Positives
1) The June Chicago manufacturing index rose to 64.1 from 62.7 and that was 4 pts better than expected. While new orders rose to a 5 month high, production fell “for the 4th time since peaking in December, with firms stifled by issues higher up in the supply chain.” Backlogs grew as a result and supplier deliveries (the higher it goes, the more constrained the supply chain) rose again with the quarterly read the highest in 14 years. Price pressures are a result as prices paid rose to the highest level since May 2011. Employment was up for a 2nd month but are down q/o/q. Of note MNI said “Confusion surrounding the trade landscape continues to breed uncertainty among businesses and their suppliers and has led to many firms’ altering their immediate purchasing decisions.”
2) The Richmond manufacturing survey rose 4 pts m/o/m to 20, a 4 month high and that was 5 pts better than expected. New orders, backlogs and employment all rose. On the latter, it still is really hard to find new employees as Availability of Skills Needed fell sharply. Capital spending plans were mixed. Wages held at just off the highest level in 21 years. Price pressures intensified as prices paid rose to the highest level since October 2012 and prices received rose to the most since December 2012. There is however hope that higher costs will abate in the coming 6 months.
3) The Dallas manufacturing index in June improved to 36.5 from 26.8. That is the best in 4 months. New orders, backlogs and employment improved but again all came with rising inflation. Prices paid rose to a 7 year high while prices received rose to a 10 year high. Wage growth rose to the 2nd highest level in 11 years.
4) There was a 4.9% y/o/y increase in private sector wage and salary growth in May which is holding around the best level in this cycle. Overall income growth was up 4% y/o/y, the 2nd best print since 2015. As a result of the .4% m/o/m gain in income and .2% rise in spending, the savings rate rose two tenths to 3.2% after falling by two tenths in April but is still hovering near 10 yr lows.
5) Core capital spending (non defense capital goods ex aircraft) fell .3% m/o/m vs the estimate of up .5% BUT it followed a big upward revision to April of up 2.3% from the last revision of up 1%. So combined, it was a beat vs expectations.
6) Exports of goods in May hit a record and combined with higher wholesale inventories added to growth in Q2.
7) New home sales in May, measuring the number of contract signings of new homes, totaled 689k, 22k more than expected but mostly offset by a downward revision of 16k to the month prior. Smoothing out the monthly noise has the 3 month average at 669k vs the 6 month average of 656k which is an improvement from the average seen last year of 616k. The median home price fell 3.3% y/o/y but is very volatile month to month. Months’ supply fell to 5.2 from 5.5 because there was only an increase of 3k homes for sale m/o/m but at 299k, is just 1k from the most amount of new homes for sale since 2009 and is finally getting near its 20 year average (although is not adjusted for the population growth).
8) Economic confidence in the eurozone in June fell a hair to 112.3 from 112.5 but that was a touch above the estimate of 112. It is at the lowest level since August. The manufacturing and services components saw no change m/o/m (but both at lowest since August) while consumer confidence and construction fell. Retail rose slightly.
9) With a new Italian government in place, regardless for now what might be implemented, it helped to lift economic sentiment in June. The ISTAT index rose .8 pts to 105.4 after falling for 4 of the last 5 months. But the internals were very mixed. Weakness in manufacturing which fell to the lowest level since February 2017 (tariff worries?) was offset by gains in services and confidence for retailers (tax cuts?). Construction confidence was down.
10) As we get closer to another cut in ECB QE and banks start paying back outstanding LTRO loans, money supply growth in May improved to 4% y/o/y from 3.8% in April but this is a reduced pace from the 4.9% average in 2017.
11) There was a nice boost in UK retail sales in June. The CBI retail sales index jumped to 32 from 11 and that was well above the forecast of 10. CBI said “Higher than average temperatures seem to have had a positive impact on shoppers, with retailers benefiting from above average seasonal sales and improved order volumes growth. While today’s findings will bring some summer cheer to retailers, underlying conditions for the sector remain challenging – household spending remains under pressure from the slow recovery in real wage growth and the sector is still grappling with key structural changes like digital transformation.”
12) Japan’s labor market got even tighter in May. Their unemployment fell to a microscopic 2.2% from 2.5% and the estimate was for no change. Go back to the summer of 1992 to see something similar. The job openings to applicant ratio rose to 1.60 from 1.59. In January 1974 it was only higher.
13) South Korea, an important country to watch in the gauging global trade trends, reported industrial production higher by .9% y/o/y as expected for May.
14) In May, Hong Kong exports jumped by 16% y/o/y, well more than the estimate of up 8.5%. Imports were up by 16.5%, above the forecast of up 11.3%.
15) To address its own growth issues, the PBOC cut its reserve requirements for many banks to 15.5% from 16%. The South China Morning Post said “The move is a ‘targeted operation’ aimed at supporting the weak links in the economy and not a change to the country’s ‘neutral and prudent’ monetary policy stance”, the PBOC said.
Negatives
1) The May PCE index was up .2% m/o/m both headline and core. The headline figure is now up 2.3% y/o/y, the most since March 2012 and the core rate was up 2% y/o/y, also the highest since early 2012.
2) Consumer spending was up .2% m/o/m in May, half the estimate and April was revised down by one tenth. We will see a reduction in Q2 GDP estimates as a result. Real personal spending in May was zero. In response, the Atlanta Fed GDPNow estimate was cut to 3.8% from 4.5% for Q2.
3) Initial jobless claims rose 9k w/o/w to 227k and that was 7k more than expected and a 5 week high. The 4 week average moved up by 1k to 222k, but are still very low. Continuing claims, delayed by a week, fell by 21k after rising by 25k last week.
4) Shipments of core capital goods unexpectedly fell and led to a cut in GDP forecasts.
5) The final read of the UoM consumer confidence index at 98.2 was 1.1 pts below the first print and below the estimate of 99. It is though up a hair from the 98 level in April. There was a bifurcation in the two main components. Current Conditions rose almost 5 pts m/o/m but the Expectations component fell almost 3 pts to the lowest level since January. One year inflation expectations were up by one tenth to 3%, matching the highest since August 2014 “partly due to rising energy prices and partly due to new tariffs.” In contrast to the Conference Board, higher income expectations rose 5 pts m/o/m and employment expectations improved. From May, spending intentions improved for major household items and a vehicle but fell for those wanting to buy a home to a 7 year low. Lastly, “The potential impact of tariffs on the domestic economy was spontaneously cited by one in four consumers, with most expecting a negative impact on the domestic economy.”
6) The Conference Board Consumer Confidence index for June fell to 126.4 from 128.8. The estimate was 128. This though comes after a 3.2 pt rise in May. The m/o/m modest drop was led by the Expectations component which fell to a 6 month low while Present Situation was little changed. The answers to the labor market questions were mixed as were spending intentions. Those expecting Higher Income fell to the least since April 2017. I’m not sure why. One year inflation expectations held at 4.9%, matching the most since September 2016. The Conference Board said simply “Consumers’ assessment of present day conditions was relatively unchanged, suggesting that the level of economic growth remains strong. While expectations remain high by historical standards, the modest curtailment in optimism suggests that consumers do not foresee the economy gaining much momentum in the months ahead.”
7) Pending home sales fell .5% m/o/m in May, below the forecast of a gain of .5%. This takes the index to a 4 month low. The m/o/m decline was all due to a 3.5% drop in the South which more than offset m/o/m gains in the Northeast, Midwest and West (though these 3 regions remain down y/o/y). The NAR continues to say that the issue in the housing market remains the lack of supply rather than an issue with demand but demand is of course getting impacted by record high home prices for existing homes and rising mortgage rates. Bottom line according to the NAR, “without enough new and existing inventory for sale, activity has essentially stalled.”
8) With mortgage rates holding near 7 yr highs, mortgage applications fell on the week. Applications to buy a home fell 5.9% w/o/w and are basically flat y/o/y, up 1.2%. This component is now at a 4 week low. Refi applications were down by 3.5% w/o/w and lower by 27% y/o/y.
9) While very old news at this point with the US economy days away from finishing up Q2, GDP in Q1 was revised down by 2 tenths from the last read to 2%. A key reason for the downward revision was an upward revision to the price deflator to 2.2% from 1.9% and vs the estimate of 1.9%. Thus, nominal GDP was actually revised up by one tenth.
10) Canada will hit us with about $15b of tariffs on Sunday on a variety of products. They are also looking at putting tariffs and quotas on steel from China due to the overflow after US steel tariffs were placed on China.
11) Harley Davidson quantifies the impact of tariffs on its business and its plans to deal with it. Q2 earnings will be flooded with discussions on this.
12) Mario Draghi finally got to his 2% inflation target as June CPI was up 2% y/o/y as expected, up from 1.9% in May. This matches the fastest inflation since December 2012. Higher energy prices were the main factor as they jumped by 8% y/o/y. CPI ex food and energy was up by 1.2% which is steady with the trend. Their core CPI which also takes out alcohol and tobacco was up by 1%, also on trend. Services inflation was higher by 1.3% vs 1.6% in May and 1% in April.
13) Tokyo CPI ex food was up .7% y/o/y in June, up from .5% in May and one tenth more than expected. The rate ex both food and energy was higher by .4% y/o/y, twice the level of May and also one tenth more than forecasted. That doesn’t sound like much but it is the 2nd highest print since June 2016.
14) Japanese retail sales in May fell 1.7% m/o/m, about twice the estimate of down .8%. The y/o/y increase of up .6% was the least since October and the 2nd lowest since February 2017.
15) With 40% of its economy dependent on exports, the German IFO business confidence index for June fell .5 pt to 101.8 but that was as expected. The expectations component was unchanged m/o/m but the current assessment fell by 1 pt. The headline number matches the lowest since March 2017. The IFO said “The tailwind enjoyed by the German economy is calming down.”
16) Germany and France both reported unexpected y/o/y declines in May retail sales. German sales were very weak in particular, falling by 1.6% y/o/y vs the estimate of up 1.9%.
Peter is the Chief Investment Officer at Bleakley Advisory Group and is a CNBC contributor. Each day The Boock Report provides summaries and commentary on the macro data and news that matter, with analysis of what it all means and how it fits together.