December existing home sales totaled 5.49mm, slightly below the 5.52mm estimate but November was revised up by 40k to 5.65mm. Of this, single family closings moderated to 4.88mm which puts it back at the September level. Amazingly, months’ supply shrunk to 3.6 from 3.9 in November and 4.3 in October. Dating back to 1999, there was only one month that matched this, January 2005. Pricing moderated to a 4% y/o/y rate, the slowest since June 2014, notwithstanding the tight supply, which I welcome since we need more 1st time households. First time buyers purchased 32% of homes sold, no different than November and no different than December last year and thus still well below the long term average. They are the missing link to a more ‘normal’ market but at the same time many of these are millennials who are not buying as early in their life as other generations.
Bottom line, this stat measures closings so the post election interest rate jump wasn’t fully felt but likely had some influence on those who closed quickly. For the year, the 5.49mm run rate in December is not much different than the average for 2016 of 5.44. The NAR cheered the year in sales as it’s the best in the recovery but said this with respect to December, “higher mortgage rates and home prices combined with record low inventory levels stunted sales in much of the country…Housing affordability for both buying and renting remains a pressing concern because of another year of insufficient home construction.” This is why I continuously say that the industry and the 1st time buyer need more homes priced below $250k but the high costs of lots, labor and regulations puts tight margins on this price point. In coming months we’ll watch to see what influence the rise in rates had.
Markit said its January US manufacturing PMI rose to 55.1 from 54.3 in December. It’s the best since March 2015 and brings the post election rise to 1.7 pts. This index in the 12 months thru October averaged 51.8. Markit said the m/o/m rise was led by “sharper increases in output and new orders, which rose at the fastest rates in 22 and 28 months respectively.” Employment also rose as did the 12 month outlook for production. Most of the improvement in new orders was domestically based as “new export work rose only slightly at the start of 2017, as has been the case in each of the past four months.” As stated earlier on rising “inflationary pressures” in Japan and Europe, in this index “the rate of input price inflation accelerated for the 2nd month in a row in January amid reports of higher raw material costs. Moreover, the latest increase in cost burdens was the sharpest seen in 28 months. As a result, companies raised their selling prices for the 4th successive month, albeit at a moderate pace that was similar to that seen in December.”
Bottom line, from here we need to see this business optimism translate into actual improvements in economic growth. On Friday we’ll see November durable goods orders. Money where their mouth is? Hopefully. With respect to the growing pressures on inflation, it highlights the tug of war I foresee this year and that I keep talking about: the welcome optimism around tax/regulatory policy and the reality that interest rates, whether Fed driven or market led, will move higher. One expansionary, the other a tightening. To quote again my friend David Rosenberg, 10 of the 13 Fed tightening cycles since WWII led to a recession. I know this one is quite different but it’s all in context as the US economy and markets are highly sensitive to changes in rates after being medicated on zero for so long.
The Richmond manufacturing index rose 4 pts m/o/m to 12, well above the estimate of 7 and joins the crowd of Trump optimism. Shipments and new orders rose as did employment but wage growth slowed. With respect to inflation it was mixed as “growth in input prices moderated, while growth in prices of finished goods accelerated…Survey respondents looked for prices of inputs to rise more rapidly over the first half of 2017, while they anticipated slower increases in prices received for their goods.”
We saw some other figures from overseas economies. Japan’s PMI for January rose to 52.8 from 52.4 which puts it at the best level since 2014. Markit said it was “helped by solid expansions in both output and new orders” which was “driven in part by a sharp increase in international demand, as new export orders rose at the quickest rate in over a year.” Not something you are used to hearing in Japan came next, “Meanwhile, inflationary pressures picked up to the greatest since March 2015.” This is becoming a common global theme. As the yen has been the main (maybe sole) driver of the Nikkei, it fell .6% overnight to close at a 7 week low. After the close though, the yen has been weaker. If there is a country to watch this year to see how companies respond to the carrot and stick of Trump trade policy (whether implemented verbally or literally) it will be Japan and its big multinationals.
The January European manufacturing and services composite index from Markit was a touch below expectations. It fell .1 pts to 54.3 instead of rising to 54.5 and compares with 54.4 in December. Manufacturing was up slightly while services was down a hair. The German composite index fell m/o/m solely due to a drop in services but manufacturing was up. On the flip side, the French index was up led by services as manufacturing was down a touch. We don’t see other country internals until the revision is done in a few weeks. As seen in Japan, exports for the region also improved. It does seem like global trade (with further evidence from the recent export data from Taiwan, Singapore and South Korea) has bottomed out. Employment rose at the quickest pace since February ’08. One year business expectations rose to the best since July ’12 when this question first was asked. Markit sees this pace of overall growth leading to a .4% q/o/q rise in GDP in Q1. Markit calls this ‘strong’ but with Europe it’s all relative of course as its still slow.
Also, as seen in Japan and what I said with them, “Inflationary pressures meanwhile intensified further in January. Firms’ average input costs rose at the fastest rate since May 2011…Price hikes often reflected higher global commodity prices as well as increased import costs resulting from the euro’s depreciation, notably against the US dollar.”
Bottom line, do not ignore the rising inflationary pressures that are becoming more apparent in many different places. Not only because of its impact on profit margins but what it means for global bond markets that even with the recent rise in rates, is wholly unprepared for any further acceleration if it were to happen. I remain bullish on commodities and still believe ag is going to play catch up to the upside. I remain bearish on global sovereign bonds. Much is being made of the record high short position in the US 10 yr Treasury future as seen in the recent CFTC data and while I certainly don’t ignore it, it’s at best a short term indicator to note. If the US stock market is anywhere close to being right on the benefits of Trumponomics, I don’t see how the US 10 yr is not much higher this year.
The dollar index is bouncing today after trading below 100 last night after Steve Mnuchin said “from time to time, an excessively strong dollar may have negative short term implications on the economy.” I for once want to hear a Treasury Secretary say we support a STABLE dollar. Either way, hearing Mnuchin’s comments on the heels of Trump’s a few weeks ago makes it completely up in the air as to what the Administration wants from the US dollar in terms of how trade and taxes will influence it and vice versa. I remain bullish on gold and silver.
The British pound is weaker on the Supreme Court ruling that Theresa May will need approval from Parliament in order to proceed with its leave from the EU but I don’t think that’s a surprise to anyone. Also, this doesn’t change the inevitability of the Brits leaving as the Parliament will go along with it but any delays now will be aggravating as let’s get this over with.
Repeating the pushback against the Germans who are beside themselves over ECB monetary policy just as its inflation stats are jumping higher, ECB Governing Council member Jozef Makuch told them “It doesn’t matter how important a country is, there can only be one monetary policy.” This battle will be one of the main stories of 2017.