Jobless Claims, Patrick Harker, The Dollar and Trade and more…

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Initial jobless claims totaled 247k, 8k less than expected and up from 237k last week. These are extraordinarily low but with the holidays being an influence we wait for coming weeks to see what’s real. Smoothing this out puts the 4 week average at 257k vs 258k last week. The low in the cycle was 250k back in October. After rising to the most since September last week, continuing claims fell by 29k. Bottom line, while influenced by the holiday’s, the pace of firings remain modest as employers hold on tight to their qualified employees at a time its real tough to find good ones.

Newly voting member (I’m trying to ignore the noise created by non voting ones) Patrick Harker told us where he is on the dot plot. I noticed that he does have a bit of a sense of humor in spelling it out as he said in his speech,

“After December’s meeting, that makes a brisk average of one 25 bps per year for the last two years. But I see three modest hikes as appropriate for the coming year, assuming the economy stays on track.”

On the economy he said

“The labor market is strong and we’re creating jobs at a good pace…Inflation is moving back up to our 2% goal, and growth is solid. We’re starting 2017 off on a good foot.”

While a voting member, the short end of the Treasury market is not responding as it only matters what Yellen, Fischer and Dudley think. They are soaking in the econometric concept of a low ‘neutral rate’ which having Fed members try to model that out is the epitome of central planning but that’s what they do.

For all the strong dollar widely bullish sentiment, the euro heavy dollar index is all of a sudden at a one month low. I want to highlight today some of the contradictory beliefs and reactions to the moves in the dollar and the now confusing nature of what the economy and markets want from it. Beginning with markets, the Nikkei overnight quietly closed at just off its lowest level in a month because of the yen bounce, a negative. US interest rates are falling coincident with the dollar decline, a positive. The CRB index never really fell on the strong dollar and is now close to breaking out to the highest level in more than a year. Great for commodity producers but not so good for the inflation story and consumers (gasoline for example is up 20% y/o/y). About 40% of S&P 500 revenue comes from overseas yet the S&P 500 is at a record high, not worried at all about the stronger dollar. Today the dollar is weak and the S&P futures are lower.

On the hoped for tax reform policy of cutting corporate tax rates with half the bill being ‘paid’ for by a border adjustment tax, the movement in the dollar has inherent contradictions as to whether this will work. The border adjustment tax needs a 20% rally in the dollar to offset the 20% tax on imports. Well if the dollar is going to rally 20% why would a US company build a plant in the US for products they would sell overseas if they can build that plant initially overseas? If I’m a US manufacturer and I’m worried about a 20% rally in the dollar from here, I’ll build a plant in Europe to sell to my European customers and an Asian plant for my Asian customers and I can repatriate the profits back at a low rate. The obvious incentive for US manufacturers seems to be only for the products they sell in the US. Please tell me if I’m wrong and not thinking this through properly.

Bottom line, I just wanted to point out some of the dizzying array of scenarios (and I can also throw in the Emerging Market/Dollar relationship) that we all have to think about driven by where the dollar goes from here because while dollar stability is truly the best scenario, not extreme dollar strength or dollar weakness, we’re not likely to get that, especially with upcoming tax policy wanting also contradictory things with the direction of the dollar.

The Chinese just can’t quit their addiction to excessive credit growth. Total yuan loans in December rose by 1.63T yuan, 330b above expectations. The only respite was that was down from 1.73T in November and lower by 10% from last December. For the full year 2016, total loans however were up 16% vs 2015 at the same time GDP growth slowed. Of the loan growth in December, 1.04T came from banks vs the estimate of 677b and up from 795b in November. Household lending did slow in response to moves to slow down housing price appreciation but was completely offset and then some by loans to the non financial corporate sector. Bottom line, Chinese authorities are juggling flaming clubs here. Chinese indexes closed lower but the yuan is jumping coincident with the broad dollar weakness.

Following the upside surprises in country industrial production figures in Europe, IP for the region in November as a whole rose 1.5% m/o/m and 3.2% y/o/y, well above the estimates of .6% and 1.6% respectively. That y/o/y gain is the best since January. As the number is somewhat dated and we’ve already seen the key country components, it’s not market moving. That said, Europe seemed to have finished 2016 on a pretty good economic note.