The October Chicago manufacturing PMI, the 2nd to last regional survey ahead of tomorrow’s national ISM, fell to 50.6 from 54.2 and that is also below the estimate of 54. As this data point is very volatile month to month it is best to smooth it out. The 3 month average is now 52.1 vs the 6 month average of 53 and the 12 month average of 51.3. New orders fell to the lowest since May. Backlogs were up a touch but remain below 50. Employment rose slightly to back above 50 “and recovering some of the lost ground experienced in the previous month.” Inventories fell back below 50. Prices paid “rose to the highest level since November 2014, following the recovery in the oil price and panelists reported higher prices for steel and plastic products. Moreover, suppliers have been pushing for price increases in recent months and some of these pressures appeared to have materialized in October.” Looking forward, “Companies were slightly less upbeat compared with a year ago about the future level of orders.” Also of note, “In response to a special question, 32% of respondents anticipated higher orders in Q4. This was a little down from 36% in October 2015, but significantly down from 46% in June 2016. 45% of panelists expected demand to keep running at the same pace, with many citing the Elections as a source of uncertainty.”
Bottom line, the data had a hint of stagflation in that prices paid rose to a near two yr high and “inflationary pressures are on the rise” while “economic growth ahead…looks very disappointing.” The MNI said “hopefully, it doesn’t mark the start of a downward trend.” Hopefully not. Tomorrow’s ISM national figure is expected to rise a touch to 51.7 from 51.5 in September pointing to very modest growth in manufacturing.
Mostly captured in Friday’s GDP data, personal spending rose .5% m/o/m in September, one tenth more than expected but August was revised down by one tenth. Spending on goods rebounded after a drop in August. Spending on services rose as well with healthcare gaining an ever greater share. Income was up by .3% which was one tenth below the forecast with no change to August. Looking straight at the private sector, wages and salaries were up by 4% y/o/y and continues a steady trend. Combining both income and spending saw the savings rate fall by one tenth to 5.7%. For perspective this is essentially at the 25 yr average of 5.5% but is well above the mid 2000’s recovery savings rate which averaged 3.5%. Bottom line, we saw on Friday that Q3 personal spending slowed to a 2.1% annualized run rate while income continues its modest rate of gain.
With respect to inflation and the PCE being the Fed’s preferred gauge, headline PCE rose .2% m/o/m and 1.2% y/o/y as expected. This y/o/y gain is the quickest since November 2014 due to the change in energy prices. The core rate was up by .1% m/o/m and 1.7% y/o/y. The y/o/y rate was unchanged from August but remains at the highest level since August 2014. Bottom line, core PCE is still a wide 5 tenths below core CPI because of the differing methodologies that go into the calculations. Either way, the Fed has essentially met their inflation target in addition to their employment one and if times were normal they would be at the END OF A RATE CYCLE, not crawling kicking and screaming into the beginning of one.
For those macro geeks such as myself, Barron’s had the best quote for us on Halloween. “This Halloween I’m going as a savings account: I sit still and earn nothing.” I laughed when I read it but I cry for so many that hoped for a risk free or lower risk retirement via interest income. We hear from the Fed on Wednesday and while they won’t likely hike for purely political reasons (putting aside the debate on the data) especially after the weekends events, we should expect the same 3 dissents as seen in September. Either way, the market has tightened for them as seen with 3 month LIBOR which hasn’t fallen at all since the new mutual fund regulation deadline passed and clearly with long bonds. The day of the last FOMC meeting the 10 yr yield stood at 1.65% vs 1.84% today.
Japan said industrial production in September was unchanged m/o/m, below the estimate of up .9% and follows a 1.3% rise in August. Japan is finishing its 4th year of Abenomics and this IP index at 97.8 is exactly in line with the 5 year average and remains well below the 103.2 peak in January 2014. The arrow that Japan needed the most of, the 3rd one, was the least implemented. They instead got overdosed with the monetary arrow. Also out in Japan was retail sales which were also flat m/o/m vs the estimate of up .2%. The y/o/y decline was 1.9%. This is the 11th month in the past 13 that has seen y/o/y retail sales declines in Japan. Why under this circumstance of still modest wage increases and declines in retail sales that the BoJ wants higher inflation is quite backwards. A low cost of living instead is a key saving grace for many.
Bottom line, the Japanese economy continues on its uneven path. Some can blame the many typhoons that has hit the country this year but the general economic theme remains the same. As for what this means for the BoJ and their get together this week, most likely nothing. Kuroda has seemed to have exhausted himself with policy with his swan song being ‘yield curve control.’ Reuters captured this well on Friday by saying “As his term winds down, Bank of Japan Governor Haruhiko Kuroda has retreated from both the radical policies and rhetoric of his early tenure, suggesting there will be no further monetary easing except in response to a big external shock. In a clear departure from his initial ‘shock and awe’ tactics to jolt the nation from its deflationary mindset, he has even taken to flagging what little change lies ahead, trying predictability where surprise has failed.” I repeat again, we are reaching the end of the road of the current uber accommodative and uber experimental brand of monetary activism. The yen is down a touch and the Nikkei was little changed overnight. JGB yields closed little changed.
In Europe, the eurozone CPI for October rose .5% y/o/y as expected, up from .4% in September. This is still of course modest but is the quickest pace of gain since June 2014 as they continue to recycle thru the declines in energy prices. To highlight, energy prices fell .9% y/o/y vs a 3% drop in September, a 5.6% fall in August and a 6.7% decline in July. Their core rate was higher by .8% y/o/y for a 3rd straight month and has been remarkably steady over the past few years as services inflation was up by 1.1% also for a 3rd straight month. As the data was as expected, the 5 yr 5 yr euro inflation swap rate is unchanged at 1.47% but that sits at the highest since early June.
Also of note in Europe, the eurozone economy grew by .3% q/o/q in Q3 and 1.6% y/o/y as forecasted. This brings the y/o/y average gain to 1.63% vs 2% in 2015 and 1.2% in 2014. The pace thus remains modest but steady. As for the ECB and likely decided in December, it’s most likely QE goes past the March expiration but not necessarily at full speed as MAYBE a taper starts taking place. The ECB will then experience firsthand that while it’s so easy to get in, it’s so difficult to get out. After the inflation and GDP data, the euro is down slightly and after last week’s selloff bonds are mixed.
German retail sales in September were weak, falling by 1.4% m/o/m instead of rising by .2% as expected and down for a 2nd straight month. This comes after last week’s decline seen in German consumer confidence and bears watching. The DAX is lower by 1/3 of a %.