The Boock Report

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Succinct Summation of the Week’s Events: 11/13

Positives

  1. Initial jobless claims totaled 243k, 7k less than expected and down from 258k last week. Smoothing out the numbers puts the 4 week average at 258k from 267k last week. Continuing claims, delayed by a week, fell by 32k to the lowest level since 1973.
  2. The UoM consumer confidence index jumped 6 pts m/o/m to 101.1 and that was well more than the forecast of a slight drop to 95. It’s also the best print since early 2004 and November 2000 before that. Current conditions were up by 4.7 pts and Expectations were higher by almost 7 pts. There was however a 1 pt drop in those expecting Higher Income and a 1 pt rise in those expecting Lower Income and thus household finances were little changed. But, those expecting higher employment was up by 5 pts. Expectations on business improved m/o/m. Most notable was that the rise in confidence did coincide with a sharp pick up in buying intentions. Those that plan to buy a vehicle jumped by 18 pts. Those that plan on buying a major household item was higher by 9 pts. Those that said it’s a good time to buy a home was higher by 14 pts while those that said it’s a good time to sell was higher by 2 pts. One year inflation expectations did fall by 4 tenths to 2.3% which is the lowest of the year likely driven by a 2 yr low in those expecting higher gasoline prices. The UoM tried to square the mixed internals by saying, “consumers anticipate low unemployment, low inflation, small increases in interest rates, and most importantly, modest income gains in the year ahead. It is this acceptance of lackluster growth rates in personal income and in the overall economy that signifies that consumers have accepted, however reluctantly, limits on the pace of improving prospects for living standards.” The UoM also said “The expectations of more rapid economic growth in the year ahead has fallen to 33% from 44% in January 2017.”
  3. Retail sales in September ex auto’s, fuel and building materials rose .4% m/o/m as expected after no change in August (revised up from -.2%). In response to the hurricanes, building materials sales grew by 2.1% m/o/m and almost 8% y/o/y. Auto sales too bounced by 3.6% as seen in vehicle data last week as all those cars/trucks needed to be replaced. Outside of this, sales fell in electronics (for a 5th straight month and down 5.3% y/o/y), furniture, health/personal care, sporting goods, and department stores (what else is new). Online sales rose by .5% m/o/m after falling by .4% in August and are up 5.8% y/o/y which is actually a slowdown from recent levels. Restaurant/bar sales rose .8% m/o/m somehow in the face of all those places closed down in Houston and Florida (and where more than 100k people were temporarily not working in this industry). Sales here are up 3.3% y/o/y. On a y/o/y basis, core sales (which also takes out the large influence of the hurricanes within building materials and auto’s) were up 3.3% vs 3.2% in August, and 3.3% in July.
  4. Consumer prices in September rose .5% m/o/m at the headline level and .1% at the core. Both were one tenth below expectations and the y/o/y gains are 2.2% and 1.7% (for 5th straight month) respectively. The headline print was driven by a 6.1% spike in energy prices for obvious reasons. Food prices were up just .1%. Weighing on the core rate was a .1% drop in medical care costs that are now up just 1.6% y/o/y. This helped to slow services inflation ex energy to .2% gain m/o/m and 2.6% y/o/y. Rent of Primary Residence was up by .2% m/o/m after a .4% gain in August and are up 3.8% y/o/y. Owners equivalent rent, a faux measure of rents, was higher by 3.2%. Thus if actual rents were used in the calculation, CPI would be higher. Also weighing on prices was the continued decline in used car prices which fell .2% m/o/m and 3.7% y/o/y. New car prices also fell and overall core goods prices were down by .2% m/o/m and 1% y/o/y. This continues the trend of goods deflation. As for those wireless cell phone prices that for some reason the Fed is unhappy about falling costs, they rose .4% m/o/m but are still down almost 12% y/o/y. Obsessing about whether inflation is 1.5%, 1.7% or 2% is complete nonsense when the fed funds rate is still only at 1.25%.
  5. The Chinese trade data was mixed and depending on what currency it was denominated in determining whether it beat or missed estimates. Exports in yuan terms were better than expected while missed in dollar terms. The reverse took place with imports. Either way, global trade has recovered this year after a few years of softness and this data helps to confirm that. As for China’s appetite for commodities, double digit imports of crude oil, fuel oil, coal and soybeans were seen y/o/y. Copper imports rose to the most this year but are down 9.4% y/o/y. Iron ore imports rose by 7.1% y/o/y to a record high and is up 4% in price today (although has come off a lot over the past month). The front month copper contract is just a few cents from a fresh 3 yr high.
  6. It’s not exactly where the BoJ wants the inflation to show up but it’s a start. Japanese PPI for September rose .2% m/o/m and 3% y/o/y as expected but that y/o/y gain is the quickest in 9 years if we take out the VAT induced jump in 2014.
  7. Japanese August core machinery orders rose 3.4% m/o/m vs the estimate of up 1%. This follows an 8% jump in July and 3 prior months of declines.
  8. China’s FX reserves for September grew for an 8th straight month to $3.109T, up by $17b from August and slightly above the forecast of $3.10T. It’s also the highest valued portfolio in about a year. A stronger yuan vs its basket and the crackdown on big Chinese companies going on overseas spending sprees were the two main catalysts.
  9. Foreign direct investment into China rose 17.3% y/o/y in yuan. The smoothed out ytd y/o/y figure though was a more modest 1.6% in growth.
  10. Taiwan, an electronics machine, saw exports spike 28.1% y/o/y in September, more than double the estimate of up 13.6% and to a record high. They were likely helped by the new iphones. Imports jumped by 22.2% y/o/y vs the estimate of up 10%.
  11. Industrial production for the euro area in August rose 1.4% m/o/m which was better than the forecast of up .6% and July was revised up by 2 tenths. The y/o/y gain of 3.8% was the 2nd best since 2011 pre Greek crisis. Even Greece contributed to the growth as IP there rose 3% m/o/m and Germany was solid too.
  12. German August exports were higher by 3.1% m/o/m, well above the estimate of up 1.1% and in euros reached an all time record high notwithstanding the stronger euro because much of the improvement was within the eurozone. Imports also exceeded expectations but grew less than exports and thus the trade surplus rose.

 

Negatives

  1. What is up with the US yield curve? The 2s/10s spread narrows by 7 bps on the week as of this writing and is just a few bps off the lowest in 10 years. The 5s/30s spread is already at a 10 yr low.
  2. The September NFIB small business optimism index fell 2.3 pts to 103 and that is the lowest level since the 7.4 pt jump in December to 105.8 immediately after the election. Likely helped by the hurricane, Plans to Hire rose but most other important categories were lower. It will be easy to cite the hurricanes for the overall confidence decline but the NFIB President said “that is not consistent with our data. Small business owners across the country were measurably less enthusiastic last month.” Bill Dunkelberg, the Chief Economist, followed by saying “Small business owners still expect policy changes from Washington on health care and taxes, and while they don’t know what those changes will look like, they expect them to be an improvement. But the frothy expectations they’ve had in the previous few months clearly slipped in September.”
  3. Bloomberg’s weekly consumer confidence index fell to an 11 week low.
  4. In September, headline PPI rose .4% as did the core rate. The headline was in line with forecasts while the core rate was two tenths above. Headline PPI now stands 2.6% above the year ago level and the core rate is 2.2% higher y/o/y. Go back to February 2012 the last time we had a faster headline PPI print. The same is said for the core rate. The CRB index today touched a 5 month high.
  5. There were 6.08mm job openings in August, not far from the estimate of 6.125mm and down somewhat from 6.14mm in July. The internals though were mixed. Hiring’s fell by 91k m/o/m (rate fell to 3.7% from 3.8%) but separations were down by 134k. Also of note, the number of quitters fell and the quit rate did as well to 2.1% from 2.2%.
  6. With another 4 bps rise in the average 30 yr mortgage rate to 4.16%, the highest since the end of July, refi applications fell for a 4th straight week and by 4.2% w/o/w to the lowest since mid July and are down 38% y/o/y. Purchase applications to buy a home were unchanged vs last week but are still up 7.4% y/o/y.
  7. Mario Draghi said yesterday that “By and large our negative interest rate policies have been a success. We haven’t seen the distortions that people were foreseeing. We haven’t seen bank profitability going down; in fact it is going up.” As I believe that negative interest rates is the dumbest idea in the history of economics as it’s a tax on capital, I of course disagree. Mr. Draghi also apparently doesn’t own European bank stocks because if so he’d see that the Euro bank stock index is still below its mid 2014 high when he first implemented NIRP.
  8. The large and highly influential IG Metall union which happens to be the biggest labor union in Europe wants a 6% rise in wages in the upcoming negotiations with employers. The leader of the union said “There is no reason to hold back.” Something to watch as its of course positive for employees but not for employers or ECB policy and German bund yields.
  9. The air is beginning to come out of the epic Swedish housing bubble where prices have doubled over the past 5 years and tripled over the past 15, //www.bloomberg.com/news/articles/2017-10-13/warning-signs-are-mounting-for-sweden-s-once-hot-housing-market. Wanting NIRP to get a weaker currency gets you this.
  10. There was a 2.1 pt m/o/m decline in the China Caixin services index for small companies to barely above 50 at 50.6. This brought the combined composite index to 51.4 from 52.4 and that’s a 3 month low. Caixin said “the expansion in both manufacturing and services cooled in September, suggesting downward pressure on economic growth may re-emerge in the fourth quarter.”
  11. Bullish stock market sentiment has gotten extreme again according to Investors Intelligence. Bulls rose 2.9 pts to 60.4 after being below 50 one month ago. Bears sunk to just 15.1 from 17 last week. That’s the least amount since May 2015. The spread between the two is the most since March. What we’ve seen this year is when we see 60+ in bulls, the market stalls out and consolidates. When around 50, the rally has resumed.