years of monetary policy is lower lows and lower highs with the fed funds rate in each successive cycle.
2) The June Markit US manufacturing and services composite index got closer to the flat line of 50 at 50.6 down from 50.9 in May, 53 in April, 54.6 in March and 55.5 in February. Manufacturing fell to 50.1 from 50.5 and services was down by .2 pts to 50.7. Markit’s bottom line, “Recent months have seen a manufacturing led downturn increasingly infect the private sector. The strong services economy seen earlier in the year has buckled to show barely any expansion in June, recording the 2nd weakest monthly growth since the global financial crisis.”
3) The June Philly manufacturing survey fell a sharp 16.3 pts m/o/m to just barely above zero at .3 and this compares with the estimate of 10.4. That’s the weakest print since it went negative in February and follows the contracting NY survey seen a few days ago. The components though were more mixed. The 6 month business activity outlook remained muted but did rise 1.7 pts from May. Capital spending plans rebounded by almost 5 pts after last months 7.6 pt drop.
4) The June NY manufacturing index collapsed from 17.8 to -8.6 and that was well worse than the forecast of +11. That’s the lowest print since October 2016. The internals were as bad as the headline figure. The only respite in the data was that the 6 month outlook wasn’t as weak. The business activity outlook fell about 5 pts at 25.7 but it was 12.4 in April.
5) The Cass Freight Index for May fell for the 5th straight month y/o/y and this decline in shipments was 6% from last year. Cass Freight that “with the 6% drop in May, we see the shipments index as going from ‘warning of a potential slowdown’ to ‘signaling an economic contraction.’” They do however recognize that comparisons are tough but “The weakness in spot market pricing for many transportation services, especially trucking, is consistent with the negative Cass Shipments Index and, along with airfreight and railroad volume data, strengthens our concerns about the economy and the risk of ongoing trade policy disputes.” They are worried about “the severe declines in international airfreight volumes (especially in Asia) and the ongoing swoon in railroad volumes, especially in auto and building materials.” They also went on and said “As volumes of chemical shipments have lost momentum in recent weeks, our concerns of the global slowdown spreading to the US, and the trade dispute reaching a ‘point of no return’ from an economic perspective, grow.”
6) After a robust rise in mortgage applications last week, they pulled back a touch this week. Purchase applications fell 3.5% w/o/w but are still up 3.8% y/o/y. Refi’s also were down 3.5% after last week’s nearly 50% spike and are higher by 80% y/o/y.
7) The June NAHB home builder survey fell to 64 from 66 and that was 3 pts below the estimate and which comes after a 3 pt rise in May. All three main components fell m/o/m with the Prospective Buyers Traffic in particular down 1 pt to 48 and thus still below the breakeven of 50. From a supply perspective of homes, “builders continue to report rising development and construction costs, with some additional concerns over trade issues.” On the demand side, “Despite lower mortgage rates, home prices remain somewhat high relative to incomes, which is particularly challenging for entry level buyers.” Combining the two, “And while new home sales picked up in March and April, builders continue to grapple with excessive regulations, a shortage of lots and lack of skilled labor that are hurting affordability and depressing supply.”
8) Japan’s June manufacturing PMI which softened to 49.5 from 49.8. This is now the 4th month in the past 5 below 50. Markit said “Softer demand in both domestic and international markets contributed to the sharpest fall in total new orders for 3 years. A soft patch for automotive demand and subdued client confidence in the wake of US-China trade frictions were often cited by survey respondents. Disappointing sales volumes also led to the largest accumulation of finished goods inventories for over 6 1/2 years. At the same time, backlogs of work were depleted to the greatest extent since January 2013, which will likely act as an additional drag on production volumes in the months ahead.”
9) Japanese exports fell 7.8% y/o/y, a bit better than the estimate of down 8.2% but imports dropped 1.5% vs the forecast of up 1%.
10) South Korea said its exports in the first 20 days of June fell 10% y/o/y, the 6th straight month of declines while imports were lower by 8.1%.
11) The UK May CPI rate was up 2% y/o/y as expected and the 1.7% rise in the core rate was one tenth more. Both though are down one tenth from April.
12) The UK CBI industrial orders index for June which weakened further to -15 from -10. The estimate was -11. The main factor in the softness was the “largest contraction in motor vehicle production since the financial crisis (March 2009), likely due to the bringing forward of planned seasonal plant closures to align with previous Brexit deadlines.” Outside of this, things were better as 10 of the other 16 industry groups saw growth. Brexit remains a major overhang as “Firms are desperate to see an end to the current impasse.”
13) The German ZEW June expectations index of the German economy plunged to -21.1 from -2.1. That was well worse than the estimate of -5.6. It’s the weakest since November but the current component held in better, falling just .4 pts m/o/m to 7.8. ZEW said “The sharp drop in the ZEW Indicator of Economic Sentiment coincides with an increased uncertainty regarding the future development of the global economy and substantially worsened figures for the German economy at the beginning of the 2nd quarter. The intensification of the conflict between the USA and China, the increased risk of a military conflict in the Middle East and the higher probability of a no-deal Brexit are all casting a shade on the global economic outlook. On top of this, German industry has been reporting worse than expected figures for production, exports and retail sales for April.”
14) The current level of negative interest rates is just not enough for Mario Draghi who is all set to push them down further.