- Unaffected by the hurricanes, the September household survey saw a job gain of 906k (663k came from the important 25-54 yr olds) which combined with the increase of 575k in the labor force sent the U3 unemployment rate down to just 4.2%. In this survey, “persons with a job are COUNTED as employed even if they miss work for the entire reference week, regardless of whether or not they are paid.” The U6 fell 3 tenths and is down to 8.3%. The pre recession low was 7.9%. The participation rate rose 2 tenths to 63.1%, matching the highest since September 2013. The employment to population ratio rose to 60.4%, the best since January 2009. And finally we saw a sharp rise in wage costs as average hourly earnings rose .5% m/o/m and 2.9% y/o/y which matches the quickest pace since May 2009. As hours worked remained unchanged, average weekly earnings also rose by 2.9%. Also of note, there was another drop in those working part time ‘for economic reasons’ (lower slack work offset rise in ‘can’t find full time’). There was also a fall in those ‘not in the labor force’ who ‘currently want a job’ but still is above its level of a few months ago. The 2 yr yield is at a fresh 9 year high.
- The US ISM September services index jumped to 59.8 from 55.3 and that was well above the estimate of little change at 55.5. It’s also the best read since August 2005. The ISM said the growth in services came despite the hurricanes and “respondents’ comments indicate a good outlook for business conditions.” Notwithstanding the headline jump in confidence, the number of industries of the 18 surveyed that saw growth remained at 15 for a 3rd straight month. Prices paid spiked by 8.4 pts to 66.3, the highest since February 2012. I’m sure the hurricanes had an impact specifically here.
- The September US ISM manufacturing index rose 2 pts to 60.8, above the estimate of 58.1 and the best level since May 2004. Of the 18 industries surveyed, 17 saw growth vs 14 in August. The only sector to report a contraction was furniture and related products.
- Auto sales totaled 18.47mm in September, well more than the estimate of 17.15mm and mostly due to a combination of vehicle replacement of those that got wrecked in the storms (I saw an estimate that 600,000 will need to be replaced in Texas and Florida) and the highest incentive month on record with an average of $4,048 per vehicle enticement said JD Power. The head of sales at Ford said 25% of its growth in September was due to sales in the metro Houston area.
- Another amazing week in stocks on hopes for tax cuts/reform as the political process progresses.
- Finally a Fed member (John Williams) agrees with me that the PCE inflation index is a flawed statistic because of the outsized healthcare component (25%) that includes the government price fixing of Medicare and Medicaid payments. He said this week “mandated cuts to Medicare payments is dampening inflation and is a key factor holding inflation below the 2% target.” So the Fed has been relying on a faulty number and essentially ignored 17 straight core CPI (which ONLY includes out of pocket costs) prints of 2%+ by giving us just 3 rate hikes with 12 of those 2%+ prints all in 2016 when they gave us only one. Also, housing is just 19% of PCE vs 42% of CPI. Bottom line, relying on a flawed inflation stat has kept policy even lower for even longer and now they are really trying to play catch up.
- Initial jobless claims totaled 260k, 5k less than expected and down from 272k last week. Again, claims data from Texas, Florida, Georgia, Puerto Rico and other US Virgin Islands were impacted by the hurricanes. Non seasonally adjusted though, claims fell by 9k in FL, GA and TX. Smoothing the data out puts the 4 week average at 268k vs 278k last week and vs 269k in the week before. Continuing claims, delayed by a week, rose by 2k.
- The MBA said mortgage applications to buy a home rose 1% w/o/w and are up 4.7% y/o/y.
- The August trade deficit was $42.4b, about in line with the forecast of $42.7b (we saw the goods deficit last week) and down from $43.6b in July. Exports were up by .4% m/o/m to the most since December 2014 as the weaker dollar and better demand from overseas helped (oil exports really picking up). Imports were down by .1% m/o/m, modest of course but lower for a 4th straight month.
- After a soft July, German factory orders in August came back strong with a 3.6% m/o/m jump. That is well above the estimate of up .7% and the y/o/y gain was 7.8%. The strength was driven by non eurozone countries and also from within Germany. Orders from within the eurozone was negative for a 3rd straight month.
- Spanish industrial production in August come in better than expected with a 1% m/o/m rise vs the estimate of up .2%.
- The Markit Eurozone Retail PMI did rise to 52.3 in September from 50.8 and that is the best level in 3 months (touched 53.2 in June). The top line was good for many retailers but, “Gross margins continued to be affected by rising input prices in September. Moreover, the rate of inflation was the most marked since January 2014, and sharper than the long run series average. Input price inflation intensified in each of the ‘big three’ eurozone economies, led by Germany. Indeed, the rate of inflation in the eurozone’s largest economy was the most marked in almost 5 ½ years.”
- The services PMI in the eurozone was revised to 55.8 from the 1st print of 55.6 and that is up 1.1 pts m/o/m. The peak seen this year was 56.4 in April. With respect to inflation, “Price pressures increased during September. Average input costs rose at the quickest rate in 5 months, leading to the steepest inflation of selling prices since March.”
- The final manufacturing PMI in Europe was revised down a hair to 58.1 from 58.2 but that still finishes the month at a multi year high. Even Greece saw its best growth since June 2008. Also of note, “Surging order book growth has encouraged manufacturers to take on extra staff at a rate never previously seen in the 20 yr history of the PMI survey…Optimism about the outlook has also improved, highlighting the increasingly positive mood among euro area producers. The stronger euro has so far barely dented export growth and domestic demand conditions were generally seen to have improved.” With respect to inflation, input costs rose to a 5 month high while selling prices “rose for the 12th month running and also at the fastest pace since April.”
- The UK services PMI in September rose .4 pts to 53.6 and slightly above the estimate of no change. The average year to date is 54. The fly in the data showed new orders rose at the slowest rate since August 2016 and “the net balance of survey respondents anticipating a rise in business activity over the next 12 months was the lowest since June, meaning that business confidence remained close to its weakest since the end of 2011.” Markit did say there was definite “anxiety about the wider economic outlook and the prospect of continued political uncertainty ahead.”
- The state sector weighted China September manufacturing PMI rose .7 pts to 52.4, the best since April 2012 (and not coincidentally comes right before the Party Congress in a few weeks) and the services index rose 2 pts to 55.4, the highest since May 2014.
- Markit’s Hong Kong September PMI index rose to 51.2 from 49.7 but the internals were mixed. Markit said “Hong Kong’s private sector economy showed signs of recovery at the end of the third quarter but business sentiment remained downbeat. The latest PMI survey signaled renewed growth in output and order books although the labor market continued to struggle.” In trying to glean what this means for China, the 2nd biggest economy in the world, “while demand for Hong Kong’s products and services were reported to have strengthened, there was evidence that Chinese orders had faltered. Survey data indicated that sales to mainland China fell for the 1st time in 5 months. Anecdotal evidence suggested that yuan depreciation and policy restrictions had dampened Chinese demand.”
- Japan’s Q3 Tankan manufacturing index improved to 22 from 17, was 4 pts better than expected and is at a 10 yr high. The breadth of industries seeing growth was widespread. The services index however was little changed from Q2. For small businesses, both manufacturing and services rose q/o/q and was above the estimates. With respect to capital spending plans, they moderated a touch to 7.7% growth from 8% and was slightly below the forecast of 8.3%.
- Manufacturing PMI indices for September saw m/o/m gains in South Korea, Japan, Vietnam, Thailand and the Philippines.
- Las Vegas
- Thanks to the obvious, in the BLS establishment survey jobs were unexpectedly ‘shed’ in September by the tune of 33k vs the estimate of job gains of 80k. I put an apostrophe around shed because the BLS says that “employees who are not paid for the pay period that includes the 12th of the month are NOT COUNTED as employed.” Thus, we’ll have a sharp bounce back in October. To quantify, there were 1.47mm people that didn’t show up for work due to the ‘bad weather.’
- Markit said its US PMI services index fell to 55.3 from 56 in August and vs 54.7 in July. Overall activity expectations fell to a 7 month low. “Service sector firms noted that positive sentiment was linked to new business growth, although some respondents noted that there was heightened uncertainty surrounding future economic conditions.” Price pressures were seen here too. Markit bottom lined their manufacturing and services composite index by saying “future optimism is at its lowest since February, suggesting companies have become increasingly cautious about the outlook.”
- The Markit index of US manufacturing for September was basically unchanged m/o/m at 53.1 vs 52.8 in August and 53.3 in July. And this wording from Markit is in stark contrast to the ISM data, “While the headline PMI remained resiliently elevated in September, despite disruption from hurricanes Harvey and Irma, the details of the survey are more worrying. Output growth was unchanged on August’s 14 month low, and translates into stagnation at best in terms of the official manufacturing output data. Firms’ expectations of future output growth also slipped to a 4 month low.”
- The August Philadelphia Fed Coincident one month diffusion index fell 32 pts m/o/m and is down 52 pts over the past 3 months to the lowest level since 2009. “There’s something happening here. What it is ain’t exactly clear.”
- Refi applications though fell 1.8% w/o/w, down for a 3rd straight week and lower by 25.3% y/o/y. This y/o/y decline is getting smaller as we recycle thru the tough comparisons. The average 30 yr mortgage rate is near a 2 month high at 4.12%.
- Retail sales in the Euro region fell m/o/m in August by .5% instead of rising by .3% as forecasted.
- At least on the wholesale pricing side the ECB is getting what it wants as August PPI for the eurozone rose .3% m/o/m and 2.5% y/o/y vs the estimate of up .1% and higher by 2.3%. The rise in energy prices was the main reason but prices were still up 2.2% y/o/y ex energy.
- The UK manufacturing PMI for September fell to 55.9 from 56.7 and was just below the estimate of 56.2. With inflation, “input costs and output charges both rose at faster rates in September” due to rising commodity prices, the exchange rate and supply chain constraints.”
- Notwithstanding all the evidence of a shortage of labor in Japan, base pay continued its anemic growth rate in August with a .4% y/o/y rise vs .5% in the two prior months. Only with a 1.5% boost in overtime pay and a 6.1% jump in bonus’ did the overall cash earnings number print up .9% y/o/y (which by the way is the most in a year).
- The Japanese services PMI fell to 51 from 51.6. This is the weakest print since October. On the pricing front, these words from Markit should make the BoJ happy, “Cost burdens facing Japanese service providers increased in September as has been the case since November 2012. Panelists indicated that staff shortages had driven up labor costs, while hikes in fuel and raw material prices had placed additional upward pressure on input costs.” What did this mean for prices received? “Services providers raised their charges to the greatest extent in 26 months in September. According to panelists, higher charges generally reflected greater input costs. Nonetheless, the rate of charge inflation remained modest.”
- The Caixin manufacturing index of smaller, mostly private companies fell to 51 from 51.6. The estimate was 51.5. That is a 3 month low. Preceding this was the PBOC decision to lower RRR requirements in 2018 for those banks that lend more to small and medium sized businesses.
- Manufacturing PMI’s declined in Malaysia, Indonesia and Taiwan m/o/m in September.
- The SNB President Thomas Jordan said while the Swiss Franc has fallen, it “remains highly valued” and “There’s no reason to change our monetary policy…It wouldn’t be a good idea now to tighten monetary conditions. The situation on FX markets remains fragile.” Yields are negative out 10 years and the 30 yr yield is .47%. This week they reported a September CPI print of up .8% (EU harmonized), the quickest since March 2011.
- Riksbank Governor Stefan Ingves is acknowledging the consumer debt bubble they have (which is of course in part tied to high mortgage debt where housing prices have tripled over the past 15 years): “Debt level issue is an urgent issue for Sweden…High consumer debt levels can cause future problems” BUT it’s “too early to make policy less expansionary” and he reiterates that it’s “important the Krona doesn’t rise too quickly.” The trade off between massive debt accumulation, a huge housing bubble and CPI running north of 2% with the benchmark rate at -.50% on one hand and worries about a strong currency on the other just doesn’t seem anywhere close to worth it.
- We’re almost there. The price to sales ratio in the S&P 500 is just 4% from the peak in March 2000 and 32% above the last cycle top in 2007. SEE ATTACHED CHART. We all know valuations mean nothing in the short term until they do but they do mean a lot in trying to figure out what the longer term potential market returns are.
- Music fans lost a legend in Tom Petty. “Somewhere, somehow, somebody must have kicked you around some. Tell me why you want to lay there, revel in your abandon. Honey, it don’t make no difference to me baby, Everybody has to fight to be free, you see…”
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