Core durable goods orders in November jumped by .9% m/o/m which was well more than the estimate of up .4% and comes after a .2% gain in October. On a y/o/y basis though it is still negative by 1.9%. Orders were mostly higher across the board with m/o/m gains seen in vehicles/parts, computers/electronics, electrical equipment, machinery and primary metals (fabricated metals fell). With respect to core shipments, they rose by .2%, one tenth more than expected but offset by a two tenths drop in October which may leave Q4 GDP estimates little changed.
Bottom line, the obvious drag for years on US growth has been lame capital spending but we hope that a change in taxes and the regulatory bite will shift this for the better in coming years. Hopefully the lift in November core orders is a beginning sign of thaw. A main offset though is the excess capacity that has built up over the years thanks to easy money that has left capacity utilization at just 75%, well below the 25 year average of near 79%. Here is a chart on the dollar level of non defense capital goods orders ex aircraft which visuals how punk capital spending has been:
Jobless claims totaled 275k, 18k more than expected and up by 21k w/o/w. It’s the highest print since June and brings up the 4 week average to 264k from 258k. Continuing claims, delayed by a week, rose by 15k to a 3 week high. Bottom line, I’m not going to draw any conclusions to the jump in claims on just one week’s data. The pace of firing’s has been very modest and I’ll wait to see if this is an outlier or something more.
Q3 GDP was revised up again, this time to 3.5% from 3.2% in the last read and vs the estimate of 3.3%. It sets a higher bar for Q4 but growth for the full year will still be around 2%. With days away from finishing Q4, this figure is old news and of course also comes pre election and pre jump in interest rates.
Just when it was thought that wages were about to accelerate, they don’t. November wages and salaries for private sector workers fell .2% m/o/m and grew by just 3.6% y/o/y, well down from the 4.5% print in October and 4.9% in September. It’s disappointing but I’m still holding out hope that we’ve turned the corner in that employees will continue to get a growing share of the profit pie after seeing the lowest share since WWII early last year. As for the headline print of overall Personal Income, they were flat m/o/m vs the estimate of up .3% and October was revised down by one tenth.
Personal spending grew by .2% m/o/m, one tenth less than the estimate but October was revised up by one tenth so unlikely this changes Q4 GDP forecasts. All of the spending was in services (healthcare and housing/utilities continues to take share from other areas of spending) as spending on goods fell.
With inflation, the November headline PCE deflator was flat m/o/m but after a .3% rise in October. On a y/o/y basis, the headline held at 1.4% growth. The core rate was also unchanged instead of rising by .1% that was forecasted and the y/o/y gain moderated to 1.6% from a 1.8% read in October (revised from 1.7%). The inflation standoff between sticky services prices mostly driven by healthcare and housing and goods pricing which remains benign continues. The 10 yr inflation breakeven didn’t respond to today’s data and sits at 1.94% vs 1.50% one year ago.
If you haven’t already, start learning about ‘border adjustability’ because it’s the main source of funds to ‘pay for’ a cut in the corporate tax rate. If its passed as part of the broader tax reform, the cost of imports will jump and the value of the dollar will be the main consideration of how much inflation we then import. The econometric models say the stronger dollar will offset the tax increase but practice unfolds always different than on paper. The other potentially major inflation influence, notwithstanding today’s income print, we expect wage gains to pick up further in 2017 and productivity figures become even more relevant in terms of pricing out unit labor costs and thus profit margins and how higher pay gets absorbed.
At least on a rate of change basis, the inflation worm continues to turn up in Europe. Two days after November German PPI went positive for the first time since June 2013 y/o/y, November import prices in German jumped by .7% m/o/m after a .9% spike in October. That was well above the estimate of up .2% and the y/o/y gain of .3% was five tenths more than expected and was the first rise in 4 years. Yes, 4 years as the weak euro and the bottoming of commodity prices starts to filter into higher input costs. Now, I’m sure German PPI and import prices were not on your radar screen today but the euro inflation 5 yr 5 yr swap is up by 2 bps to 1.74% (see chart) which is the highest level since December 2015. Mario Draghi has cited this stat as his key inflation gauge and the euro is higher in response to the German news. Sovereign bonds in the region are also down across the board. Stated again, I firmly believe that we’ve entered into a rising interest rate environment that will last years.
Monetary policy in the UK is about to be put under the microscope as Parliament’s Treasury Committee is about to do a review of BoE’s policies. The Chairman of that committee said in a statement that “Interest rates are stuck near zero, the BoE has used increasingly unconventional forms of QE, and inflation has been below the 2% target for three years. The efficacy of monetary policy or otherwise, its unintended consequences, and its prospects, need careful examination.” 2016 marked the beginning of the end of the extraordinary monetary experiment we’ve seen in place since 2007 globally and 2017 will mark a further retreat.
Stocks in China and Hong Kong continue to trade terribly. The Hang Seng is now down 5% over the past two weeks and closed overnight at its lowest level since July. It is down year to date. The China H share index closed down 1.4% to its weakest point since August and is down almost 5% year to date. The retail heavily traded Shanghai comp was flat but is lower by 11% year to date as Chinese markets battle their own debt demons and now major volatility in credit markets. Hong Kong for better or for worse imports US monetary policy due to the peg and they can now combine a huge property bubble with rising interest rates. As for Chinese bonds, they rallied sharply overnight with yields lower as the PBOC added liquidity into money markets. The yuan is weaker vs the US dollar. News from China has been neatly swept under the rug this year but we can’t ignore the 2nd largest economy.