The NFIB small business optimism index for July rose 1.6 pts to 105.2 and is a touch above the year to date average of 104.8. The post election optimism is pretty much holding up as this index printed 94.9 in October and 98.4 in November. The standout was the Plans to Hire component which rose 4 pts to 19% and matches the best level since December 2003. There remains however difficulty in finding those hires as Positions Not Able To Fill rose 5 pts to 35%, the most since November 2000. This led to a 3 pt rise in current Compensation but Compensation Plans in the future fell 2 pts. Maybe because of rising labor costs, the Positive Earnings Trends component held at -10%, holding at a 5 month low. After falling by 6 pts in June, those that Expect a Better Economy rose 4 pts and those that Expect Higher Sales was up 5 pts after falling by 5 pts last month. We also saw a 1 pt rise in those that plan on increasing inventories to the most since late 2014. The continued sluggishness remains in capital spending plans which fell 2 pts to 28% and remains stuck in a 26-30 pt range seen this year. Also of note was the 7 pt jump in Higher Selling Prices from 1% to 8%, a 3 year high and 23% “plan price hikes”, up 4 pts.
The NFIB said simply, “Main Street was buoyed by stronger customer demand despite the dysfunction in Washington, DC.” As to the growing labor shortage, “19% of owners cited the difficulty of finding qualified workers as their Single Most Important Business Problem (up 4 pts), second only to taxes.” In construction and manufacturing, it is the number one problem. Combine this with the rise in selling prices, both current and expected and if the Fed reads this press release they’ll have more reason to initiate QT next month and follow thru with another rate hike in December. While healthcare and tax reform have not yet come to fruition, “many important changes have occurred to the regulatory structure with few if any new rules showing up in the Congressional Register. These changes will seep into the regulatory structure with little fanfare, but will have significant impacts on regulation costs paid by small businesses going forward.”
In Japan, Haruhiko Kuroda’s term as Governor of the BoJ ends in April. One of the contenders for his job is Kazumasa Iwata, the former deputy governor of the BoJ, and if the possibility of him taking over becomes real, you better pay attention to what he told Reuters overnight. Reuters reported that Iwata said “The Bank of Japan should dial back its massive stimulus before inflation hits its 2% target.” In this interview, “Iwata criticized the central bank’s price forecasts as too optimistic and warned that even hitting 1% inflation could be challenging.” Iwata also said “The BoJ should slow its annual bond buying to around 40T yen from the current 80T yen. That would make its policy more sustainable.” He also wants a slowdown in the pace of ETF buying, “given the distortions it is creating in the market.” He also thinks that ‘yield curve control’ should go out 5 years and not 10 so the yield curve can steepen. I can’t say for sure it is the reason but the yen is higher at 110.3 and the Nikkei fell .3% overnight. There was no response though in JGB yields as they were unchanged. Bottom line, don’t forget the name Kazumasa Iwata.
China reported a miss in its July trade data relative to expectations. Exports rose 7.2% y/o/y in dollar terms which was below the forecast of up 11%. Exports to the US were up by 8.9% y/o/y, a slowdown from the nearly 20% jump in June as the two countries dance around trade issues. Exports to the EU were up by 9.5% y/o/y. Imports were up by 11% but that was well below the estimate of up 18%. Part of the reason for the drop in imports was a m/o/m fall in commodity imports of coal, crude oil, iron ore and steel. Copper imports held unchanged m/o/m but are down 15% y/o/y. Soybean imports hit an all time record high. While ag prices have backed off from the recent move higher, I remain very bullish on this space. Bottom line, I’m not going to make much of the below estimate trade data for just one month as the figures are still pretty good and we know global trade has definitely recovered this year. But it also can’t be ignored after seeing the German trade data for June. See below. Chinese stocks were little changed in response but the offshore yuan is having its best day against the US dollar since late June. Go back to early October to see the yuan this strong vs the US dollar.
We also saw trade data out of Germany, the other export powerhouse but this was for June. They disappointed as well. Exports fell 2.8% m/o/m, well worse than the estimate of up .2%. Also reflecting weakness was the 4.5% m/o/m drop in imports, a sharp deviation from the forecast of up .2%. Bottom line, these numbers sucked and followed the miss in industrial production seen yesterday. I’m surprised by the miss and comes out of nowhere. I can’t blame the euro as it averaged just $1.12 in June. I won’t jump to any major conclusion on one month of volatile data but this is worth watching especially after seeing the miss in the July China figures. Notwithstanding the data, the euro is higher as the US dollar can’t get out of its own way. European bourses are flattish as are European sovereign bonds.