This is being sent before the GDP report because I’ll be in transit/meetings.
1) Pending home sales rose .5% in September, a touch above the forecast of no change and follows a 1.9% decline in August. Sales are still lower by 3.4% y/o/y and the m/o/m rise is off the lowest index level since October 2014. The chief economist of the NAR said a lift in inventory helped to bring buyers into the market. There was an acknowledgement though that “With rising mortgage rates and high prices, conversations about the possible benefits of renting over buying have begun to pop up.”
1) In light of rates that are at or near multi year highs, all three main Treasury auctions this week were terrible. This is a concerning continuing trend when considering the amount of supply hitting the Street, we need all the help we can get.
2) I’ll let the CFO of Texas Instruments again give color on what is impacting many companies as we see their Q3 earnings reports because of their broad exposure to the industrial, auto and tech sectors. “Demand is slowing across most markets. What we’re trying to figure out is, is it just the semiconductor cycle or on top of that do we have end demand slowing because of macro issues? We don’t know.” We can add for others the margin pressures created by tariffs, transportation costs and higher labor costs. When the monetary tide flows out, there is no room for these errors. This all said, eps growth for Q3 will still be north of 20% with almost half from the tax cut.
3) Listening to Mario Draghi try to thread the needle of wanting to end QE and get on with getting out of NIRP next year at the same time economic growth is slowing highlights the problem the Fed, BoJ, BoE, SNB, BoC (who hiked rates this week and hinted at more to come), and Riksbank face. By so overdoing the level of easing and barely reversing the policy, they’ve left themselves with nothing to deal with when the upcoming downturn comes. If you’re looking for them to save our ass whenever that might occur, you better start looking somewhere else.
4) The first look at the goods trade deficit for September (not including services) widened to $76.04b, about $1b above the forecast. That is now the biggest goods deficit on record. Exports did rise by 1.8% m/o/m but after 3 months of declines. Imports though rose by more and is up for the 5th straight month.
5) Wholesale inventories rose less than expected in September.
6) The Richmond manufacturing index was well below expectations at 15. The estimate was 24 and it’s down from 29 in September. It’s also the lowest since April. New orders fell 14 pts to 20, a 5 month low. Backlogs shrunk by 7 pts to 13, a 3 month low. Capital spending plans fell 8 pts after rising by 8 pts last month. With respect to the labor market, the big problem remains, “Firms were unable to find workers with skills they needed, as the skills index dropped to an all time low of -22. Respondents expect this struggle to continue in the next six months.” Of note, price pressures really intensified. Prices paid jumped by more than 2 pts to the most since May 2011. Prices received rose to also the most since May 2011. Expectations 6 months out also see further cost increases. The outlook 6 months for now did show some optimism. New order expectations rose 6 pts to a 4 month high but backlogs fell by 5. Capital spending plans did improve.
7) New home sales in September were well below expectations totaling 553k, about 75k less than expected and August was revised down by 44k to 585k. This September level is the worst since December 2016 and the 3 month average has slipped to 580k vs the 6 month average of 607k and the 12 month average of 631k. Sales in the Northeast fell to the least since April 2015. There is no more blaming tight inventory as the number of new homes for sale rose to the most since January 2009 and is above its 15 year average. This brought months’ supply up to 7.1, the most since March 2011. The median home price did fall 3.5% y/o/y but unlike in the existing home sales data, this is a very volatile data point month to month when measuring the price of new homes.
8) Hong Kong exports in September rose 4.5%, almost half the estimate of up 8.6%. Exports to China were up 7% after rising by 14% in August. Exports to the US grew by 5.6% after an almost 18% jump in August. Exports fell to Japan and Germany, to name a few more. Imports were up by 4.8% vs the forecast of up 10.5%.
9) The South Korea’s economy in Q3 rose 2% y/o/y, below the estimate of up 2.3% and that is the slowest quarter since Q3 2009.
10) The German IFO business confidence index for October weakened to 102.8 from 103.7 and that was below the estimate of 103.2. That’s a 3 month low with both current conditions and the outlook lower. The manufacturing sector saw particular softness with this index at the lowest since January 2017. The IFO said succinctly, “Growing global uncertainty is increasingly taking its toll on the German economy.”
11) German PPI rose 3.2% y/o/y in September, two tenths more than expected and up one tenth from August. This is the quickest pace since April 2017. Prices though ex energy were up just 1.6%, matching the lowest since December 2016.
12) The Eurozone Markit manufacturing and services composite index weakened further in October. The index dropped to 52.7 from 54.1 and that was below the forecast of 53.9. That is the lowest since September 2016. Both components fell with particular weakness in Germany. It’s composite index fell to 52.7 from 55 and that is just above a 3 1/2 year low. France saw a modest increase with a lift in services offsetting a m/o/m drop in manufacturing. Markit attributed the European weakness to “a drop in exports, linked in turn by many survey respondents to trade wars and tariffs, which appears to have darkened the global economic environment and led to increased risk aversion.”
15) Australia’s manufacturing and services PMI fell to 51.2 from 52.5 with a modest rise in the former and more than offset by the latter. This level is the weakest in this survey’s 2 1/2 year history. That said, “companies still expect activity to rise over the coming year. Those companies predicting an increase in output linked this to expectations of a stronger demand environment.”
16) Janet Yellen, a prophet of the nobility of zero interest rates and QE whose sole purpose is stimulate borrowing, higher debt, speculation and risk taking is now complaining about the excesses in the leveraged loan market. In the FT today, “I am worried about the systemic risks associated with these loans. There has been a huge deterioration in standards; covenants have been loosened in leveraged lending.” Instead of blaming Fed policies (her own) in encouraging this and stimulating the massive search for yield, “There are a lot of weaknesses in the system, and instead of looking to remedy those weaknesses I feel things have turned in a very deregulatory direction…When I see what is happening politically with lobbying and the pushback on the regulators, and the priorities of some of the regulators, I am really concerned we are on the verge of forgetting about the financial crisis and the need for stronger regulation.” Her and Bernanke still believe it was the lack of regulation that resulted in the housing bubble. I list this as a negative, not to whine again about the Fed but to point out the dangers of them not understanding the full impact of their policies over the past 20 years that created 3 huge bubbles (the current one in bonds, now globally).