The Boock Report

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Succinct Summation of the Week’s Events – 10/27/17

Positives

  1. While down slightly from the preliminary print a few weeks ago, the final UoM consumer confidence index for October rose to 100.7 as expected and up from 95.1. Both components were higher m/o/m and one year inflation expectations came in at 2.4% vs 2.3% initially but down from 2.7% in September. This was lowered in part to the 2nd weakest reading in those expecting higher gasoline prices, a price that many see every day. Business expectations were little changed with September but those expecting higher employment was up by 3 pts m/o/m. The UoM also said this, “Personal finances were judged near all-time record favorable levels due to gains in household incomes as well as decade highs in home and stock values.” In fact, the spread between the value of stock and home values relative to disposable income is at a record high and above the March 2000 and July 2007 previous peaks. Spending intentions improved from September but fell a touch from the first October print. Those that expect a higher stock market. In the coming 12 months hit a record dating back to 2002. The two previous peaks were June 2015 and July 2007.
  2. US GDP growth in Q3 was 3% q/o/q annualized, better than the forecast of 2.6%. Also of note, the inflation deflator jumped by 2.2%, 5 tenths more than expected (goosed by energy prices) which means that nominal GDP was 5.2% vs the estimate of 4.3%. On a y/o/y basis, growth was 2.3% and has averaged 2% over the past 4 quarters. Thanks to a further drop in the savings rate to 3.4% (lowest since 2008) from 3.8% in Q2, personal spending rose 2.4%, higher than the estimate of up 2.1%. with much of that in durable goods (likely helped by the boost in auto sales in September post Harvey). The negative hurricane impact was on the 5.2% drop in investment in ‘non residential structures.’ Capital spending continued to improve on both equipment and intellectual property and follows the recent better durable goods orders. Residential construction fell 6% annualized, partly depressed by Houston and Florida. Trade (strong export growth) added 4 tenths to GDP growth while there was no change from government spending. Inventory building was a key contributor to GDP growth in Q3 as it added 7 tenths to growth. Reflecting the influence of the inventory build, real final sales which excludes this was up by 2.3% vs 2.9% in Q2 and 2.7% in Q1. Also of note, final sales to private domestic buyers slowed to 2.2%, the weakest since Q1 2016.
  3. New home sales in September totaled 667k, well more than the forecast of 554k and up from 561k in August. It’s the most since October and it mostly has to do with a huge spike in the South where sales jumped 26% m/o/m. It’s probably best to average the August/September pace and that would be 614k which is about in line with the year to date average of 609k.With the number of homes for sale remaining the same as in August, months’ supply fell by a full month to 5.0 from 6.0. The median home price was up by 1.6% y/o/y.
  4. Core durable goods orders in September rose 1.3% m/o/m, above the forecast of up .3% and August was revised up by 2 tenths. The y/o/y gain is now 7%. Also of note, shipments of core goods rose by .7% m/o/m vs the estimate of up .1%.
  5. The Markit US services and manufacturing composite index for October rose to 55.7 from 54.8. That is the best since January with both components higher m/o/m. Some of the improvement within manufacturing was “catch up to production schedules and orders, following hurricane related disruption in Q3.” This is also causing supply chain problems. “In particular, survey respondents pointed to depleted inventories among suppliers, ongoing transport delays and sharply rising raw material prices during October.” Exports were strong. Services were good.
  6. Initial jobless claims totaled 233k, a touch below the estimate of 235k but up from the 44 year low seen last week of 223k. Puerto Rico and the US Virgin Islands still of course have power issues and its resulting in many applying for claims via the mail instead of online which is slowing the reporting of claims in these regions. The 4 week average of 240k is down from 249k last week. Delayed by a week, continuing claims fell another 3k and are at the lowest level since 1973.
  7. The first look at the trade deficit in goods in September saw it total $64.1b as expected. That’s up from $63.3b in August. Exports rose to the best level since December 2014 helped by the weaker dollar and rebound in overseas economies. Imports were also higher m/o/m to a 5 month high.
  8. Japan reported that core CPI (ex food for them) rose .7% y/o/y in September as expected and unchanged from August. It does though match the highest level since March 2015 when the CPI prints were rolling thru the impact of the VAT increase. Also taking out energy prices has it up .2% y/o/y, also in line with expectations but is far from the higher inflation the BoJ so desperately wants. The October Tokyo CPI (so a more timely read for this city) saw the core rate up by .6% y/o/y, one tenth more than expected and also up one tenth from September. That is also the highest level since March 2015. But ex food and energy, prices were up just .1% y/o/y.
  9. Reflecting again the rebound in global trade that we’ve seen this year, Hong Kong exports in September rose by 9.4% y/o/y, well more than the forecast of up 5.9%. Exports to China rose by 7.5%, to the US by 4.1% (but after falling by 5.5% in August and are only up .4% ytd), to Japan by 18%, and to Germany by 39% to name a few destinations. Imports also exceeded expectations with a 9.7% y/o/y rise, almost double the forecast of up 5%.
  10. Mario Draghi as fully expected decided to cut in half the ECB monthly purchases of bonds beginning in January. QE is likely over by the end of 2018. The ECB will have a new President in 2018 and most likely it’s a German.
  11. The German IFO business confidence index for October rose 1.4 pts m/o/m to 116.7 and that was better than the expected slight decline to 115.1. This is the highest level on record dating back to 1991, around the time of reunification. Both the Current Assessment and Expectations components were higher. The IFO said succinctly, “Germany’s economy is powering ahead.”
  12. The UK economy grew by .4% q/o/q (.3% est) and 1.5% y/o/y (1.5% est) in Q3, pretty much as expected. That y/o/y figure is the same as Q2 and has now averaged 1.6% growth over the past 4 quarters.
  13. Economic sentiment in Italy rose to the best level in 10 years in October.
  14. Consumer confidence in the euro area reached its highest level since April 2001.
  15. The Indian Sensex index closed at an all time record high after the government announced its own version of TARP into the state banking system where there has been a high level of non performing loans.

 

Negatives

  1. Pending home sales were unchanged m/o/m in September, slightly below the estimate of up .5%. August was revised a touch lower to a 2.8% decline. Relative to last year, sales are down 5.4% y/o/y. As to be expected, the weakness was seen in the South and that offset m/o/m gains in the Northeast (but after 2 months of decline), the Midwest (but after 4 of 5 months of declines) and the West (after a fall of 1.5% in August). The overall index at 106 matches the slowest since January 2015. The NAR is again blaming the lack of inventories and the coincident rise in prices. They said “activity is falling further behind last year’s pace because new listings aren’t keeping up with what’s being sold.”
  2. US mortgage applications disappointed w/o/w as the 30 yr average mortgage rate rose 4 bps to 4.18%, the highest in 3 months. Purchases fell 6.1% w/o/w BUT still remain higher by 10% y/o/y. The index level is at a 5 week low. Refi’s fell 3% and are down for the 5th week in the past 6 and are lower by 36% y/o/y.
  3. The Richmond manufacturing index which fell to 12 from 19 and that was below the estimate of 17. New orders, backlogs, employment, the workweek, and shipments all fell m/o/m. Prices paid and received both fell slightly after September’s spike.
  4. German import prices in September spiked by .9% m/o/m and was higher by 3% y/o/y. That was above the estimate of up .5% and 2.6% respectively. Part of the jump was certainly petro prices but even ex this saw import prices up by .4% m/o/m and 2.1% y/o/y.
  5. Mario Draghi and the ECB are still dangerously adding air to the epic bubble that is the European bond market, both sovereigns and corporates. Another year of NIRP will further damage bank profitability. This will be really ugly when it ends. Also, Peter Praet, the ECB chief economist said an important point today, “It’s difficult to imagine that if there is a new shock, that the policy space that you have will be available as it was 10 years ago.”
  6. Even though the Swedish Riksbank said “Economic activity is strong and inflation is close to the target of 2%” they still held its repo rate unchanged at -.50% and doesn’t want to raise it until the summer of 2018. They also want to continue with QE. Inflation ran 2.3% in September and they have a massive housing bubble on their hands but they are afraid of a stronger currency!?
  7. As measured by this index from the CBI in the UK, retail sales in October tanked. Its index fell a whopping 76 pts to -36 from +42 in September, well worse than the estimate of +14. It’s the worst print since the depths of the recession in March 2009. CBI said “It’s clear retailers are beginning to really feel the pinch from higher inflation. While retail sales can be volatile from month to month, the steep drop in sales in October echoes other recent data pointing to a marked softening in consumer demand.” The BoE has some stagflation on its hands that it helped to create.
  8. Sentiment for UK industry turned negative in October as the CBI orders index fell to -2 from +7. That was well worse than the estimate of +9 and the weakest since November 2016. The business optimism component fell 16 pts to -11. Also of note, “investment intentions for the year ahead deteriorated, with spending plans for buildings at their lowest since July 2009.” With the UK unemployment rate at the lowest level in 42 years, “concerns over labor shortages edged up from already high levels, with the number of respondents citing them as a limitation to investment plans at the highest since October 2013.” As for profit margins, “Unit costs growth picked up compared with the previous quarter, running ahead of output price inflation, indicating an ongoing squeeze on manufacturers’ margins.”
  9. The European manufacturing and services composite index for October moderated m/o/m to 55.9 from 56.7. The estimate was 56.5 and this is just slightly below the year to date average of 56.1. The components though were mixed as manufacturing rose .5 pt (no sign at all that a stronger euro has impacted business as export orders improved) while the services index was down by almost 1 pt. As for inflation, “Inflationary pressures continued to build at the start of the fourth quarter. Companies posted the fastest rise in input costs in 6 months, with both the manufacturing and service sectors seeing sharper rates of inflation in October. Further improvements in demand meant that firms were often able to pass rising cost burdens on to their clients. As a result, output price inflation accelerated for the 3rd month running and was the sharpest since June 2011. As was the case with input prices, charges increased at sharper rates across both monitored sectors.”
  10. The French business confidence index fell 1 pt in October off the highest level since April 2011.
  11. Japan’s manufacturing PMI in October cooled a bit to 52.5 from 52.9 but that’s about in line with the year to date average of 52.6. Markit said “Softer expansions were seen for both output and new orders. Meanwhile, firms continued to largely absorb cost pressures, with output price inflation only marginal again in October. Signs of slowing growth coincided with faltering optimism, as the level of positive sentiment fell to an 11 month low.”
  12. Property prices continued to slow down in China in September. In 70 cities surveyed for new apartments, 44 saw price gains m/o/m vs 46 in August and vs 60 back in June. For existing units, prices rose in 49 cities vs 54 in August and also 60 in June. Versus last year, prices rose in 67 cities for new apartments, while still barely off all 70 cities asked, it was the lowest since February. Prices in particular have really calmed down in the major cities. The slowdown in home price gains though is well needed to calm this bubble.
  13. According to Investors Intelligence, the Bull/Bear at 47.2 is at the highest level since early 1987.

 

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