The Boock Report

By

1/27 – Succinct Summation of the Week’s Events

Positives

  1. Core capital goods orders ex defense and aircraft rose .8% m/o/m in December and November was revised up by 6 tenths. The estimate was for up just .2%. It finally brings the y/o/y change into positive territory at 1.2%. On the shipments side, which gets plugged into GDP, was up by 1%, twice the estimate and November was also revised up. This could help the next revision to Q4 GDP.  As inventories were flat, the inventory to sales ratio fell to 1.61, the lowest since 2015 from 1.64 and sets up well for a build.
  2. Markit’s US services PMI index for January improved to 55.1 from 53.9 in December. That puts it at the best level since November 2015. Markit said “The latest survey revealed a robust expansion of business activity and another strong increase in incoming new work. Meanwhile, service providers were more upbeat about the business outlook than at any time since May 2015.”
  3. Markit’s January US manufacturing PMI rose to 55.1 from 54.3 in December. It’s the best since March 2015 and brings the post election rise to 1.7 pts. Markit said the m/o/m rise was led by “sharper increases in output and new orders, which rose at the fastest rates in 22 and 28 months respectively.” Employment also rose as did the 12 month outlook for production. Most of the improvement in new orders was domestically based as “new export work rose only slightly at the start of 2017, as has been the case in each of the past four months.” On inflation, “the rate of input price inflation accelerated for the 2nd month in a row in January amid reports of higher raw material costs. Moreover, the latest increase in cost burdens was the sharpest seen in 28 months. As a result, companies raised their selling prices for the 4th successive month, albeit at a moderate pace that was similar to that seen in December.”
  4. The final January UoM consumer confidence index was 98.5 vs the initial print of 98.1 and up from 98.2 in December. This index was 87.2 pre election. Since October, Current Economic Conditions are up 8.1 pts. Consumer Expectations are higher by 13.5 pts. One year inflation expectations at 2.6% is the most since July.
  5. The advance look at the trade of US goods (not services) in December saw a deficit of $65b that was in line with expectations. Exports jumped by 3% m/o/m driven by capital goods while imports were up by 1.8%.
  6. Mortgage applications to buy a home rose 6% w/o/w after falling by 5.2% in the week prior. They are flat y/o/y. Refi applications were unchanged w/o/w but are down 31% y/o/y. The 30 yr mortgage rate was up by 8 bps to a 3 week high but still off 10 bps from the 4.45% multi year high we saw in late December.
  7. The Richmond manufacturing index rose 4 pts m/o/m to 12, well above the estimate of 7 and joins the crowd of Trump optimism.
  8. Japanese December CPI ex food and energy was zero y/o/y but that was .1% more than forecasted. The headline gain of .3% y/o/y was driven by food. The forward looking Tokyo CPI for January also saw no change y/o/y after falling by .2% in December.
  9. December Japanese exports rose 5.4% y/o/y vs the estimate of up 1.1%. While this was certainly helped by the weaker yen off the November lows, merchandise volume exports still rose 8.4% with particular strength to the rest of Asia and record exports to China.
  10. Japan’s manufacturing PMI for January rose to 52.8 from 52.4 which puts it at the best level since 2014. Markit said it was “helped by solid expansions in both output and new orders” which was “driven in part by a sharp increase in international demand, as new export orders rose at the quickest rate in over a year.” “Meanwhile, inflationary pressures picked up to the greatest since March 2015.”
  11. Hong Kong said December exports grew by 10.1% y/o/y, almost twice the estimate of up 5.1%. All of the gain was to Asia as exports to the US, Germany and the UK fell. Imports were up by 8.7% vs the forecast of up 5.9%.
  12. South Korea’s Q4 GDP figure which rose 2.3% y/o/y, a hair better than the 2.2% estimate but a slowdown from 2.6% seen in Q3 and the slowest pace of gain since Q2 2015.
  13. ECB said loans to households were up by 2% in December y/o/y, a slight improvement from the 1.9% growth seen in November. Loans to companies grew by 2.3%, up from 2.1% in the month prior. M3 money supply growth was up by 5% y/o/y vs the estimate of up 4.9%.
  14. The UK economy grew by .6% q/o/q and 2.2% y/o/y in Q4, exactly as seen in Q3 but one tenth more than expected. The consumer led the way but does face upcoming inflation.
  15. The CBI industrial order index in the UK improved by 5 pts to +5, the highest since February 2015. The weaker pound has certainly emboldened exporters but CBI also saw “strong growth in domestic orders.” This came with higher inflation pressures as “unit costs rose at the their highest pace in over 5 years.”
  16. Italian economic confidence improved in January with its index up by 2.3 pts, a 6 month high but remains within the tight range seen in 2016. The manufacturing component did rise to the best since October 2015.

Negatives

  1. The US economy grew by 1.9% annualized in Q4, below the estimate of 2.2% and brings the 4 quarter average for 2016 to 1.9% which is in line with the 1.9% gain we saw in 2015. Spending on durable goods, capital investments and inventory helped. Trade was a drag. The inflation deflator of 2.1% was as expected. We can call this old news as policy is about to change, positively on the fiscal side and a drag on the monetary/rate side.
  2. Initial jobless claims totaled 259k, 12k more than expected and is up from 237k last week. The holidays have messed around with the seasonal adjustments so looking at the smoothed 4 week average is 246k, the lowest since 1973 vs 248k last week. Continuing claims, delayed by a week, rose by 41k.
  3. New home sales in December totaled 536k annualized, well below the estimate of 588k and down from 598k in November. It’s also the slowest pace of contract signings since February. For the full year new home sales averaged 561k vs 502k in 2015 and just 440k in 2014.  Months’ supply rebounded to 5.8 from 5.0 as the number of homes for sale rose by 10k while sales fell. The median price rose by 7.9% y/o/y and combined with the rise in mortgage rates was not a help. The rise in price was in part due to mix as sales of homes priced above $500k rose while those priced below $300k was down. The average 30 yr rate in December was 4.36% vs 4.03% in November and 3.72% in October.
  4. December existing home sales totaled 5.49mm, slightly below the 5.52mm estimate but November was revised up by 40k to 5.65mm. Of this, single family closings moderated to 4.88mm which puts it back at the September level. Months’ supply shrunk to 3.6 from 3.9 in November and 4.3 in October. Dating back to 1999, there was only one month that matched this, January 2005. Pricing moderated to a 4% y/o/y rate, the slowest since June 2014, notwithstanding the tight supply. First time buyers purchased 32% of homes sold, no different than November and no different than December last year and thus still well below the long term average.
  5. The January European manufacturing and services composite index from Markit was a touch below expectations. It fell .1 pts to 54.3 instead of rising to 54.5 and compares with 54.4 in December. Manufacturing was up slightly while services was down a hair. “Inflationary pressures meanwhile intensified further in January. Firms’ average input costs rose at the fastest rate since May 2011…Price hikes often reflected higher global commodity prices as well as increased import costs resulting from the euro’s depreciation, notably against the US dollar.”
  6. The German IFO fell to 109.8 from 111. Expectations were for a further rise to 111.3. That is a 4 month low but the components were mixed as the fall was all in the Expectations component which fell 2.3 pts while Current Conditions were up slightly. The IFO said “The German economy made a less confident start to the year.”
  7. German import prices spiked 1.9% m/o/m and 3.5% y/o/y, both well above expectations of 1.3% and 2.7% respectively. That y/o/y gain is the most in 5 years and no, it was not all energy. Import prices ex petroleum was higher by 1.7% y/o/y, the biggest gain since July 2015.
  8. French business confidence fell 1 pt to 104 vs the estimate of no change and off the best level since 2011. French business confidence peaked in 2007 at 115.
  9. I hope this is nothing more than bluster but picking a fight with our neighbor, friend and 3rd largest trading partner, Mexico, is not a good idea. “According to the Department of Commerce, US exports of goods and services to Mexico supported an estimated 1.1 million jobs in 2014 (latest data available).” I got this off the USTR website, //ustr.gov/countries-regions/americas/mexico. Total trade with Mexico creates about 4.9mm jobs in the US according to the Mexico Institute at the Wilson Center in DC: //www.wilsoncenter.org/sites/default/files/growing_together_how_trade_with_mexico_impacts_employment_in_the_united_states_2.pdf