The Boock Report

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Succinct Summation of the Week’s Events – 8/18

Positives

  1. Initial jobless claims totaled 232k, 8k less than expected and down from 244k. This drops the 4 week average a hair to 240,500 from 241,000 as a similar 234k print drops out. Continuing claims, delayed by a week, fell by 3k.
  2. The NY manufacturing August index saw a large rebound to 25.2 from 9.8, was well above the forecast of 10 and is at the best level since 2014. New orders grew but backlogs remained below zero. Employment was up. There is growing business optimism for the next 6 months as this component rose 10 pts to the best since January. But, the big disappointment was capital spending plans which fell almost 4 pts to the weakest level since September 2016 and planned spending on technology dropping to the lowest level in 5 months.
  3. The August Philly manufacturing index at 18.9 was a touch above the forecast of 18 but down slightly from 19.5 in July and is at the lowest level since November. New orders and backlogs got back most of what they lost in July. Employment fell to the lowest since December but the workweek rose. The overall 6 month outlook rose to 42.3 from 36.9 which is about in line with the 6 month average. After seeing a sharp decline in capital spending plans in the NY survey, cap ex plans here were down by 2.8 pts but still holding near its best level since 2011.
  4. Core US retail sales in July rose .6% m/o/m, two tenths more than expected and also off a higher than expected base as June was revised up by 2 tenths. Auto sales/parts were up by 1.2% m/o/m, higher for a 4th straight month and up 5.5% y/o/y. As July auto sales were reported down 6% y/o/y a few weeks ago, I have no idea where the government number comes from because it squares with nothing. Online sales remained very positive, up by 1.3% m/o/m and 11.4% y/o/y (thank you Amazon Prime Day). After the slowest y/o/y core sales gain since March 2016 in June of 2.5%, they rose by 3.6% y/o/y in July which is about in line with the 5 year average of 3.3%. This pace though still remains well below the 5%+ growth rates in the two prior recoveries.
  5. For the 3rd month in the past 4 thru June, foreigners were back buying US notes and bonds. In June it totaled a net $19.7b which brings the year to date purchases to $47.3b after net selling seen in 2016 of $326b. China stepped up their buying of notes and bonds with a net add to their balance sheet of $21.1b after 3 straight months of selling. They added a similar amount of T-bills and the combination put them back on top as the largest foreign holder of US Treasuries. Japan was a net buyer of $22.3b of notes and bonds but that was swamped by either the maturation or selling of about $40b of bills. Europe and the Caribbean (aka, hedge funds) were net sellers of notes and bonds.
  6. The weaker dollar did not have any noticeable impact on import prices in July as they grew by .1% m/o/m and 1.5% y/o/y as expected. The y/o/y gain is unchanged with June and are up just .6% y/o/y ex food and fuels.
  7. The UoM consumer confidence index in August jumped 4.2 pts to 97.6 and that was well above the estimate of 94. It is at the best level since January but the components were mixed. Current conditions fell 2.4 pts to 111 which is the lowest level since November but was more than offset by the 8.5 pt jump in the Expectations component. Disappointingly, those expecting Higher Income fell 6 pts to a 4 month low and there was a 2 pt uptick in those expecting Lower Income. However, overall household finance components rose. Business expectations did improve m/o/m. To the question titled “Country will have continuous good times over the next 12 months” rose 12 pts. One year inflation expectations held at 2.6% for a 4th straight month. Notwithstanding the big rise in Expectations, spending intentions were mixed. Those that plan to buy a home fell to the lowest level since August 2011. Those that said it’s a Good Time to Sell held just off the highest level since 2005. Those that plan on buying a vehicle rose 2 pts but after falling by 4 pts last month. Those that plan on buying a major household item fell to the weakest point since October 2016. As to the timing of this survey in light of all the news this week, The UoM specifically said  “Too few interviews were conducted following Charlottesville to assess how much it will weaken consumer’s economic assessments.”
  8. The Q2 unemployment rate in France fell one tenth to 9.2%, obviously still very high but it’s the lowest since March 2012. It did however get as low as 6.8% pre recession.
  9. The July eurozone CPI figures were left unrevised at 1.3% y/o/y headline and 1.2% core. That core rate, while still modest, matches the quickest pace in almost 4 ½ years.
  10. Confirming the initial estimate of two weeks ago, the eurozone economy grew .6% q/o/q and 2.2% y/o/y (the best since Q1 2011).
  11. The UK economy generated a net 125k jobs in the 3 months ended June which was above the estimate of 97k. This helped to bring the unemployment rate down by one tenth to just 4.4%, the lowest since June 1975. It bottomed at 4.7% in the mid 2000’s expansion. Wage growth ex bonus’ grew by 2.1% y/o/y which was one tenth more than expected and the most in 5 months.
  12. UK headline CPI was up by 2.6% y/o/y in July, the same rate as in June but one tenth less than expected. The core rate held at 2.4% which was also one tenth below the forecast. As seen above, these levels are still above the rate of income growth.
  13. In July, all 70 Chinese cities surveyed saw price gains of new apartments y/o/y. That is the same level in June but vs last month, 56 of 70 said prices rose which is the least in 5 months. For existing homes, 67 reported price increases vs last year, up 1 from June but 54 saw gains vs last month vs 60 in June. There was also an increase in cities seeing price declines m/o/m for both new and existing. In terms of price gains in the major cities, Beijing home prices were up by 8.9% y/o/y vs 10.7% in June. This was running at a 28% rate last September. In Shanghai, prices rose 7.3% y/o/y vs 8.6% in June and down from 33% last September. Lastly, prices in Shenzhen were basically flat y/o/y vs 2.7% in June and which got as crazy as a 62% gain in April. Importantly too, prices in 2nd and 3rd tier cities have cooled as well. I put this as a ‘positive’ because the bubble needs to deflate but the short term negative consequences of a bubble leaking is rarely good.
  14. Aggregate financing in China in July totaled 1.22T yuan, 220b more than expected but down from 1.77T yuan in June. Of this, 825b were official bank loans (down from 1.54T m/o/m) with the balance coming from the non bank side that Chinese officials are trying so hard to corral. Part of this was a rebound in corporate bond issuance. They are having some success which is being reflected in the money supply data where M2 growth was 9.2% y/o/y, down from 9.4% in June, below the estimate of 9.5% and which is the slowest rate of gain on record dating back to 1996 where data first started.
  15. The China proxy that is Australia reported a better than expected gain in jobs in July but it was all due to a sharp jump in part time employment of 48.2k but after a similar fall of 49.3k in June. Those quirky seasonal adjustments. Even though full time employment dropped by 20.3k, it came after a sharp gain of 69.3k jobs in June. The unemployment rate at 5.6% is slightly below the 5 yr average of 5.8%.
  16. Japan reported July trade data that was about in line with expectations. Exports grew by 13.4% y/o/y vs the forecast of up 13.2% while imports were up by 16.3% y/o/y, a touch below the estimate of up 17.1%.
  17. Japan’s economy grew by 4% SAAR in Q2 and the upside came from both personal and business spending and also a sharp increase in government spending (up 5.1% q/o/q and 22% SAAR).

 

Negatives

  1. ‘Yet’ happened rather quickly. The title of my note yesterday was “Markets don’t give a damn, yet” defining where the line was when it would care. Picking fights and getting criticized by members of one’s own party don’t help in pursuing one’s agenda. I’ll take two quotes from today’s WSJ article titled “Donald Trump’s Jabs at Lawmakers Fire Up GOP Senators” as while obvious, clearly spells out the problem. One Senate aide said in reference to Congress and DJT, “We’ll continue to see distance as members recognize that he is more likely to hinder than help their agenda, and his constant drumbeat of homemade scandals and unforced errors give them more incentive to speak against him than work with him.” Republican Senator Tim Scott said, “It is always helpful for the president to have coattails…The president’s coattails are shorter.” I’ll leave it at that.
  2. US July industrial production rose by .2% m/o/m, one tenth more than expected but a key internal was weak. Manufacturing production shrunk by .1% m/o/m instead of rising .2% as forecasted. Motor vehicle/parts production fell by 3.6% m/o/m and are now down 5% y/o/y as auto markets adjust to too much inventory. Mining continued its rebound with the rise in commodity prices (and helped by rising rig counts) as it was up .5% m/o/m and 10.2% y/o/y. Overall capacity utilization held at 76.7%, while at the most in 2 years, remains below its 25 yr average of 78.7%. Capacity utilization for motor vehicles/parts is at a 2 ½ yr low.
  3. July housing starts totaled 1.155mm, 65k less than expected and down from 1.213mm in June. Most of the reason for the m/o/m drop was a 54k unit fall in multi family as single family starts were down just 4k m/o/m. As for permits, single family was unchanged m/o/m at 811k while multi family permits fell by 52k after jumping by 75k in June.
  4. The MBA said mortgage applications to buy a home fell 1.5% w/o/w to the lowest level since late February but they still remain up by 10% y/o/y. The NAHB’s affordability index last week hit its lowest level since 2008. Refi applications rose by 1.6% w/o/w but are still down 40% y/o/y. The average 30 yr mortgage rate ticked down by 2 bps to 4.12%, the lowest November.
  5. The August NAHB home builder survey rose 4 pts m/o/m to 68 and better than the estimate of no change. Present conditions rose by 4 pts while the Outlook was up by 5. Prospective Buyers Traffic though was up by just 1 pt and is still below 50 at 49. Notwithstanding this last important component, the NAHB said “Our members are encouraged by rising demand in the new home market.” I hope so but affordability is becoming more of an issue. On the supply side, the NAHB repeated the issues that remain for builders: “Builders continue to face supply side challenges, such as lot and labor shortages and rising building material costs.” It is these factors that are also raising the price of a home and “impeding a more robust housing recovery” according to last week’s NAHB affordability press release.
  6. Business inventories in June grew by .5% m/o/m, one tenth more than expected and up from .3% growth in May after declining .2% in April.  As sales rose .3%, the inventory to sales ratio did tick up to 1.38 from 1.37 and while a modest increase is the most since November. Excessive auto inventories was clearly evident in June as they rose .7% m/o/m and 7.4% y/o/y.
  7. If you were hoping to sell a business to the Chinese, China has officially announced restrictions on investment outside its borders in real estate (including hotels), movie studios and theaters, other entertainment and sports teams. They outright banned investments in gambling, ‘sex industries’, and military technology.  What they are encouraging is investing in the One Belt, One Road initiative that is a massive multi decade economic project.
  8. Come on Mario Draghi, you’re now going to make us wait until September to tell us about your December 31st expiring QE program that we know gets extended into 2018!
  9. The IP figure for the eurozone fell .6% m/o/m in June, one tenth weaker than expected and May was revised down by one tenth. The y/o/y gain of 2.6% though was still pretty good.
  10. UK retail sales ex auto fuel in July were about in line with the forecast if we include the June revision. Reflecting shrinking real wages, the 1.5% y/o/y gain is the 2nd slowest since 2013 and remains a drag on the UK economy.
  11. Chinese July retail sales grew by 10.4% y/o/y, down from 11% growth in June and was below the forecast of up 10.8%. Industrial production was higher by 6.4% y/o/y but vs 7.6% in the month prior and less than the estimate of 7.1%. Lastly, fixed asset investment was up by 8.3% y/o/y ytd and that too was below the expectations of up 8.6%. China also reported that value of new homes sold was up by 4.3% y/o/y which is the slowest rate of gain in two years.

 

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