Retail Sales, NY Manufacturing, Mortgage Rates, Inflation and more…

Retail sales in October jumped .8% m/o/m at the core level (ex fuel, auto’s and building materials), double expectations and September and August were both revised up by two tenths. The gains were in most categories with weakness seen again with department stores, a drop in sales at restaurant and bars and a drop in the sales of furniture. Online sales rose 1.5% m/o/m and are up 10% y/o/y. Sporting goods, clothing, auto’s and building materials also saw gains of note. Also, the miscellaneous category jumped by 2.4% m/o/m and this includes convenience stores, pet stores, etc…

Bottom line, there was little sign in this data of consumer hesitancy ahead of the election that some retailers have blamed (Starbucks and Dunkin Donuts in particular but restaurant/bar sales did fall) for soft October sales. On a y/o/y basis, core spending rose by 4% which is the best since January ’15 and is now above the 5 year average of 3.4%. The pace is still well below the gains seen in the prior two economic expansions but we’ll take improvement where we can get it in the 1.5% economy we are now in. Q3 GDP estimates should get raised after this print.

The NY manufacturing index for November, the 1^st industrial figure out this month, rose to +1.5 from -6.8, was 4 pts better than expected and follows 3 months of contraction. New orders and shipments went positive after 2 months of declines. Backlogs though weakened to the lowest since December and inventories plunged by 10 pts to -23.6, a level last seen in 2009. Employment fell 6 pts to -10.9 and the average workweek was also deeply negative at -10.9. Prices paid and received both fell. As for the future, the 6 month outlook fell 6 pts to a 3 month low and capital expenditures and tech spending plans fell a touch. It is likely that most, if not all, of the respondents sent in their answers to this survey before the election.

Bottom line, after 3 months of contraction, activity basically flat lined in November. As for all the incoming sentiment surveys (as opposed to hard data), those taken post election will be most noteworthy and everything else will be considered old news. Treasuries are still up on the day with yields down but they did give back some ground after the better data this morning. The 10 yr yield is at 2.23-.24% after touching 2.20% just before. Also, the 2 yr note yield is breaking above 1% at 1.02-.03% after Eric Rosengren said “we’d tighten faster with more stimulative fiscal policy” but then said “raising US rates too fast could threaten the recovery.” That my friends encapsulates the bind the Fed is in, especially in light of a Trump Administration that is hell bent on fiscal stimulus.

Coincident with the spike in Treasury yields, Bankrate.com said the average 30 yr mortgage rate rose another 11 bps yesterday to 3.88%, up 41 bps over the past week. It’s the highest since early January and here is a chart giving the visual of the rapidity of the move. I look forward to seeing mortgage applications tomorrow to see the initial response. To quantify, at last Monday’s 30 yr rate of 3.47%, a $300k mortgage would have a monthly payment of $1,342.12. At the 3.88% rate, the monthly payment would increase by about $70 to $1,411.57, a 5.2% increase.

The cost of capital is of course going up across the board and while I’m optimistic about growth initiatives to come, we’ve got to get past the move higher in rates because business activity and asset price gains have been built on the foundation of low rates over the past 7 years (as in the prior expansion). The US and the world also have an extraordinary amount of debt that has accumulated which has created the dangerous tinder for this rise in interest rates.

Germany’s economy in Q3 grew .2% q/o/q and 1.7% y/o/y, both a tenth less than expected. The y/o/y gain is about in line with the modest pace seen over the past few years. Consumer and government spending helped lift growth while equipment spending and exports fell. Looking forward, investors have become more optimistic on the German economy as measured by ZEW whose November index rose to 13.8 from 6.2 in October. That was above the estimate of 8.1 but the current situation component fell a touch unexpectedly. Some of the survey results came in before the US election and some after and the ZEW said this on that: “The election of Donald Trump as US President and the resulting political and economic uncertainties, however, have made an impact. After the election, the economic sentiment has been less positive than before.” They are of course mostly worried about what sort of trade policies come out of the new administration. The day’s data has the DAX little changed.

Italy is the next source of political angst. With 63 different governments in the past 70 years I have no idea why Renzi hasn’t been able to better sell the referendum as real change, ala Trump and Brexit, rather than the No vote being just more of the same. It’s economy actually grew in Q3 by .3% q/o/q and .9% y/o/y, both a tenth more than expected. That y/o/y matches the best growth since Q2 ’11.

Thanks to the weaker pound, wholesale input prices in the UK skyrocketed in October. They rose 4.6% m/o/m, more than double the estimate of up 2% and the y/o/y gain shot up by 12.2% instead of rising by a still whopping 9.3% as expected. Margins got crushed as wholesale output prices rose just .6% m/o/m and 2.1% y/o/y. As for consumer prices, they rose .9% y/o/y and 1.2% at the core, both two tenths less than expected but the UK citizenry better enjoy that while they can because prices are going higher in coming months and quarters. The pound is lower for a 2^nd day and the 10 yr Gilt yield is down by 1 bp as sovereign bonds are rallying throughout Europe and the US.

Mark Carney spoke to Parliament explaining the inflation situation where he tried to say with a straight face how higher inflation, aka 2%, is good for the UK consumer. He repeated that the BoE has “limits to tolerance for above target CPI” but then said they “will accommodate inflation overshoot if caused by slack and exchange rate.” I say to him, consumer price inflation is a tax no matter where it comes from.