Initial jobless claims totaled 268k, 15k above the estimate and up from 251k last week. It’s the highest level since late June but smoothing this out puts the 4 week average at 252k which is little changed with last week’s print of 251k. Continuing claims, delayed by a week, did rise another 38k after rising by 60k in the week prior off the lowest level since 2000. Bottom line, the 4 week average is near the lowest level since 1973 and this week’s higher than expected print is just some mean reversion off the very low levels seen in the week’s prior. The pace of firings remains modest.
The ISM manufacturing index for November rose to 53.2 from 51.9 in October. That was a touch ahead of the estimate of 52.5 and matches the June level that was the best since early 2015. New orders rose .9 pts to 53 but after falling by 3 pts in October. Backlogs rose 3.5 pts but still remain below 50 at 49. Export orders fell slightly to 52 from 52.5 but has been pretty steady over the past 5 months. Manufacturing inventories stayed below 50 at 49 but that’s up 1.5 pts. Customer inventories fell by .5 to also 49. Employment fell .6 pts to 52.3 but after rising by 3.2 pts in October. Prices paid were unchanged. Of the 18 industries surveyed, 11 saw growth vs 10 in October.
The ISM’s bottom line was “comments from the panel cite increasing demand, some tightness in the labor market and plans to reduce inventory by the end of the year.” My bottom line, manufacturers I’m sure felt a wave of emotion post election with optimism on future tax and regulatory policy, uncertainty with trade policy and the potential pain of a stronger dollar for those that export at the same time global trade is soft. This number after all is a ‘feel better’ or ‘feel worse’ sentiment figure rather than measuring the degree of change. As for ‘some tightness in the labor market,’ it certainly squares with the bond market worries of a new regime of higher inflation post Trump’s victory. Because I like to smooth out the data to get a better perspective on trends, today’s 53.2 print compares with the 6 month average of 52.0, the 12 month average of 51 and the 2015 average of 51.3.
The 10 yr yield immediately touched 2.47% after the better than expected print but is back at 2.44%. That is still up another 6 bps today and 15 bps in just the past two days. With another rise in oil prices, the 10 yr inflation breakeven is up another 3 bps to exactly 2%, the highest level since September 2014. Chart below:
Bloomberg News is quantifying the extent of the bond carnage in November. They report that $1.7 Trillion was lost from the Bloomberg Barclays Global Aggregate Total Return Index. That was a 4% decline and was “the deepest slump since the gauge’s inception in 1990.” For some bonds, a 4% one month decline wipes out a few years of interest expense. While the selloff in bonds may take a breather right now after the rapid selloff, we believe this is only the beginning. The partial offset was the world’s equity market cap which rose by $635 Billion. We seem to hear every day about ‘market rotation’ and ‘money coming out of bonds and going into stocks.’ This is one of the great market fallacies. Unless a bond is officially retired, money can’t come out as for every seller there is a buyer. For every $1 coming out, there is a $1 going in. The same is said for stocks (unless stock is being retired by a corporate buyback). It is mostly the pace of the selling and buying that moves prices. I believe I’m stating the obvious but sometimes it gets lost when describing sharp market moves.
After the extreme sentiment reading yesterday of newsletter writers according to II, the AAII measure of individual sentiment cooled a bit from its stretched levels of last week. Bulls fell 6.1 pts to 43.8 off the highest level in nearly two years. Bears were up half that amount to 25.1 off the lowest level since April with the Neutral category getting the balance. The AAII is much more fickle than the II numbers and the retreat this week is also indicative of the very bifurcated market that we’ve seen over the past few weeks after the initial burst of optimism after the election. This chart is a cumulative NYSE advance/decline line over the past year:
China’s state sector weighted PMI rose .5 pt to 51.7, above the estimate of 51 and it matches the highest level since 2012 but the private sector weighted measure by Caixin fell to 50.9 from 51.2. We know the state sector usually gets dibs when it comes to stimulus and bank lending and thus part of the improvement in the main PMI was artificially driven by government. With the Caixin index we may be getting the first whiff of imported inflation due to a weaker currency. “Input and output prices rose at a faster pace to hit their highest levels in five years. Anecdotal evidence suggested that higher prices for raw materials, particularly for items such as metals, had raised overall input costs. In order to help protect their margins, firms generally raised their prices charged, and to the greatest extent since February 2011.” With services, the state sector PMI rose .7 pts to 54.7, the best since June 2014 while the private sector weighted one comes out next week.
The manufacturing PMI in South Korea in November was unchanged at 48 (but its exports rebounded in November by 10.1% y/o/y after a stretch of 24 of the last 25 months of declines). For Taiwan it rose 2 pts to 54.7. In Indonesia it was up 1 pt to 49.7. In Malaysia it was down a hair to 47.1. In Vietnam it gained 2.3 pts to 54 while in Japan it fell .1 pt to 51.3 and in Thailand’s was lower by .6 to 48.2. India’s economy is unfortunately temporarily frozen due to the forced cash conversion and their PMI index fell 2.1 pts to 52.3. Bottom line, the region’s indices are very mixed with some in expansion and others in contraction. Asian stock markets were mostly green with the Shanghai comp in particular up .7% after yesterday’s 1% selloff.
The eurozone manufacturing PMI was left unrevised at 53.7 which is up .2 pts from October and is the best level since January 2014. Growth was driven by the Netherlands, Austria, Spain and Germany. Ireland’s hit an 8 month high and Italy rose to a 5 month high. France is at a 2 month low.
The UK PMI fell to 53.4 from 54.2 last month. Markit said this about the pros and cons of the weaker pound: “On the plus side, the boost to export competitiveness is leading to increased inflows of new export business. However, 84% of manufacturers offering a reason for higher purchase prices made at least some reference to rising import costs due to the exchange rate. Higher costs are also being felt at the factory gate, with selling prices rising to one of the greatest extents in the past 5 ½ years. The concern is that higher costs may in time offset any positive effect of the weaker exchange rate, especially given that export order book growth has already waned markedly from September’s 5 ½ year high.” The pound is rallying this morning to a 2 month high on comments from UK government officials that they would be willing to pay some money to the EU in order to maintain some access to the EU market.
Lastly, the eurozone unemployment rate in October fell to 9.8% from a revised 9.9% in September. The estimate was 10% and this is now the lowest rate since June 2009. Germany’s adjusted rate fell to just 4.1% while French unemployment fell to 9.7%. Days before the Italian vote has their rate at 11.6% vs 11.7% last month. Spain’s fell to 19.2%.