The Boock Report

By

Succinct Summation of the Week’s Events – 6/15

Positives

1) US retail sales in May within the so called ‘control group’ which takes out auto’s, gasoline and building materials rose .5% m/o/m, one tenth more than expected and April was revised up by two tenths and March down by one tenth.

2) Initial jobless claims totaled 218k, 5k less than expected and down from 222k last week. The 4 week average was 224k vs 226k last week while continuing claims fell by 46k to a fresh 45 year low.

3) The NFIB small business optimism index for May improved by 3 pts m/o/m to 107.8. Exceeding the February level by a hair puts it at the best level since 1983. Current Compensation Plans rose 2 pts to 35%, the highest since this question was first asked back in 1984. Higher Selling Prices jumped by 5 pts to 19%, the most in 10 years while Earnings Expectations rose 4 pts to the best level on record dating back to 1973. The CEO of the NFIB was ebullient. “Main Street optimism is on a stratospheric trajectory thanks to recent tax cuts and regulatory changes. For years, owners have continuously signaled that when taxes and regulations ease, earnings and employee compensation increase.” Finding qualified workers remains the Single Most Important Business Problem and hence, the rising wage situation.

4) The preliminary June UoM consumer confidence index rose 1.3 pts m/o/m to 99.3, a bit above the estimate of 98.5. The peak in this cycle was seen in March at 101.4. The components were mixed as Current Conditions rose by 6 pts led by better household finances but Expectations were down by 1.7 pts “due to less favorable prospects for the overall economy” according to the UoM. Of note, one year inflation expectations rose one tenth to 2.9% and that is the highest since March 2015. The Higher Income component jumped 6 pts to the highest on record (dating back to 1978). The employment component also improved m/o/m. Higher income expectations and the confidence that comes with it helped to lift buying intentions of ‘major household items’ and vehicles. It did not help the housing component due to higher interest rates and record high prices. The ‘good time to buy a house’ component fell 3 pts to match the lowest level in 7 years. Those that said it’s a good time to sell a house rose to within 1 pt of the highest since at least 1992 when this question was first asked.

5) The June NY manufacturing survey was a better than expected 25, up from 20.1 in May and above the forecast of 18.8. It’s also the best print since October. New orders and backlogs both rose while inventories fell. Employment was a particular bright spot, rising to 19 from 8.7 and that is the best since December. While prices paid fell a touch, prices received rose to a 7 year high. The overall 6 month outlook did improve to 38.9 from 31.1 but that just puts it back in line with the 6 month average. The outlook for prices paid and received did fall back. Capital spending plans are still showing a frustratingly inability to accelerate as they fell by 2.4 pts and tech spending plans dropped by 6 pt.

6) Momentous meeting between Kim and Trump.

7) The Fed continued on with the path of normalizing interest rates. I define normal as rates above the rate of inflation. Policy will tighten again in two weeks when QT increases to $120b in Q3 from $90b in Q2.

8) Eurozone labor costs in Q1 rose 2% y/o/y, up from 1.4% in Q4 and that matches the quickest pace of gain since Q3 2012.

9) UK retail sales ex auto fuel were better than expected in May. They rose by 1.3% m/o/m, above the consensus gain of .3%. Warmer weather and the Royal Wedding (yes, was an economic boost) were the main reasons cited by the ONS.

10) The jobs data out of the UK was better than expected with a gain of 146k for the 3 months ended April, above the forecast of 120k. The unemployment rate held at 4.2% as expected, the lowest since 1975. Wage growth ex bonus’ rose by 2.8% y/o/y, down a tenth but still just off the best in 3 years. After a jump in April, May jobless claims did fall.

11) The Italian markets heard exactly what they wanted to hear from the Italian Finance Minster Giovanni Tria who spoke early this week. “The position of the government is clear and unanimous. There is no question of leaving the euro…It’s not just that we do not want to leave, we will act in such a way that the conditions do not get anywhere near to a position where they might challenge our presence in the euro.”

12) Positive for slowing excessive credit growth but certainly not positive for current economic activity, total loan growth in China in May fell by more than half m/o/m and at 761b yuan was well below expectations. Almost all of the decline was due to a continued shrinkage in lending from the shadow side of the banking system. Bank loan growth of 1.15T was only slightly below the forecast of 1.2T. Also of note, money supply growth (M2) was up by 8.3% y/o/y, just off the lowest level since data was first collected in 1996.

13) Japan’s uneven economic path continues but in a good way in April as its machinery orders figure surprised to the upside with a 10.1% m/o/m jump, well better than the estimate of up 2.4%.

14) Dead and Company are back in town and I get to take my son tonight to his 4th show.

 

Negatives

1) After a round of tariffs on washing machines, solar panels, steel and aluminum, we have announced a new round of taxes on Chinese products. It was about 30 minutes later that China responded with tariffs of their own which we in turn now threaten to add even more in response to that retaliation. The Shanghai composite closed the week at the lowest level since September 2016.

2) The May CPI rose .2% m/o/m both headline and core as expected. This brings the y/o/y gain to 2.8%, matching a 6 year high and the core rate to 2.2%. That core rate is one tenth from matching a 10 yr high. Services inflation ex energy, the persistent push on higher prices, was up .3% m/o/m and 3% y/o/y driven by rents again. Goods prices ex food and energy fell again but I question for how much longer.

3) Producer price inflation ran hotter than expected in May. The headline gain was .5% m/o/m and 3.1% y/o/y vs the forecast of up .3% and 2.8% respectively. That headline y/o/y print is the highest since December 2011. The core rate was up by .3% m/o/m and 2.4% y/o/y, both one tenth more than expected. Of note was the 4th .3% m/o/m increase in goods prices ex food and energy in the past 5 months. ‘Truck transportation of freight’ prices rose .8% m/o/m and 6.5% y/o/y.

4) US import prices in May rose 4.3% y/o/y, above the estimate of up 3.9% and that is just below the highest in 6 years. A lot of the gain was certainly energy but ex petro prices were still up 1.8% y/o/y which is also near the highest since 2012.

5) With the rebound in mortgage rates to near a 7 yr high, applications to buy a home fell 1.5% w/o/w and is now unchanged y/o/y. They are lower for the 6th week in the past 7 as higher rates along with record high home prices (or near) has clearly slowed the pace of transactions. Refi’s were down also by 1.5% w/o/w and lower by 34% y/o/y.

6) US industrial production fell .1% m/o/m, below the forecast of up .2% and it was driven by a 7 tenths decline in manufacturing. The forecast here was for no change. Blame it on a plunge in auto production of 6.5% m/o/m and 2.3% y/o/y. Machinery production fell by .9% m/o/m but is still up 2.3% y/o/y and there was no change for computers/electronics m/o/m but are up 5% y/o/y. Mining production was good, rising 1.8% due to oil and other higher commodities.

7) While Draghi finally laid out his plan for ending QE, keeping rates below zero for another year will further damage bank profitability. The Euro STOXX bank index closed the week just off a 19 month low.

8) Kuroda and the BoJ will continue on their path of nationalizing the Japan’s bonds and stocks in the arbitrary search for 2% inflation. The Japanese TOPIX bank index closed the week just off the lowest level in 9 months.

9) Japan reported a spike in producer prices in May as they grew by 2.7% y/o/y, well more than the estimate of up 2.1%. That matches the quickest pace since December

10) The currencies of Argentina and Turkey plunge again and take others with it.

11) China reported economic data from May that was weaker than expected across the board. Retail sales grew by 8.5% y/o/y which is a solid number compared to most places but the slowest rate of growth since 2003 and below the forecast of 9.6%. Industrial production and fixed asset investment also missed forecasts with the latter slowing to the weakest pace since at least 1999 when the data set began.

12) The UK reported CPI for May as expected with the headline print up 2.4% y/o/y and up 2.1% at the core level. These are unchanged with April but remain well above where the BoE has their benchmark rate. Producer prices though surprised to the upside with a 9.2% y/o/y jump vs the estimate of up 7.6%.

13) The eurozone industrial production figure for April fell by .9% m/o/m, two tenths more than expected but March was revised up by a tenth. The y/o/y increase of 1.7% is the least since April 2017.

14) The ZEW investor measure of the Germany economy fell to -16.1 from -8.2. That is the worst print in 6 years. The Current Conditions component fell almost 7 pts m/o/m to the lowest since April. The ZEW said, “The recent escalation in the trade dispute with the United States as well as fears over the new Italian government pursuing a policy which potentially destabilizes the financial markets have left their mark on the economic outlook for Germany. On top of this, German industry has been reporting worse than expected figures for exports, production and incoming orders for April. As a result, the economic outlook for the next six months has worsened considerably.”

By

Higher income a reality

The preliminary June UoM consumer confidence index rose 1.3 pts m/o/m to 99.3, a bit above the estimate of 98.5. The peak in this cycle was seen in March at 101.4. The components were mixed as Current Conditions rose by 6 pts led by better household finances but Expectations were down by 1.7 pts “due to less favorable prospects for the overall economy” according to the UoM. Of note, one year inflation expectations rose one tenth to 2.9% and that is the highest since March 2015. I’m sure the persistent rise in gasoline prices, a price most consumers see every day, was the main factor.

Adding to the growing evidence that wages are going higher, the Higher Income component jumped 6 pts to the highest on record (dating back to 1978). The employment component also improved m/o/m.

HIGHER INCOME EXPECTATIONS

higher income uom

Business expectations were little changed from May.

Higher income expectations and the confidence that comes with it helped to lift buying intentions of ‘major household items’ and vehicles. It did not help the housing component due to higher interest rates and record high prices. The ‘good time to buy a house’ component fell 3 pts to match the lowest level in 7 years. Those that said it’s a good time to sell a house rose to within 1 pt of the highest since at least 1992 when this question was first asked.

Bottom line, the real bright spot within this data was the income component for consumers. It’s about time and we watch to see what inflationary impact it has, if any. Can companies offset higher labor costs via higher productivity or do they try to raise prices of their goods and services to protect profit margins.

By

IP

Industrial production fell .1% m/o/m, below the forecast of up .2% and it was driven by a 7 tenths decline in manufacturing. The forecast here was for no change. Blame it on a plunge in auto production of 6.5% m/o/m and 2.3% y/o/y and I have to assume much of this is due to the sharp decline in the production of sedan’s. Machinery production fell by .9% m/o/m but is still up 2.3% y/o/y and there was no change for computers/electronics m/o/m but are up 5% y/o/y. Mining production was good, rising 1.8% due to oil and other higher commodities. The CRB raw industrials index is just off a 4 year high.

Bottom line, expect a trim to Q2 GDP forecasts due to the sharp fall in auto production as we know about the big shift to SUV’s and car markers outright closing the production of sedan’s. I won’t consider this weakness a broader call on the US economy and more product specific. That said, auto sales have plateaued in this cycle and we all have to wonder what the impact of tariffs are having on the psychology and economics of many industrial companies.

By

NY manufacturing

The June NY manufacturing survey was a better than expected 25, up from 20.1 in May and above the forecast of 18.8. It’s also the best print since October. New orders and backlogs both rose while inventories fell. Employment was a particular bright spot, rising to 19 from 8.7 and that is the best since December. Delivery Time (the higher it is the longer the lead times) fell .5 pt as maybe some supply constraints are easing. Prices paid also fell by 1.3 pts but is still very high at 52.7. Prices received rose to the highest level since May 2011, pointing to success companies are having in passing on their higher costs.

The overall 6 month outlook did improve to 38.9 from 31.1 but that just puts it back in line with the 6 month average. The outlook for prices paid and received did fall back. Capital spending plans are still showing a frustratingly inability to accelerate as they fell by 2.4 pts and tech spending plans dropped by 6 pt.

Bottom line, whether it’s the need for trucking capacity, steel and aluminum and/or other things that might be taxed, companies are scrambling to get product and inventories are being drawn. This should continue to help new orders and backlogs and the need for warm bodies. I wish I could separate out what’s more due to this as opposed to plain old ordinary business activity.

By

BoJ/Tariff impact/ECB/EM

The BoJ kept their monetary foot firmly on the pedal continuing to believe that it is not what they are doing that isn’t working in generating higher inflation but that they still aren’t doing enough. “It’s appropriate for Japan to continue current powerful monetary easing persistently.” They are maintaining this because they trimmed their CPI forecast to a range of .5%-1% from the April estimate of 1%.

One thing that Kuroda did admit is that it is “possible to link low rates and low bank profits” and that he is “aware of risk for banks from prolonged low rates.” Banks in Europe are experiencing the same pressure and why we’ve reached a point where keeping rates at negative to zero in Japan and Europe is growth damaging, not enhancing as banks are the transmission mechanism for this policy. The Japanese Topix bank stock index is about the same level it was 5 years ago.

TOPIX BANK STOCK INDEX

The round of tariffs coming their way weighed on Chinese stocks that continue to trade poorly. The Shanghai comp was lower by .7% and 8.6% ytd. It closes the week at the weakest level since September 2016 for the 2nd biggest economy in the world. The H share index was down by a similar amount and is now up just 1.4% ytd. I understand the end goal with our tariff policy in shaking things up and trying to open up foreign markets but I’m not sure we are any closer to achieving our goals as we get hit back with taxes on us. Fingers crossed.

If there is one thing that could disrupt Mario Draghi’s forward guidance plan in not raising rates until next summer it is a quicker rise in inflation to his target goal of around 2%. One component of his plan is higher wage costs and that is exactly what the Eurozone got in Q1. Labor costs in Q1 rose 2% y/o/y, up from 1.4% in Q4 and that matches the quickest pace of gain since Q3 2012. Looking at this chart and I’d say we are about to curl higher.

Eurostat LABOR COSTS in Q1

Interestingly, ECB Governing Council member Ewald Nowotny today said “I think the ECB can say that we have successfully achieved our objective” on getting inflation around 2%. While I agree with him, why is QE still on going and why are rates still negative and won’t be touched for another year? “The task now is about securing this success permanently” he then said.” I believe the inflation stats in coming quarters will force their hand sooner rather than later.

The May eurozone CPI data out a few weeks ago was kept unchanged in the revision. Headline CPI was up 1.9% y/o/y and the core rate was higher by 1.1%. That headline gain is one tenth from matching a 5 yr high.

Lastly, if you didn’t notice yesterday, the Argentinian peso hit a record low (even after the IMF bailout and interest rates at 40%) vs the US dollar as did the Turkish lira. Stating the obvious, you really have to be very discriminating on one’s exposure to EM. I prefer the Asian region because of the enormous growth potential in coming decades. But in the short term, even Asia is not spared. The Thailand Baht today is having its worst day vs the US dollar in 4 months trading at the weakest level since the end of 2017.

By

Draghi and the US data

Draghi gave the hawks what they wanted by officially declaring the end of QE by year end and held to his very dovish being by saying he won’t raise rates until after the summer of 2019. On the latter though, he assumes that inflation doesn’t get to 2% or near sooner rather than later. Draghi’s only mandate is ‘price stability’ which he defines at or near 2%. On the dovish taper, the euro sold off and European bonds rallied but there really wasn’t any surprise to today’s news. He did cut his 2018 GDP forecast to a still good 2.1% from 2.4% initially, acknowledging the recent softness in the economic data. He also said underlying inflation is expected to pick up for a variety of reasons, including rising wages. The ECB did raise their inflation forecasts to 1.7% for this year and next from 1.4%, mainly reflecting higher oil prices.

Retail sales in May within the so called ‘control group’ which takes out auto’s, gasoline and building materials rose .5% m/o/m, one tenth more than expected and April was revised up by two tenths and March down by one tenth. After a strong April, online retailing was little changed m/o/m, up .1% but is still up 9.1% y/o/y. Sales at restaurants/bars rebounded by 1.3% m/o/m and are up 5.8% y/o/y. Spending on department stores, clothing, and electronics also rose. They fell on furniture and sporting goods. Auto sales were up as was spending on building materials. Gasoline spending was higher by 18% y/o/y.

Bottom line, after a mediocre start to the year in consumer spending after a strong Q4, consumer spending in Q2 has definitely improved. Consumers are seeing the tax cuts in their paychecks and higher wages which is helping to offset a rising cost of living. Q2 GDP estimates should lift a few tenths on today’s news.

We saw higher inflation stats the past two days in CPI and PPI and we got another data point today pointing in the same direction, aka, up. Import prices in May rose 4.3% y/o/y, above the estimate of up 3.9% and that is just below the highest in 6 years. A lot of the gain was certainly energy but ex petro prices were still up 1.8% y/o/y which is also near the highest since 2012. The yield curve is flattening further in response with the 2s/10s spread now at 38 bps. The short end is remaining sticky on the inflation and economic data while the long end yield today is lower following the bounce in European bonds on the still uber dovish Draghi.

IMPORT PRICES ex petro

import prices ex petro

Initial jobless claims totaled 218k, 5k less than expected and down from 222k last week. The 4 week average was 224k vs 226k last week while continuing claims fell by 46k to a fresh 45 year low. The positive picture on claims remains the same.