Core durable goods orders in March were up by .2% m/o/m which was 3 tenths worse than expected but mostly offset by February which was revised up by two tenths to a .1% gain. The average Q1 monthly rise was just .16% but y/o/y did pick up a bit to 3.2%. In the chart attached you can see how sluggish capital spending still is.
Non defense capital goods orders ex aircraft:
Orders for autos/parts fell for a 2nd month and there was the 3rd month in a row of declines for orders for computers/electronics. Machinery orders also dropped but are up 6.4% y/o/y. As for shipments of core goods which goes into the GDP calculation, it rose by .4% m/o/m, 3 tenths more than expected and February was revised up which means Q1 GDP estimates might move up a touch. Metals orders were up sharply y/o/y with the rise in commodity prices but were more mixed m/o/m.
Bottom line, capital spending remains punk and all the excitement and confidence generated by the Trump victory hasn’t yet translated into any notable increase in investment at least thru March. I am hopefully though that this might change for the better because we did see some improvement in capital spending plans looking forward in the April NY and Philly manufacturing indices and the March NFIB small business optimism data. We also likely have businesses that are sitting and waiting on tax reform in terms of size and timing of implementation.
Initial jobless claims rose by 14k to 257k and that was 12k more than expected. Because a 259k print dropped out of the calculation, the 4 week average held at around 242k, near the lowest in decades. Continuing claims, delayed by a week, rose by 10k off its lowest level since 2000. Bottom line, notwithstanding the w/o/w rise in claims, the pace of firing’s remains very modest for reasons stated every week.
Offsetting a potential uptick in Q1 GDP estimates after the durable goods shipments number, wholesale inventories in March fell .1% vs the estimate of up .2% and February was revised lower. Retail inventories were up .4% for a 2nd straight month and particularly, motor vehicle/parts inventories were up by a sharp 7.9% y/o/y and confirms the challenges facing that industry.
The exports of goods fell 1.8% m/o/m in March to the lowest level since November as the export of industrial supplies, autos and consumer goods all moderated. This is the advanced look on trade and doesn’t include services. The goods balance did widen about $1b on the export slowdown as imports fell by a smaller amount. The absolute number though was slightly less than expected and February was revised down. Bottom line, this might lift by a touch the Q1 GDP estimates, joining the durable goods data and offset by inventories.
On election day November 8th, the 2s/10s Treasury spread stood at 100 bps. Today it’s at 104 bps. On December 22nd it peaked post election at 136 bps. The 3 month/5 year spread is at 103 bps vs 91 bps on November 8th and it reached 159 bps on December 16th. The last spread look is the 5 yr/30 yr and it stands at 113 bps vs 128 bps on election day and it peaked a few days later at 140 bps. Every day we wonder what the messages from the bond market say. Watching the excitement in US stocks this week after the French election and the real beginning of the tax reform negotiation news yesterday at the same time the yield curve flattened is quite amazing. I’m now believing that all the good overseas macro news and hopes for major tax cuts is just giving the green light to the Fed to continue to hike rates this year at the same time US growth is mediocre and that’s why we’re seeing the curve flattening because Treasuries think that will be more of a drag on growth than fiscal stimulus will be a benefit to it.
The ECB statement is not changing its very dovish stripes even in the face of all the data. They continue to threaten more QE and even lower rates if the outlook worsens. In the press conference, Mario Draghi is covering all his bases though. He said the risks are diminishing and he sees “tentative signs of price pressures picking up” but is ready to ramp up QE and cut rates further if this reverses. He currently “sees no reason to deviate from the indicated policy path” right now as he still thinks the “risks to economic outlook is still tilted to the downside” but he also highlighted the improvement in a variety of economic statistics. He still believes in the effectiveness of negative interest rates which I think is lunacy. I expect him to lay out more instructions on further tapering in June. The euro is facilitating higher with every optimistic comment on growth and inflation and falls right back down again when he talks dovish. The net result is a euro that is down a hair. European sovereign bonds are up a touch.
German inflation rebounded in April with a 2% y/o/y gain as it digests the timing of Easter which caused the March fall off from February.
After a sluggish Q1, CBI in the UK said retail sales bounced back in April as its retailing index (different than the official government figure) bounced almost 30 pts. The CBI did say “the warm weather in early April might go some way to explaining the uptick. However, retailers are still cautious over the outlook as higher inflation eats into household spending.” The official sales data for Q1 saw the slowest rate of sales since 2010. The pound is higher to just shy of $1.29. I continue to like the pound. The BoE is done expanding their balance sheet and I expect a rate hike this year which would take away the emergency one they implemented soon after Brexit.
The other major central bank of note to meet was the BoJ and they said they will continue on their path of nationalizing all the publicly traded securities in Japan all in the name of 2% inflation which hasn’t been seen since 1998 ex food and energy and not including the VAT hike spike. They did trim their inflation forecast by one tenth to 1.5% for fiscal year 2017 which started last month but remains really confident that they will hit 2% by “around” fiscal 2018 “but stabilizing above 2%, as we say with our overshoot commitment, is likely to be later than that.” Their full year 2018 forecast for inflation is 1.7%. The BoJ should really get off this 2% obsession with inflation. It truly is a quest to nowhere at the cost of destroying their entire capital markets which they are fully on track of doing. They currently already own 40% of the JGB market and a growing percentage of many stocks. As to when this all might end, “I think debate over exit strategies will start when our price stability target of 2% is achieved” said Mr. Kuroda. Imagine what will happen then to their markets as they stop buying at the same time inflation singes JGB’s. The yen is slightly lower in response while the Nikkei traded down a touch and JGB yields were little changed. It’s clear that the BoJ will keep on digging the biggest monetary hole and will be the last major central bank to reverse themselves.
One last thing on Japan: April 2017 is shaping up to the be the biggest month ever of Japanese selling of foreign bonds. No yield grab here. I don’t have a good explanation for the selling but there is always a cost in hedging out FX.
The improving global trade situation that we’ve seen in a variety of trade figures in Asia over the last few months was reflected in the GDP figure for Q1 in South Korea. Their economy grew 2.7% y/o/y, up from 2.4% in Q4. Growth was .9% q/o/q and exports were up by 1.9% q/o/q. Notwithstanding the upside, the Won is lower but after 6 straight days of gains. The Kospi was flat but is still up 9% ytd and remains one of my top stock market ideas trading at 10x earnings. I assume no North Korean bombs are dropped.