The ISM services index for November rose 2.4 pts to 57.2 and that was above the estimate of 55.5. The post election enthusiasm has this index at the best level since October 2015 (the peak in 2015 was 59.6 back in July of that year). Notwithstanding the headline improvement, the internals were more mixed. New orders fell .7 pts to 57 and is back below the 6 month average of 57.7. Backlogs fell 1 pt to 51. The real improvement was on the employment side where it rose 5.1 pts to 58.2, the best since October 2015 but this follows just another decent payroll report seen last Friday. Also, just 11 of the 18 industries surveyed saw payroll growth. Export orders rose 1.5 pts to 57 but only a few service companies report exports. Prices paid fell slightly off the highest level since August 2014. Of the 18 industries surveyed, 14 saw growth vs 13 in October.
Bottom line, the ISM summed up the report by saying “the majority of respondents’ comments are positive about business conditions and the direction of the overall economy.” Not said but likely obvious is the Trump effect that has been clearly reflected in markets as this index is just a sentiment gauge and doesn’t measure the degree of improvement. The 10 yr yield got back almost all of what it lost on Friday but most of that move came before this index came out and treasuries have since reversed. The most interesting move of the day remains the euro and its rally as it was clear that an Italian No vote was fully priced in. Also, the euro heavy dollar index is lower for the 6th day in the past 7 as it takes a breather.
The Italians didn’t vote anti establishment I believe, they voted to keep the same sclerotic system in place. What a huge missed opportunity. Does this spell the end of the Euro experiment? Are we a step closer to a breakup? Maybe and I’ve heard all the scare stories but I still don’t believe it irrespective of the referendum outcome as the majority of Europeans still want it. Austria did not vote for the anti euro candidate and France may, and I emphasize may, elect a pro business President next year. This all said, if regulatory, labor and tax reforms don’t take shape in many European countries that have excessive debt levels and pathetic growth, then anything is possible. As for markets, a NO vote was well expected going into the weekend and clearly priced in as the euro is up on the day after teasing the $1.05 level overnight and European stocks are ripping higher ex Italy. Long dollar is an extremely crowded trade again. Italian stocks will remain in the doldrums and banks will still do their best to raise more capital. Unfortunately for banks though, key reform on bankruptcy laws that haven’t been updated since Mussolini where it could take 7 years to unlock collateral backing many non performing loans, will not go forward anytime soon. The Italian 10 yr yield is up by 14 bps to 2.04% but only after falling by 15 bps on Friday.
The hope and belief of many voters is that when deciding on a candidate, campaigning is different than governing and things said doing the former are implemented more practically under the latter or not at all. If the first month after the US election is any indication, there will be no difference this time around, for better or for worse. I say this after another Trump tweet storm over the weekend. Sticking only to the economic talk (and not the SNL comments), we’ll get a better regulatory and corporate/individual tax environment I believe but the trade talk was always the fear that apparently won’t go away after what I read yesterday. In case you missed it, the President elect tweeted
“The US is going to substantially reduce taxes and regulations on businesses, but any business that leaves our country for another country, fires its employees, builds a new factory or plant in the other country, and then thinks it will sell its product back into the US without retribution or consequence, is WRONG! There will be a tax on our soon to be strong border of 35% for these companies wanting to sell their product, cars, AC units, etc… back across the border. This tax will make leaving financially difficult, but these companies are able to move between all 50 states, with no tax or tariff being charged. Please be forewarned prior to making a very expensive mistake! THE UNITED STATES IS OPEN FOR BUSINESS.”
I so dislike politics and I’m going to no longer discuss it after today but I have to respectively disagree with anyone that tries to convince me that this sort of trade talk is somehow a good thing. I’m actually alarmed by it notwithstanding Trump’s good intentions of creating more US jobs . I wonder what Smoot and Hawley would say if they could tweet from their graves.
I want to talk about commodities for a moment and reiterate my positive stance. One thing that is noteworthy over the past month is that they continue to rally in the face of a stronger dollar. The Journal of Commerce index of raw materials on Friday closed at an 18 month high. The only area that lags is the food space but the CRB food stuff index is quietly up 4% over the past 3 weeks and I believe there is where the next commodity opportunity is as ag has lagged badly over the past 5 years.
The Singapore PMI rebounded by 2.3 pts to 52.8, Hong Kong’s was up 1.3 pts but is still below 50 at 49.5. Japan’s services PMI rose 1.3 pts to 51.8. China’s private sector weighted services PMI rose .7 pts to 53.1 (again, what’s real and what’s stimulus driven?). India’s economy is in a temporary mess due to the forced cash exchange and its services PMI plunged to 46.7 from 54.5.
The European services PMI for November was revised to 53.8 from the 1st print of 54.1 but it’s up 1 pt m/o/m to the best level since December 2015. “The strongest rates of increase were registered by Ireland and Spain.” We also saw a 9 month high in Italy, “improving from the subdued expansion seen during September and October. Meanwhile, a slowdown in its manufacturing sector saw economic growth in France slip to its weakest since July.” The UK services index rose .7 pts to 55.2, the best since January. Price pressures though also grew to the most in 5 ½ years. Also in the euro area, retail sales grew by 1.1% m/o/m, slightly above the estimate of up .8% but September was revised down by two tenths. Low inflation has been a help to European sales over the past few years.
From the perspective of the Japanese consumer, Abenomics has been one big fat bust. It’s November consumer confidence index fell to 40.9 from 42.3 last month and is basically at the same level as it was in late 2012 when Abe took office. The important Income Growth component fell .6 pts to match the lowest since February. The Nikkei fell .8% overnight but mostly red was the initial Asian market response to the Italian vote.