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. Getting to the so called ‘control group’ which also takes out building materials saw a gain of just .1%, also two tenths below the forecast and October was also revised lower. Online retailing was up just .1% m/o/m but follows big gains in the prior months and are up a solid 15.3% y/o/y. Department stores continue to bleed as sales fell for a 5th straight month and are down by 6.1% y/o/y. Restaurant/bars saw a good gain with a .8% m/o/m rise and 5% y/o/y. Sales gains were also seen in furniture and building materials and a slight gain in electronics. There was no holiday help for clothing sales as they were flat m/o/m after just a .1% gain in October.
Bottom line, core retail sales grew by 3.4% which is exactly in line with the mediocre 5 year average. I say mediocre because it 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. For all the Trump optimism, consumers are still being pressured by higher healthcare and housing costs predominantly and wages that are still growing modestly. Hopefully and evidently the wage story is changing for the better and should continue to improve in 2017. As the market has built up an enormous amount of optimism about upcoming tax and regulatory policy, we can almost split up the upcoming economic data into pre Trump tax plan news and post, of course assuming the Republicans pass the full Ryan plan or something close to it.
I expect GDP estimates to get trimmed today for Q4. The Atlanta Fed GDPNow forecast is at 2.6% prior to this data. Assuming something close for Q4 will leave the US economic growth at around 2% for 2016 but its Pre Trump tax plan of course.
Wholesale inflation ran hotter across the board. 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. On the services side, which has been the most sticky, prices jumped by .5% m/o/m, 25% of which was driven by retail products.
Bottom line, the markets care much more about CPI which is out tomorrow but the PPI numbers reflect an inflation situation that is ticking higher, especially with commodity prices having bottomed. The 10 yr inflation breakeven though isn’t doing much in response today as its down about 1 bp to 1.98%.
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. Vehicle production dropped by 2.3% m/o/m and maybe the first response on the part of car makers to peak auto sales. Machinery orders fell 1.5% m/o/m and are down on the year as well. Mining improved though as commodity prices bounce which should at some point lead to an improvement in machinery orders. Disappointingly, capacity utilization fell to 75%, the lowest since March and remains well below the 25 year average of 79%.
Bottom line, IP was very much a mixed bag but the direction of auto’s with the rise in rates on top of a peak in sales (after all, monetary policy pulls forward economic activity) will be a key focus in 2017. Also, with capacity utilization still punk Trumponomics will have its challenges in encouraging US companies to invest more in capacity in the US. Sorry to be a broken record but that will be the trade off in 2017: the best attempts of new fiscal policy to encourage capital investment and job growth that will butt heads with the aftermath of extraordinary monetary policy that created excess capacity and a low interest rate credit addiction.
While the Fed is bringing their interest rate hike cycle to 50 bps, LIBOR based borrowers have already seen their cost of capital go up by almost 75 bps since the low in 2014, 35 bps of which has come since December 31st. The long end of the curve of course has done their own form of tightening. Expect this to be the pattern in 2017, the Fed will only follow the market. Actually, that is what they always seem to do on the upside dating back to the Greenspan years. In terms of real rates, since the first Fed hike last December, the 10 yr inflation breakeven is higher by 50 bps. Again, the key question today is how much of the new, hoped for economic reality will the Fed acknowledge.
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. The hoped for offset for buyers is home price gains should moderate from here.
Not surprisingly, bullish investor sentiment has gotten even more extreme. Investors Intelligence said Bulls rose to 59.6 from 58.8 and II continues to believe “this is a stronger warning of a trading top” as a print above 60 “would be a major call to take defensive measures.” Bears fell .4 pts to 19.2, the lowest since August 2015. The spread between the two of 40.4 is the most since early 2015. This bullishness coincides with an overbought reading in the DJIA that I’ve never seen before. The 7 day Relative Strength Index yesterday closed at 95.3. This index can’t go above 100 and I went back to the early 1970’s and wasn’t able to find anything higher. The CNN Fear & Greed Index finished yesterday at 88 (Extreme Greed according to them) vs the mid 20’s right before the election.
Bottom line, it’s not hard to say that we’ve reached a euphoric feeling in markets and while this tells us little about the direction of markets in 2017, it may at least mean an upcoming breather. It is quite amazing how the stock market went from loving slow growth, QE and no rate hikes over the past 7 years and has now transitioned that love to the hopes for quicker growth, no QE and rising interest rates. Of the belief that the next black swan comes from global bond markets and higher rates, the $64k question in coming years is when higher rates will matter for equity valuations that have only been seen in 1929 and 2000 in many respects. Equity valuations overseas, particularly in emerging markets, are so much more attractive to me, still.
Is this the tit for tat that we have to look forward to over the next 4 years?
SHANGHAI (Reuters) — China will soon slap a penalty on an un-named U.S. automaker for monopolistic behaviour, the official China Daily newspaper reported on Wednesday, quoting a senior state planning official.
Investigators found the U.S. company had instructed distributors to fix prices starting in 2014, Zhang Handong, director of the National Development and Reform Commission’s price supervision bureau, was quoted as saying.
News of the penalty comes at a sensitive time for China-U.S. relations after U.S. president-elect Donald Trump called into question a long-standing U.S. policy of acknowledging that Taiwan is part of “one China”.
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. Bottom line, China is headed to debt outstanding as a percent of GDP to north of 250% vs 163% in 2008. This is out of control as this is happening at the same time their growth rate is in secular decline.
Apparently not happy with the jump in long term interest rates as it upsets his ‘yield curve control’ plan, Haruhiko Kuroda and his BoJ came out last night and offered to buy JGB’s with maturities ranging from 10 to 25 years in a size that was above its previous attempt. This comes before a 20 yr government auction Friday and smells very much like blatant government debt monetization. I know that is semantics since they’ve been essentially doing it for a while but this is potentially symbolic in that the market has tested Kuroda’ resolve (I mean, god forbid the banking system gets a yield curve steeper than 10 bps out to 10 yrs) in his ‘yield curve control’ experiment. I expect more tests next year. In response, the 40 yr yield fell 9 bps to .86% (this was just 7 bps back in July) and the 10 yr yield fell by 3 bps to .06%. The yen though is higher and the Nikkei close unchanged.
Also out of Japan was their quarterly tankan report which 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. Japanese exporters have gotten a respite since the US election with the weaker yen but we’ve already seen that a weaker yen has not led to any economic consistency out of Japan’s economy since Abenomics took hold in 2013.
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.” Brexit related? We’ll see. Wage growth though improved to 2.6% y/o/y ex bonus’, 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. The forward looking November jobless claims figure rose by 2.4k, 4k less than expected but basically offset by an upward revision to October. Notwithstanding the disappointing jobs data, the pound is flat vs the US dollar. The 10 yr Gilt yield is lower by 3.5 bps, rallying with global bonds.