The very volatile Chicago manufacturing PMI index from MNI for January fell to 50.3 from 53.9 in December. It misses the estimate of 55.0. The index is the lowest since it printed the same level back in May and thus gives back all of the Trump bump and then some. New orders led the decline as it fell 7.8 pts and is now below 50 and the weakest since December 2015. Backlogs were up but is still below 50. Employment fell and is below 50 for now a 3rd straight month. Inventories fell. Inflation pressures were apparent as prices paid rose to 61.4, the most since September 2014.
Bottom line, there was no discussion of Trump and his potential policies in the press release but it’s clear that the initial ebullience has cooled in the Chicago area. I still am taking these diffusion, sentiment indicators with a grain of salt though in that it’s not telling me the degree of economic change over the past few months. It’s right now driven by a lot of emotion post election. If anything, businesses are still dealing with a bout of confusion over trade and tax policy (will a border adjustment tax pass? If not, what will the corporate rate be?).
The conference board’s consumer confidence index for January fell 1.5 pts to 111.8, one pt below the estimate but off a 15 year high. It’s still up 10 pts since October. The two main components were hugely mixed as the Present Situation rose by 6.2 pts but Expectations fell by 6.6 pts. The answers to the labor market questions improved as those that said jobs were Plentiful rose 1.4 pts but only after falling by 1.8 pts last month. Those that said jobs were Hard To Get fell 1.2 pts but after jumping by 1.5 pts in December. Current business expectations rose but expectations 6 months hence fell. Employment and Income expectations both fell but after jumping last month.
Of note were the spending decisions. Those that plan to buy a car fell 1.9 pts to the lowest level in 6 months (we’ve certainly pulled forward a lot of auto sales over the past few years). Those that plan to buy a home fell 1.5 pts to the weakest in 7 months (higher prices and now higher interest rates?). Lastly, one year inflation expectations rebounded by 4 tenths to 4.9% after falling by 3 tenths last month.
Bottom line, this is just another confidence number that has been up sharply and now is moderating post election and we eagerly await to see how the emotional changes translate into actual economic activity. The two most interest rate sensitive areas, houses and autos, are now dealing with a rise in interest rates and maybe we’re seeing the first signs of sensitivity to the changes.
As we continue to look and hope for an acceleration in wage growth, the situation remains instead steady state. The overall Employment Cost Index for Q4 rose .5% q/o/q vs the estimate of up .6%. On a y/o/y basis, the gain was 2.2% which is really no different than the multi yr trend. For the private sector, which is the only thing that really matters, wages/salaries were up by 2.3% y/o/y while benefits were up by 1.8%, basically the same trend for both from Q3.
Bottom line, with the U6 unemployment rate at 9.2% vs the previous expansion low of 7.9% and the year 2000 low of 6.8%, wage growth in the aggregate remains only decent. I wish I could quantify the impact of all those 6 figure oil and gas jobs that were lost when oil prices collapsed. There is also a mix issue here as in the late stages of an economic cycle most of the new hires are younger people who of course get paid less. There are shortages of skilled labor and they have leverage but that seems to be only apparent in certain industries. Thus, we continue to wait for the wage/salary acceleration and the hope is that it comes when friendlier fiscal policy kicks in and a pick up in economic growth results. On the other hand, we are 90 months into an economic expansion vs the post WWII average of 60 months now combined with a quicker pace of rate hikes (most likely) on top of an over leveraged economy which provides the headwind.
Blame it on energy as eurozone CPI in January jumped 1.8% y/o/y, 3 tenths more than expected and up sharply from 1.1% in December. This is a 4 yr high but the core rate held at a .9% y/o/y gain as forecasted. Draghi in his last press conference tried to distance himself from the rise in energy prices y/o/y and said watch core. Well, the core rate has been very stable between .7-1.1% for the past year and a half and never broke below a .6% gain even in the depths of the ‘whatever it takes’ crisis. As seen in the US, services inflation was up 1.2% y/o/y and has been consistently above 1%. The market today is giving the headline jump a pass as the euro inflation 5 yr 5 yr swap is little changed at 1.80% but that is still a one year high. European sovereign bonds are mixed but all of a sudden for the 3rd straight day Greek yields are spiking. Jeez, do we really have to talk about Greece again? Their 10 yr yield is up 110 bps in the past 3 days on debt/budget concerns AGAIN.
While the ECB will be cutting their monthly purchases by 25% beginning in April, the pressure will only get more intense for another taper in the 2nd half of the year as this program winds down. The ECB balance sheet is up to 3.7T euros or 33% of eurozone GDP. Also, we look for clues on when the negative deposit rate will get less negative. Bottom line, Mario Draghi’s game is now entering a more dangerous path as not only is he pushing the limits of QE (in the context of available assets to buy) but he is soon to face the nightmare scenario of getting out of the epic bond bubble that he created. Finally, that 1.8% CPI gain was just .6% in November, .2% in August and was negative last Spring, highlighting the rapidity of the reversal.
The euro was up against the dollar after the CPI number but it’s not because of the CPI number. The FT is reporting that Peter Navarro, head of the National Trade Council in the Trump Administration, said “Germany continues to exploit other countries in the EU as well as the US with an ‘implicit Deutsche Mark’ that is grossly undervalued.” Because of this he is blaming Germany as “one of the main hurdles to a US trade deal with the EU and declared talks with the bloc over a Transatlantic Trade and Investment Partnership dead.” The article goes on to say that “one of the administration’s trade priorities was unwinding and repatriating the international supply chains on which many US multinational companies rely, taking aim at one of the pillars of the modern global economy.” It then says he is a proponent of the border adjustment tax as a means to that end but Navarro is going to have to square the circle of criticizing weak currencies overseas with the needed 20%+ rally in the dollar to ease the BAT adjustment for importers.
Also out was Q4 GDP for the eurozone which grew by 1.8% y/o/y and .5% q/o/q. That 1.8% figure basically matches the average pace over the past two years.
Speaking of central bankers, the BoJ left policy alone as expected as it thinks it’s on to something with its ‘yield curve control.’ That control is only out to 10 yrs we know. They did raise their fiscal 2017 GDP (beginning in March) estimate to 1.5% from 1.3% given last October. The Japanese 10 yr inflation breakeven bottomed in February 2016 at .15%. Today it stands at .57%.
Higher wages in Japan of substance is still missing but their labor market continues to tighten up as the jobs to applicant ratio rose to 1.43 in December, the highest since July 1991, up from 1.41. The unemployment rate held at 3.1%, one tenth off a 22 yr low. Rate hikes in the US and the slowdown/end to ECB and BoE QE could pressure the BoJ in the 2nd half to pull back as well. What’s going to happen to Japanese bonds and stocks when they stop buying?
Also out in Japan was a less negative than expected household spending number and a slightly better IP figure.