Getting right to the focus of the durable goods number, core capital spending fell 1.2% m/o/m, well worse than expectations of a .1% drop. This was only partially offset by a three tenths rise in August to up 1.2%. On a y/o/y basis, core capital spending is down 3.6%. Vehicle/parts orders were positive by 1.2% m/o/m and 1.9% y/o/y but inventories in this space are still an issue as seen in yesterday’s wholesale inventory data that saw a 9% y/o/y increase. As for core shipments which gets plugged into the GDP models, they rose .3% m/o/m as expected and with a .1% rise in inventories, the inventory to shipments number fell to 1.64 from 1.65.
Bottom line, core capital spending on an absolute dollar basis peaked in September 2014 and the current pace was also seen in 2006. Thus, the unfortunate story of capital investment remains the sluggish same and today’s number was a disappointment.
Initial jobless claims totaled 258k, 2k more than expected but down from 261k last week. The 4 week average moved up by 1k but to a still very modest 253k. Continuing claims, delayed by a week, fell by 15k to the lowest level since 2000. The bottom line here is also the same in that the modest level of firing’s most likely reflects a tight labor market where employers are keeping their qualified workers. We’ve also seen on the other hand that this is not inconsistent with the slowing pace of job growth.
Notwithstanding the UK decision to leave the EU on June 23rd and all the uproar that it brought, the UK economy in Q3 grew by 2.3% y/o/y, above the estimate of 2.1%. On a q/o/q basis the growth was .5%, also two tenths more than expected but a modest slowdown from the .7% growth seen in Q2. The service side of the economy (80% of it) was the main contributor with a .8% q/o/q increase. Construction and manufacturing though saw declines in activity. The Chief Economist for the Office for National Statistics said “There is little evidence of a pronounced effect in the immediate aftermath of the vote.” In October we saw another plunge in the pound, inflation is about to rise but exports may get a lift and the politics around actually implementing Brexit is getting heated so we’ll soon see the sustainability of this growth but it’s clear that the UK economy held in much better than feared in Q3. Most relevant for markets is what this means for monetary policy and we can take off the table any new easing from the BoE anytime soon. Shame on those who think the BoE needed to do more anyway.
The bond market response to the Q3 UK GDP number was swiftly higher yields but yields were up in Asia even before the Brits woke up after BoJ Governor Kuroda said they may not be increasing their 80T yen per year QE program (peak QE has been reached?). The 10 yr Gilt yield is higher to 1.25%. For perspective, the yield was 1.37% as of the close on June 23rd only to fall to 1.09% the day after. The German 10 yr bund yield is up to .17%. That is the highest yield since late May. Noteworthy in the US, the 10 yr yield has broken above its trading range and at 1.84% was last seen in early June.
I want to say this about the US equity market, there is some deserved excitement that just maybe the earnings recession is over but this market is not and has not been driven by earnings (evidence being how it shrugged off 5 quarters in a row of earnings declines). It has been all about interest rates. We are not trading at 18x earnings on the earnings outlook. Thus, I believe higher rates are a big threat to equities if this continues. Valuations provide NO MARGIN OF SAFETY AT ALL.
Spain’s growth rate over the past few years has been one of the best in Europe and even growing faster than Germany. Growth this year in Spain is expected to run at about 3%. The problem though has been the very elevated unemployment rate that has been above 20% over the past 5 years plus. Encouragingly, Spain reported today that as of Q3 the unemployment rate fell to 18.9% from 20% in Q2 and below the estimate of 19.3%. While they still have a ways to go (the rate was 7.9% in Q2 ’07), it is at the lowest level since 2009. The only caveat was most of the job gains were on short term contracts with only a modest increase in permanent employment. Also fortunate for Spain, Prime Minister Mariano Rajoy can now form a government for the first time in years.
For the sake of global trade and in the heat of all the anti trade rhetoric everywhere (especially in the land of the free and home of the brave) let’s be happy that the EU and Canada got past their differences and finally agreed to a trade pact.
The ECB said bank lending to households rose 1.8% y/o/y in September, steady but no pick up from the pace seen in August. The same is said for business lending which rose 1.9% y/o/y. Money supply growth was 5% in September vs 5.1% in August and which was also the estimate. This figure has ranged in the 5% area for a while now. Bottom line, we’ve seen throughout this whole central bank easing cycle globally that very low rates has mostly spurred refinancing and not much investment and economic growth.
The Swedish Riksbank kept policy unchanged with their base rate at -.50% and a QE program that has sucked up about 40% of their bond market. The obsession though of driving higher inflation won’t stop as Riksbank Governor said “Inflation still needs forceful support from monetary policy.” Their wish for higher inflation has led to a huge pick up in household debt and they have a housing bubble. What can pop this, higher inflation that leads to higher interest rates.
Hong Kong said exports in September rose 3.6% y/o/y, much better than the estimate of a slight drop of .4% and imports also surprised to the upside. The country breakdown though of the exports was splintered. Exports to Asia rose 4.9% with particular gains seen to Taiwan (electronics), India, Singapore and China. Exports though fell to Japan, Europe and the US. Still reflecting distortions but not as much, exports to China in particular rose 5.1% while China said its imports from Hong Kong fell 3.2%.
Bottom line, it was nice to see the trade gain but it was very geographically mixed. A Hong Kong spokesman within the press release acknowledged the macro risks by saying “looking ahead, the external environment is still fraught with considerable uncertainties, including those arising from the fragile recoveries of some advanced economies, monetary policy divergence among major central banks, unfolding Brexit event and heightened geopolitical tensions in various regions.”