Initial jobless claims totaled 258k, 11k more than expected and compares with 261k last week which was also a surprise vs the estimate of 240k. This brings the 4 week average up to 254k from 247k last week and that is the most since December. Continuing claims, delayed by a week, rose by 65k and almost gets back all of the 72k person drop in the two prior weeks. Bottom line, the leg lower in claims since December maybe has ended with this two week uptick. Last week I didn’t put much stake in the rise but now we have two weeks in a row. As it’s still very low as seen in the 4 week chart dating back 5 years, I’m not going to say confidently yet that a trend has changed.
4 week claims average
Q4 US GDP was revised up by 2 tenths to 2.1%, one tenth more than expected. Consumption was revised up (mostly due to non durable spending such as food and healthcare costs were revised up) while trade and government spending was lowered. Investment was revised a hair higher as was inventories. Bottom line, this is old news as we are two days away from finishing Q1 but at least we see from what base we are moving from.
German CPI in March rose .1% m/o/m and 1.5% y/o/y EU harmonized, both well below expectations of up .5% and 1.9% respectively to the delight of the German wage earner and to the dismay of Mario Draghi and most members of the ECB. There was a moderation in the both the gains in food and energy and services inflation also slowed. The euro is at the low of the day and bund yields are down slightly.
It was reported yesterday that NYSE member firm margin debt rose to a record high of $528b but I only think that figure is relevant when comparing it to nominal GDP and total market capitalization. As a percent of GDP it’s at 2.8% which is back to a record high, up from 2.7% at year end and back to the same level it reached in June 2015. It was 2% at the end of 2012 and 2.65% at the end of 2013 after that year’s rally. On September 30th, 2007 it was 2.3% of nominal GDP before you know what and it also stood at 2.8% in March 2000. Looking at margin debt as a percent of US market capitalization has it at 2% as of the end of February vs 1.9% as of December and vs 2% in June 2015. It was also 2% at the end of 2012 and 2% after 2013. On September 30th, 2007 it stood at 1.8%. I don’t have a market cap stat in March 2000 to figure out that number.
Bottom line, margin debt as a percent of these two benchmarks is back to the highs BUT this in no way tells us anything about where markets go from here. It only is a reminder of the high level of debt backing current market levels but which will only matter when markets do eventual decline in a sustainable way. Who knows when.
It’s rare that I talk about retail sales in Hong Kong but I’m going to do so today in light of the capital controls currently underway in mainland China. Smoothing out the lunar holiday saw retail sales for the ytd January-February time frame down 3.1% y/o/y. This also was the 24th month in a row of y/o/y declines in sales. I have to blame predominantly the mainland Chinese tourist that is either buying more at home or elsewhere or maybe just less. The Hong Kong government said “Looking ahead, the performance of retail sales will depend on the recovery pace of inbound tourism as well as whether consumer sentiment will be affected by the various external uncertainties.” The Hang Seng was lower by .4% overnight. Hong Kong is a direct beneficiary and casualty of what goes on in China but is also now importing US monetary policy and its higher rates.
The Shanghai index fell 1% and is down for the 4th straight day. That matches the worst day since mid December. Shibor was down over night as we get to quarter end but still sits just below a 2 yr high. Rates have been moving steadily higher since the Fed hiked in December and again two weeks ago. This bears continued watching because of the credit bubble that Chinese officials are trying to deal with.
The strain in US retail is not just a US event. It is also for others outside of the US that do business with US retail and have retail themselves. Li and Fung in Hong Kong that refers to themselves as “the world’s leader in consumer goods design, development, sourcing and logistics. It specializes in responsibly managing supply chains of high volume, time sensitive goods for leading retailers and brands worldwide, in more than 250 offices across 40 economies” is down 10% today after earnings that disappointed. They said earnings were “impacted due to a tough retail environment.” The CEO said “This has been one of the toughest trading environments Li and Fung has ever seen. Macroeconomic conditions weakened, the retail environment worsened, input prices deflated two years in a row, and retailers continued to destock.”
The Eurozone economic confidence index was essentially flat in March at 107.9 vs 108 in February. The estimate was for a slight rise to 108.3. It still though is holding near the best level since 2011 before Greece started to fall apart. A few months after Mario Draghi said “whatever it takes” in 2012 it bottomed at 84.7. Europe has definitely seen a cyclical rebound but GDP estimates are still for just 1.5-2% growth. Q1 should though do better than that. In order to turn this cyclical improvement into something more sustainable, we need to see more liberalization of labor markets and an end to negative interest rates and QE. The problem with the latter though is the damage it will do to the European bond market so it’s only after that adjustment (or mess) that the banking system can start making real money again. The euro is lower on the slight miss.
On when QE may end for good in Europe, Governing Council member Klaus Knot said today that after December, “it should be phased out as soon as possible, because the grounds for the program have disappeared.” He is acknowledging the diminishing returns they have reached: “Given the substantial size of liquidities in circulation and the already very low interest rate, the added value of more liquidity or an even lower interest rate will become more limited. At this stage this will hardly boost credits, investments and consumption.” Again, we’ve reached peak monetary easing.
This said by Knot, we also heard from other ECB members that are playing down a premature evacuation from easing because they want to see higher inflation. Just think for a moment the insanity of wanting higher inflation when yields in Europe sit where they are.
We get more Fed speak today but with 3 months before their next press conference meeting (which is the real live meeting notwithstanding what they say), I’m not paying much attention as so much can change. They want to raise 2 more times and maybe 3 if growth accelerates in response to fiscal reform. We know that already. What we don’t know yet is how the economy responds to that if it happens and also what markets do as a result.
Of importance today will be Trump’s meeting with Gary Cohn to discuss the different options for tax reform, the holy grail of the hope trade.