If we include the downward revision to the March core durable goods orders number of 5 tenths, the April rise of 1% vs the estimate of up .7% has the data about as expected. Shipments did surprise to the upside so that could lead to a modest rise in Q2 GDP forecasts. I was expecting a bigger pick up in inventories as the threat of tariffs and capacity constraints pushes the desire for more inventories but maybe those constraints kept a lid on the ability to stock inventory. Headline inventories rose .3% m/o/m but were up just .1% at the core (non defense capital goods ex aircraft).

We entered 2018 with the new tax law that allows companies to immediately expense their capital expenditures rather than having to straight line the depreciation over a period of time (usually 30 yrs). The hope of course was a sharp pick up in spending but the timing was never certain. Many 2018 spending plans were budgeted and put in place in 2017 and it might not be until the later before we see much of a response. Core capital spending is barely above where it was last October. Big cap tech companies are certainly spending but it’s more mixed elsewhere.

CORE DURABLE GOODS ORDERS

It was on June 5^th 2014 when the ECB first introduced its negative deposit rate. It started at -.10% and today sits at -.40%. Here is an updated chart today of the Italian 2 yr yield.

The German IFO business confidence index for May was unchanged m/o/m at 102.2 and was about in line with the estimate of 102. This is though a one year low and follows 5 straight months of declines. The IFO said “The German economy is performing well in a difficult international situation.” The standout in the German economy continues to be in construction where the business climate in this industry hit a record high. Rates near zero certainly help.

Thanks to worries about Italy, the German bund continues to be a flight to safety and the yield on the 10 yr is lower for the 5th day in the past 6 to .45%. The Italian 2 yr yield is blowing out again, higher by 14 bps to +.41%. It was -.31% three Friday’s ago. The 10 yr yield is at the highest level since October 2014, up 5.5 bps to 2.46%. Almost 4 years of monetary repression gone in two weeks. Markets always win in the end?

Italian banks are all trading lower again and as for the Euro STOXX bank index, it’s down for the 8th day in the past 10 to the weakest level since April 2017. Notice in the chart that the ECB initiated NIRP in June 2014. Damaging the profitability of the sector that is supposed to be the transmission mechanism of monetary policy is proving to be a mistake.

EURO STOXX BANK INDEX

The BoJ keeps getting further away from its inflation goal. May CPI in Tokyo (a precursor to CPI for the whole country) rose .5% ex food vs .6% in April and one tenth less than expected. CPI ex both food and energy was higher by .2%, also one tenth below the forecast and down from .3% last month. If the BoJ was focused on true price stability, aka, little change in inflation, they can declare victory. Instead, declaring an arbitrary target as a goal that is not connected to reality will usually bring failure. The yen is down slightly, the Nikkei is little changed as were JGB yields.

The South Korean Kospi yawned on the news of the canceled meeting as it was down just .2%. I guess they are used to this or maybe still have hope that a meeting will eventually occur. The North Korean Central News Agency said in a translation that “We would like to make known to the US side once again that we have the intent to sit with the US side to solve problem regardless of ways at any time.”

Existing home sales in April totaled 5.46mm annualized, about 100k less than expected and down from 5.6mm in March. As this measures closings, assume contracts were signed in the January thru March time frame. The average 30 yr mortgage rate started the year at 4.22% and ended March at 4.69%. The median home price rose 5.3% y/o/y and is approaching the record high seen last year.

Positively, there was an increase in the percent of first time buyers to 33% of all purchases from 30% last month but vs 34% one year ago.

Bottom line, the same challenges and opportunities remain in the housing industry. The lack of inventory and persistently high prices along now with rising mortgage rates is limiting the choices of buyers. On the other hand, a better labor market, rising wages and the demographic hopes of millennials creates demand. The end result is a standoff that has slowed transactions. The April # seen here is no different than it was in April 2016. We’ve also seen purchase applications to buy a home fall for 4 straight weeks and yesterday’s less than expected new home sales report. Rates matter when many make decisions on what their monthly payment will be and don’t think bigger picture.

EXISTING HOME SALES

Initial jobless claims totaled 234k, up 11k w/o/w and was 14k more than expected. The 4 week average rose to 220k from 214k which was the lowest since 1969. Continuing claims, delayed by a week, rose 29k after falling in the week prior by 82k to the lowest since 1973.

Bottom line, claims came in at the highest in 7 weeks but still remain very modest with the 4 week average near 48 year lows. I’ll state for the millionth time, claims remain low because of the dwindling supply of available labor and employers keep their labor force intact because of the difficulty in finding new qualified workers.

4 WEEK AVERAGE in CLAIMS

Yesterday II said that Bulls rose to 49.1 from 46.6. That is the most in a month. Bears fell a touch to 19.2 from 19.4 to a 6 week low. Those expecting a Correction is down to a 9 week low at 31.7. In today’s AAII index of individual investor sentiment saw Bulls up for a 3rd week to 38.6 from 36.7 last week and that is a 13 week high. Bears were up too by 4.6 pts to 25.2 but after falling by the same amount last week to the lowest since January. Bottom line, as sentiment follows price, the higher we go, the more bulls we now see.

In light of the heightened emerging market landscape, the Bank of Korea left rates unchanged as expected. This also comes ahead of the hoped for meeting between Un and Trump. The Governor said “While South Korea’s economy won’t deviate greatly from April forecasts, the BoK decided to maintain rates considering that inflationary pressures aren’t big on the demand side and that there is still a high level of uncertainty in internal and external conditions.” The Won is little changed while the Kospi closed down about 1/4 of a percent.

The central bank of Turkey’s attempt yesterday at stemming the decline in the lira with their 300 bps rate hike was successful for not even 24 hours. On a closing basis, it’s at a new low, although higher than the pre rate hike panic yesterday morning. They are going to need to do more like the central bank of Argentina did which has helped to stop the peso depreciation.

TURKISH LIRA

After the better CBI retail sales data seen yesterday in the UK, today’s April retail sales figure was above the estimate too. Sales ex auto fuel rose 1.3% m/o/m vs the forecast of up .5% and follows a .5% drop in March. As the Spring is here after a tough winter, that was likely a factor in the upside. Hopefully too the improvement in wage growth and moderation in the rise in the cost of living was a factor. Clothing and household goods led the way along with online sales. The pound is getting a lift in response.

French business confidence in May unexpectedly fell m/o/m by 2 pts to 106. The estimate was for no change and it is now at the lowest level since last June. A decline in the services component was the main reason as manufacturing confidence was unchanged m/o/m. The Citi Eurozone Economic Surprise index yesterday closed down to just off the lowest level since 2011.

Italian bonds are getting a rise today with the 2 yr yield down by 5.5 bps to +.23%. The 10 yr yield is down by 5 bps to 2.35%. Giuseppe Conte has been confirmed as the guy to be PM. He said late yesterday “What is about to be born is the government of change.” As this is the 65th government since WWII, that seems to happen often.

On Trump’s new trade threat on auto imports which is likely just bluster, BMW, Daimler and Volkswagen are all down about 3%. Toyota and Kia closed lower by a similar amount. Ford and GM are higher pre market.

Positively on the flip side, BN is reporting that “China is planning to reduce import duties on consumer goods ranging from food to cosmetics, people familiar with the matter said.” This of course follows the auto tariff cut to 15% from 25%.

The FOMC minutes confirmed that a majority of the voting committee wants to hike two more times this year and the flexibility will be there if they want a 3^rd. Unlikely I believe. Pointing AGAIN to their desire for a ‘gradual’ path, the minutes included this: “Participants generally agreed with the assessment that continuing to raise the target range for the federal funds rate gradually would likely be appropriate if the economy evolves about as expected. These participants commented that this gradual approach was most likely to be conducive to maintaining strong labor market conditions and achieving the symmetric 2 percent inflation objective on a sustained basis without resulting in conditions that would eventually require an abrupt policy tightening.”

The uber doves included this wording: “A few participants noted that if increases in the target range for the federal funds rate continued, the federal funds rate could be at or above their estimates of its longer-run normal level before too long. In addition, a few observed that the neutral level of the federal funds rate might currently be lower than their estimates of its longer-run level.”

On the symmetry thing the Fed has been talking about since March, “It was also noted that a temporary period of inflation modestly above 2 percent would be consistent with the Committee’s symmetric inflation objective and could be helpful in anchoring longer-run inflation expectations at a level consistent with that objective.” Above 2% inflation might make the Fed happy but won’t be helpful to an economy that is dependent on consumer spending.

While the Fed wants 2%ish inflation and now welcomes a bit of an overshoot, they did acknowledge the rising cost pressures: “In some cases, labor shortages were contributing to upward pressure on wages. In many Districts, business contacts experienced rising costs of nonlabor inputs, particularly trucking, rail, and shipping rates and prices of steel, aluminum, lumber, and petroleum-based commodities. Reports on the ability of firms to pass through higher costs to customers varied across Districts.” The latter point is the biggest swing factor now on policy potentially.

Bottom line, notwithstanding the new boss, the FOMC remains dovish and will continue to go very slow in raising rates as they won’t feel the urge to go more aggressively even in the face of what is a clear rise in inflation and inflationary pressures. The symmetry comments give them internal cover for that. What is not dovish and not said is the continued shrinking of their balance sheet at the same time rates are rising, however slow. There seems to be only a constant discussion on rate hikes and its pace and very little about QT. In a bit more than a month, the pace of QT will accelerate to $120b in Q3.

To my dovish point of view of this Fed confirmed by the minutes, the 2 yr yield is slipping by 2 bps to just under 2.55% and why the stock market has recovered all of its losses I believe.