The Boock Report

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12/16 – Succinct Summation of the Week’s Events

Positives

  1. The November NFIB small business optimism index rose to 98.4 from 94.9 in October. “Before election day small business owners’ optimism was flat, and after election day it soared” said the NFIB. That is the best level since December 2014. The NFIB also said “federal taxes, regulations, and Obamacare are the three biggest impediments to running a small business in America. Small business owners have high expectations that those problems will be addressed.”
  2. 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.
  3. 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.” The caveat is that “builders remain sensitive to rising mortgage rates and continue to deal with shortages of lots and labor.”
  4. Trump optimism also drove a 7.5 pt increase in the December NY manufacturing index to 9 vs the estimate of 4 and the Philly region joined as well as its manufacturing index jumped to 21.5 from 7.6. The estimate was 9.1. The 6 month outlook for both jumped higher.
  5. While business inventories fell more than expected in October, a pick up in sales lowered the inventory to sales ratio to 1.37, the lowest since July 2015. The key auto sector saw an I/S drop to 2.20 from 2.23, the lowest since February.
  6. 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. 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.”
  7. UK retail sales jumped by .6% m/o/m ex auto fuel vs the estimate of no change. Their version of Black Friday helped.
  8. UK Wage growth improved to 2.6% y/o/y ex bonus’ for the 3 months ended October, up from 2.4% in September and that is the quickest pace since August ’15 and considering the inflation they are now importing that is well needed.
  9. French business confidence rose 3 pts to the best level since July 2011 vs the estimate of no change.
  10. The Japanese quarterly tankan report rose to 10 for Q4 as expected from 6 in Q3. There was no change for service companies q/o/q and smaller companies saw a mixed picture. As for the important cap ex expectations, they moderated to 5.5% growth from 6.3% in the prior quarter.
  11. In China, after falling to the slowest rate of growth since last year, retail sales grew by 10.8% y/o/y, above the estimate of 10.2%. Industrial production was up by 6.2%, a one tenth uptick from October and also one tenth better than the forecast. Lastly, fixed asset investment ytd y/o/y was up by 8.3% as expected.
  12. 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.

 

Negatives

  1. The lack of any real acknowledgement on the part of the FOMC that Trumponomics is going to alter the economic picture means that they are at real risk of losing control of the bond market (they’ve already gotten a taste) if they don’t start paying more attention. ‘Gradual rate hikes’ is being driven by their so called belief in their ‘neutral rate’ measure which is an econometric construct that the Fed is using to rationalize this slow pace because their model believes in secular stagnation (which is bulls**t) and doesn’t adjust for supply side initiatives. Three hikes in 2017 would take us to a whopping 1.375%.
  2. US retail sales in November grew by .2% m/o/m ex gasoline stations and auto’s. That was two tenths below the estimate and October was revised down by one tenth. The so called ‘control group’ saw a gain of just .1%, also two tenths below the forecast and October was also revised lower. Control group retail sales grew by 3.4% y/o/y which is exactly in line with the mediocre 5 year average. This compares with the 5% average run rate in the mid 2000’s and the 5.5% gain in the 2nd half of the 1990’s.
  3. The pace of foreign selling of US Treasuries continued in October at a sharp pace. Foreigners sold a net $63.5b of notes and bonds and brings the year to date amount of liquidation to $321b. China continued its selling, by $25.7b and brings the last 5 months of selling to $109b. Japan continued its selling too, by another $16.1b but they are now the largest foreign holder of US Treasuries, surpassing China. Europe was also net sellers of notes and bonds.
  4. 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. Rents and healthcare continue to drive the persistent 3% annual gains in services inflation ex energy which makes up 60% of CPI.
  5. Headline PPI in November rose by .4%, 3 tenths more than expected and the core rate was up by the same amount. The y/o/y increase accelerated to 1.3% from .8% and that is the most in 2 years. The core grew by 1.6%, the most since January ’15. The BLS also gives us PPI ex food, energy and trade services and that rose by 1.8% y/o/y, the most since August 2014.
  6. US industrial production fell by .4% m/o/m, one tenth more than expected but October was revised up by one tenth so call it a push. Utility output fell sharply and was the main reason for the headline miss. Manufacturing production fell by .1% m/o/m but after rising by .3% in the month prior. Lower vehicle production led that decline. Disappointingly, capacity utilization fell to 75%, the lowest since March and remains well below the 25 year average of 79%.
  7. Higher mortgage rates led to the 10th straight week of refi declines as they fell 3.6% w/o/w to the slowest pace since January. They have now fallen 50% from the 2016 peak and are down 12% y/o/y. Purchases dropped by 3.3% w/o/w to a 4 week low as higher funding costs turn off some while they result in a rush to lock in from others. They remain up 2.4% y/o/y.
  8. November housing starts totaled 1.09mm, well less than the estimate of 1.23mm but smoothing out the last few volatile months puts the 3 month average at 1.16mm vs the 6 month average of 1.178mm and 12 month average of 1.16mm. Single family starts were 828, not far from the peak in this cycle but still below the 25 yr average of 944k. Multi family we know has been the area of outperformance. Permits were also weaker than expected but almost offset by an upward revision to October.
  9. Is this a harbinger of what’s to come? , //asia.nikkei.com/Politics-Economy/International-Relations/China-to-penalise-U.S.-automaker-for-monopolistic-behaviour-China-Daily .
  10. Excessive credit growth in China continues as aggregate loans in China in November totaled 1.74T (most since March and up 70% y/o/y), well above the estimate of 1.1T of which 795b yuan were bank loans, 55b above the forecast and up from 651b in October. Thus, the ‘shadow side’ saw a huge lift in financing (trust loans, entrusted loans and bankers acceptance bills). Household loans, aka property loans, made up 2/3 of new bank issued yuan loans.
  11. For the 3 months ended October, employment in the UK unexpectedly fell by 6k instead of rising by 50 as forecasted. It would have been worse if it wasn’t for an influx of part time work as full time employment dropped by 51k. Overall it is the first monthly decline since June 2015 but the unemployment rate held at 4.8%. The UK stats office said the jobs market “appears to have flattened off in recent months.” The forward looking November jobless claims figure rose by 2.4k, 4k less than expected but basically offset by an upward revision to October. They’ve risen for the 8th month in the past 9.
  12. The German ZEW December economic expectations of investors was unchanged at 13.8, a hair below the estimate of 14. The current situation component though saw a nearly 5 pt gain to the best since September ’15. The ZEW said “The considerable economic risks arising from the tense situation in the Italian banking sector, as well as the political risks surrounding upcoming elections in Europe, seem to have faded into the background at the moment.”
  13. UK is slowly feeling the effect of a weaker pound as headline CPI rose 1.2% y/o/y, still modest but the most since October ’14. The core rate was up by 1.4%. Wholesale input prices are up by 12.9% y/o/y.
  14. October IP in the eurozone fell .1% m/o/m vs the forecast of up .1% and September was revised down by one tenth.