The November CPI rose by .2% m/o/m both headline and core and rose by 1.7% and 2.1% y/o/y. That headline rate matches the quickest pace since July 2014 and I expect it to be above 2% by early next year on base effects. Energy prices are now rising y/o/y and were up for a 3rd straight month, m/o/m. Food prices were flat vs October and are down .4% vs last year. Rents continued its persistent rise (although we’ve seen some price moderation in NY and San Fran) with another .3% m/o/m gain and 3.5% y/o/y rise in Owners’ Equivalent Rent. Rent of Primary Residence was also up .3% m/o/m and by 3.9% vs last year. Medical care costs were unchanged for a 2nd month but are still up 4% y/o/y. Both of these factors explains the persistent 3% annual gains in services inflation ex energy which makes up 60% of CPI. Car prices were mixed while apparel prices fell.
Bottom line, we have sticky services inflation mostly driven by rents and healthcare and now a rise in commodity prices where the y/o/y drop is close to zero after a few years of persistent declines. Thus, expect 2% headline prints in the new year. Inflation breakevens have been slightly lower all morning.
Initial jobless claims totaled 254k, about in line with the estimate of 255k and down from 258k last week. Because a 233k print fell out of the 4 week average, it rose to 258k from 253k. Continuing claims, delayed by a week, rose by 11k off near the lowest since year 2000. Bottom line, the pace of firing’s remain modest as employers hold on tight to their qualified workers in the context of a labor market where it’s getting tougher and tougher to find the right people.
Trump optimism drove a 7.5 pt increase in the December NY manufacturing index to 9 vs the estimate of 4. New orders jumped by almost 8 pts while backlogs rose by 2.3 pts but still remains below zero. Inventories were negative again. The disappointment was in hiring as the employee component fell 1.3 pts to -12.2 and has been negative for 6 straight months. Hours worked also was negative but a bit less so. Prices paid rose to match the highest level in 2 yrs as commodity prices rise. The hope for a better economy was really reflected in the 6 month outlook which jumped by 20 pts to 50.2, the best since January 2012. Capital spending plans also improved. Bottom line, this is another sentiment indicator (as opposed to hard data) that is bullish post election on economic growth. We now need to see this excitement spill over into actual gains in business activity.
The Philly region joined NY in its post election hopes as its manufacturing index jumped to 21.5 from 7.6. The estimate was 9.1. The components though were much more mixed (headline print is not a sum of its parts). New orders fell 4.7 pts to 13.9 but backlogs were up by 1.6 pts to 5.7. Inventories dropped by 12 pts. In contrast to NY, the employment component went positive for the 1st time in a year and the workweek was higher. Prices paid rose to the highest level since February 2012 but those prices received fell. Similar to NY, the 6 month overall outlook jumped by 23 pts and capital spending plans rose as well. The bottom line here is the same written for the NY index.
Trump optimism spreads to the home building industry as the NAHB December index jumped 7 pts to 70 vs expectations of no change. It’s the highest since ’05 but of course all relative considering the activity then vs now. Both the present situation and future outlook improved and the category titled Prospective Buyers Traffic rose by 6 pts to 53. That is the first print above 50 since August 2005.
The NAHB said “this notable rise in builder sentiment is largely attributable to a post election bound, as builders are hopeful that President elect Trump will follow through on his pledge to cut burdensome regulations that are harming small businesses and housing affordability. This is particularly important, given that a recent NAHB study shows that regulatory costs for home building have increased 29% in the past 5 years.”
Consumer confidence also is ebullient, along with sentiment in the stock market which likely helped this index post election but the obvious caveat is “builders remain sensitive to rising mortgage rates and continue to deal with shortages of lots and labor.”
Bottom line, let’s add this figure to the list of diffusion indices (literally asking businesses whether things are better, the same or worse) that are embracing the possibilities of Trumponomics. Thus, they measure the direction of change, not the degree. I’m optimistic too but reality now needs to meet the very high expectations and rising rates that can upset the whole applecart, especially for the housing industry which is so sensitive to the cost of money.
The boy who cried rate. I attribute that line to my friend Peter Tchir who made it a few months ago as it was a great description of the FOMC who entered 2016 with a dot plot forecasting 4 rate hikes. We of course got one. Now the dots predict 3 in 2017 and the market this time actually believes we may get it because of Trumponomics and the reality that Fed forecasts must shift higher. Three rate hikes though will only take us to a whopping fed funds rate of 1.375%. Even with a zero rate for 8 straight years, the 25 year average in the fed funds rate is still about 2.75%. The dollar doesn’t care about the absolute level of rates as it continues to rip on the continued growing rate differentials. I’m waiting for the Trump tweet complaining about the strong dollar. I find that to be inevitable if he wants to bring manufacturing jobs back to the US.
After yesterday’s initial 2s/10s flattening response to the FOMC which ended up closing at no change, it is widening again by 2 bps to near the most in a year because maybe the market continues to realize that even with 2-3 hikes in 2017, the Fed is still woefully behind the 8 ball. Interestingly though, the 5s/30s spread is narrowing by 5 bps today to just near the flattest in 9 years. What message does that send? Is it a bet questioning how the overlevered US economy deals with a rise in interest rates? Not sure yet. To quantify the damage done to the 10 yr note in such a short period of time, the front month future is down 5.4% since right before the election. When the yield was about 1.75% then, that is about 3 years of coupon’s.
Asian and European bond markets got hit as well today. The BoJ’s best attempt yesterday to maintain the 10 yr yield closer to zero was a one day wonder as its yield is up by 3 bps after falling by 3 bps yesterday. Hong Kong, who imports our monetary policy, saw its 10 yr yield jump by 12 bps. The UK gilt yield is spiking by 14 bps to 1.52%.
I cannot emphasize and warn enough that this rise in rates is happening when the world has never been more overleveraged. We had an epic global bond bubble as I don’t know any other way of describing $13 Trillion of negative yielding rates back in July.
The China proxy that is Australia reported a better than expected jobs figure in November with a 39.1k job gain vs the estimate of up 17.5k with all of it full time workers. The unemployment rate though did tick up by one tenth to 5.7% because there was an increase in the participation rate. Because of the rise in commodity prices, the Aussie$ has traded much better against the US dollar than most other currencies but it’s down slightly today. The same situation with the Canadian $.
The European manufacturing and services composite index for December was unchanged with November at 53.9 but holding at its best level since December ’15. Manufacturing improved (helped by weaker euro) while services moderated m/o/m. Germany’s index fell a touch while France improved. Markit believes this equates to growth for the region of .4% q/o/q. The caveat within the data is “the intensification of inflationary pressures. Rising global prices for many commodities, including oil and metals, is being exacerbated by the weak euro, pushing prices up at the sharpest rate for 5 ½ years.” The ECB will be happy about that but no one else is. With a 10 yr yield of .37% in Germany, .80% in France and 1.85% in Italy, what a tinder box of trouble if inflation really takes hold.
UK retail sales jumped by .6% m/o/m ex auto fuel vs the estimate of no change. Remember though that the UK created their own Black Friday which goosed sales. Also, the BoE left policy unchanged as completely expected. What’s Carney going to do as he imports inflation via the weaker pound just after he accelerated QE?