Confidence falling back to earth, Earnings, CPI, China and more…

The April NY manufacturing index (the first April industrial data point out) moderated to 5.2 from 16.4 in March and which was about 10 pts below expectations. It’s the lowest since November when it was at 2.2 from -5.5 in October. New orders slowed to 7 from 21.3 but stood at -3.3 back in November. Backlogs were down by 1.8 pts to 12.4 which does remain well above its 6 month average of 1.7. Inventories went positive again at 3.6 which is the most since May 2015. Employment was a bright spot as this component was higher by 5.1 pts to the best level since March 2015. The workweek though fell 6.2 pts but after jumping by 11 pts in March. Coincident with higher commodity prices, prices paid rose 1.8 pts to 32.8, above the 6 month average of 29.3 but below the 37.8 print in February. It was 15.5 back in November. Prices received was higher by 3.6 pts to 12.4 vs the 6 month average of 10.7. Looking forward, 6 month business activity expectations was higher by 2.5 pts to 39.9 after falling by 4.3 pts in March. The 6 month average is 41.6. Capital spending plans was noteworthy as it was higher by almost 4 pts to the best level since February 2015. Technology spending expectations were also higher. On the flip side, expectations for new orders fell to the lowest since August and thus pre election.

Bottom line, the NY Fed referred to growth in April as rising “at a more subdued pace in New York State.” That is certainly the case and expect the ebullient business confidence numbers seen since the election to start falling back to earth because earth is where the subdued pace of economic growth is actually taking place and continues to do so. The 5 yr average in this index is 3.0 vs today’s print of 5.2. The Philly region reports on Thursday.

NY Manufacturing:

 

As we begin the flood of earnings reports for Q1 be sure that magically about 70% of companies will beat earnings estimates and about half will exceed revenue estimates. That is not good, that is just normal so use that as a rough benchmark in determining the quality of what is to come. For those who enjoyed taking out energy earnings when they declined for almost two years, they should do the same now that they are rebounding. That would lead to a y/o/y earnings gain of between 5-7% with revenue up 4-5% (thank you stock buybacks because profit margins are declining). If we take out both energy and financial results, expect revenues up 3-4% and earnings higher by 4-5%. Also remember that the S&P 500 was up about 10% last year when the 4 quarter earnings per share figure was essentially flat so stocks have already priced in a 10% earnings gain this year and then some if you go back more years (aka, multiple expansion).

Before we get to the overseas news, I just wanted to chime in some more on the US CPI data we saw on Friday. The Fed and many others make the inflation/deflation argument black or white, good or bad. What is clear instead is its very much gray. We are seeing the good deflation of progress, technology and efficiency whether via the direct influence of lower prices for tech products forever or indirectly via the internet and the smartphone to use as examples. Uber and its convenience at a cheaper price than taxi cabs is a great example as is the internet’s downward influence on the cost of goods as price transparency could not be more obvious. On the other hand we have persistent inflation in the cost of housing, whether rents, home prices, property taxes, insurance and education and these are our biggest expenses. We have persistent gains in medical care and also in a variety of services we consume in a services dependent economy. Services inflation seems endless while goods deflation seems endemic. Commodity prices create variability in between.

I guess my bottom line point is, the inflation debate is very nuanced and not black or white and the Fed’s obsession, along with other central banks, of 2% seems to not make any distinction whatsoever among the moving variables that combine to drive the headline and core data points. Do we really want a 2% rise in the price of everything in the aggregate every single year when technology and efficiency is a natural price deflator?

Noteworthy but still untrustworthy are the Chinese economic data points that we all follow. Did their economy really grow 6.9% y/o/y in Q1 vs a 6.8% rate in Q4 and one tenth more than expected? And with credit growth running about double the pace of nominal GDP growth, how much of this is steroid driven growth and how much is truly organic and thus how much is sustainable? I think we know the answer. It was the ‘secondary industry’ component that led the growth with mining, manufacturing, construction (non stop gains in housing) and electricity output. Services saw the fastest rate but a 7.7% y/o/y rise was a one tenth drop in pace from Q4. Retail sales in March grew by 10.9% y/o/y which was in line with the January/February pace and 120 bps above expectations. Double digit gains in sales were seen in food/drinks/tobacco, office supplies, household electronics, furniture, construction materials (my guess is this is similar to building materials in US retail sales data), petro and communication appliances (smartphones). Industrial production also accelerated to a 7.6% y/o/y pace which is a pick up from the 6% seen in the first two months and also above the estimate of 6.3%. Production of auto’s, crude steel (capacity should be getting cut here I thought) electricity, coal, crude oil, and natural gas led the gains. Along these lines, fixed asset investment was higher by 9.2% ytd y/o/y, 4 tenths more than expected. We’ll get property price data tonight to reflect the housing boom that just won’t quit.

Bottom line, we can use the term ‘stabilization’ again but excessive credit growth seems to be the underlying reason. We’ve also seen ‘stabilization’ in global trade in the trade data in a variety of countries over the past few months after a challenging few years. This said, we’ve seen a recent rise in interest rates and some tighter policy steps in controlling the extension of credit so I do expect growth to slow from here but you can be sure China will print a full year 2017 GDP growth rate of around 6.5%.

The upside in the data across the board relative to expectations didn’t help their stock market as the Shanghai comp was down by .7% and the Shenzhen index was lower by 1.4%. Hong Kong trading was closed. Maybe North Korean worries dominated but we also got comments from a Chinese securities regulator that said “stock exchanges should punish market irregularities without mercy.” He was referring to the accounting books of listed firms and the accounting firms themselves. The onshore yuan is unchanged while the offshore yuan is higher.

The data beat also didn’t generate any fears of faster growth in US Treasuries are yields are down again to 2.21%. Bond yields in the US will continue to get bullied around between what is becoming clear that growth is punk on one side along with thinning patience on the timing and size of tax reform (and I guess geopolitics right now), and on the other central bank largesse that is now reversing. Do you really think the German 10 yr bund yield would be at .18% without it or the French oat at .91% for that matter or an Italian 10 yr at 2.29%? US yields will certainly trade off US data but the direction of European and Japanese yields will also be a huge influence.

Lastly, death, taxes and the lack of self introspection in central banking was apparent again in hearing BoJ Governor Haruhiko Kuroda speaking this morning. He repeated that they still need “to continue powerful easing to achieve CPI target” because they “still have a long way to hit price goal.” Just as a frame of reference and not including the sales tax hike influence a few years ago, Japan hasn’t seen core/core (taking out both food and energy) CPI at 2% or more since 1998.