The Boock Report

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Succinct Summation of the Week’s Events – 10/26

This is being sent before the GDP report because I’ll be in transit/meetings.

 

Positives

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.”

2) After the mortgage rate sticker shock seen in the last few weeks when the average rate rose above 5% for the first time since 2011, another 1 bp increase to 5.11% actually brought out some activity as people rush to lock in before another potential move higher. Off the lowest level since February 2017, purchase applications rose 2% w/o/w but the y/o/y pace is now flat. Refi’s rebounded by 10% but after last week’s 9% drop to an 18 year low. The y/o/y decline is still 32%.
3) If we include the upward revision to August, non defense capital goods ex aircraft orders were as expected for September. That said after a good rebound from April thru July, these core orders have fallen for 2 straight months, albeit modestly. Shipments of core goods were slightly below expectations including the August revision which leads to a trim to Q3 GDP estimates.
4) Initial jobless claims were as expected at 215k, up 5k w/o/w. The 4 week average was unchanged at 212k. Continuing claims, delayed by a week, fell 5k, down for a 3rd week and to a fresh 45 year low.
5) The Markit manufacturing and services October composite index rose to 54.8 from 53.9 in September vs 54.7 in August and 55.7 in July. Services drove most of the gain with manufacturing up a touch. The services increase comes off an 8 month low and Markit said the “Latest data signaled a robust upturn in new work, which contributed to another accumulation of backlogs at service sector firms.” Employment though slowed to the weakest since June 2017 where “some survey respondents noted that tight labor market conditions had held back their staff recruitment plans.” Highlighting continued price pressures, “input cost inflation accelerated to its sharpest since September 2013. A number of panel members cited the pass thru of tariffs, alongside rising fuel bills and higher borrowing costs.” The negative, “New work from abroad remained close to stagnation.”
6) Japan’s manufacturing index rose to 53.1 from 52.5 and that happens to be the best since April. Markit said “The latest survey indicated stronger expansions in all the key barometers of macroeconomic health, with output, new order and employment growth quickening since September. Furthermore, export sales rose for the first time since May, despite several respondents highlighting problems arising from global trade tensions.” How much of the activity is a pull forward to get things done before year end is unknown and Markit said “next month’s data will be important to assess whether the latest growth rebound is a transitory response to weakness resulting from recent natural disasters.” Of note on the inflation side, “rates of input cost and output price inflation both quicken to multi year highs.”
7) The CPI in Tokyo in October (always precedes the country CPI) ex food (their core rate) rose 1% as expected and that is the same pace seen in September and matches the quickest since March 2015 when the VAT hike influenced the data. Taking out that impact, go back to 2008 the last time it was this high (I know, it’s still only 1%). The ex food and energy index (core-core rate), was up by .6%, one tenth less than expected and down from a .7% gain in August. The BoJ went to the ends of the earth to drum up this rate of inflation.
8) While this is not something one usually hears from a self proclaimed Communist, we know in China that is mostly in name only when it comes to many parts of their economy. The South China Morning Post is reporting that “Chinese President Xi Jinping has written an open letter to the country’s private business owners, saying Beijing will continue to value and protect them to ensure a ‘better tomorrow’ ” He said “It is always a policy of the Central Committee of the Communist Party to support private business development, and this will be unwavering.”
9) In a likely front running of the new tariff tax rate in two months on Chinese goods, South Korean exports for the first 20 days of October jumped by 26% y/o/y and imports were higher by 31.4%. Which means this will likely turn negative come January.
10) Moody’s buys some time for Italy by slapping a ‘stable’ rating as a footnote to their downgrade to one level above junk. While off its intraweek high of 3.80%, the Italian 10 yr yield though is up about 4 bps on the week at 3.53%.
11) The ECB said eurozone banks lending to corporations rose 4.3% y/o/y in September vs 4.1% in August. That’s the best since 2009. Loans to households held at up 3.1% y/o/y. Keep in mind though that nominal GDP is rising by about 4%. While the best level in years, a lot of NIRP and QE was expended to achieve these ordinary rates of growth.
12) Notwithstanding the angst on the part of Corporate Germany, the German consumer confidence GfK index held at 10.6, still near the highest level since this survey began in 2005.
13) Off the lowest level since 2016, French consumer confidence rose 1 pt as expected. I still can’t figure out why Macron’s poll numbers have fallen so sharply. I guess economic change to a more liberalized environment was just not something many were ready for or comfortable with.

 

Negatives

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.”

13) French business confidence in October fell to the lowest level since January 2017 with particular weakness in the manufacturing and retail trade components. Services and employment were unchanged.
14) In the UK, the CBI industrial orders index went to -6 from -1 and that was below the estimate of +2. The outlook is no better as the quarterly Business Optimism component fell to -16 from -3 and that’s the worst since July 2016, the quarter of the Brexit vote. As for expectations on exports, “export prospects for the year ahead fell at the fastest pace since the Eurozone crisis.” The Chief Economist of CBI was downright cautious. “This is a sobering set of figures demanding immediate action at home and abroad. Planned investment is being scaled back in the face of deepening Brexit uncertainty.” Another CBI member said “These figures are concerning and must not be taken lightly. Ongoing uncertainty around Brexit has made for a particularly tough quarter for the UK’s manufacturers.”

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).