Positives
1) There is an opportunity Saturday night to at least postpone further tariffs as both sides seem interested in some détente. Even Robert Lighthizer is optimistic.
2) Jay Powell gave himself some breathing room and flexibility in terms of the timing of achieving his goal of an eventual 3%-ish fed funds rate.
3) The headline PCE inflation deflator rose .2% m/o/m in October as expected and 2% y/o/y. The core rate though was up .1% m/o/m which was one tenth below the estimate as was the 1.8% y/o/y increase.
4) Personal spending in October rose .6% m/o/m, two tenths more than expected but September was revised down by 2 tenths so call it a push relative to forecasts.
5) Income growth was a touch better than expected with private sector wages and salaries up by 4.7% y/o/y vs 4.4% in September and 4.7% in August.
6) The November Conference Board consumer confidence index was 135.7, exactly as expected but down 2.2 pts from October which was the best since 2000. The Present Situation did rise about 1 pt but was completely offset by a 4 pt drop in Expectations. One year inflation expectations rose one tenth to 4.9%, smack in line with the 5 year average. The answers to the jobs question remain very solid. Those that said jobs are Plentiful rose 1.2 pts to the highest level since January 2001 while those that said they are Hard To Get fell to just off the least since 2000. Spending intentions didn’t change much. I was disappointed to see a 3.2 pt drop in those expecting an Increase in income to the least in 4 months.
7) The Chicago manufacturing PMI in November jumped 8 pts m/o/m to 66.4 and that was well above the forecast of 58.5. That is also the best level of the year but because it’s such a volatile month to month number, it’s best to average out the noise. The 3 month average is 61.7 vs the 6 month average of 63.1 and the 12 month average of 62.6. There was likely some pick up in activity ahead of tariff worries. MNI said “Some firms said that while they were seeing increased orders in November, there were also demands from customers for earlier delivery on existing orders.” Delivery issues remain as supplier deliveries index rose to the highest since April 2004. Looking forward, “many firms reported seeing the effects of higher China tariffs on their invoices for the first time, and voiced concern that business could be stifled going forward.”
8) Within the Q3 GDP revision which was left unchanged at 3.5% (with a pickup in capital investment but reduction in pace of spending), corporate profits pre tax rose 10.3% y/o/y from 7.3% in Q2 and 5.9% in Q1. Thanks to the tax cut, the after tax profit rise was 19.4% in Q3 vs 15.8% in Q2 and 15.1% in Q1.
9) The Japanese unemployment rate did tick up by one tenth to 2.4% where no change was expected. Also, the job to applicant ratio fell to 1.62 from 1.64 (the highest since 1974) vs the forecast of an uptick to 1.65. Positively, this all happened for good reason as the number of employed jumped by 230k, the size of the labor force rose by 330k and the participation rate rose to the best level since 2001.
10) Industrial production in Japan was much better than expected with a 2.9% m/o/m increase more than double the forecast of up 1.2%.
11) As for inflation in Japan, the November CPI print for Tokyo saw a .6% y/o/y rise ex food and energy as expected. It’s now been .6% or .7% for 4 straight months which is around a 1 1/2 year high.
12) Assuming this was a front loading of commerce ahead of the tariff rate uncertainty as of January 1, Hong Kong exports in October jumped by 14.6% y/o/y, well more than the estimate of a rise of 9.4%. Exports to China were up by 18% y/o/y and by 10% to the US. Imports were up by 13.1% y/o/y, also above the forecast of up 10.2%.
13) Eurozone inflation in November was up 2% as expected but down from 2.2% in October. The core rate was higher by 1%, one tenth less than expected and vs 1.1% in October. While Mario Draghi is still looking for near 2%, there has actually been price stability in Europe as the core rate has averaged .9% over the past 3 years.
14) In November, the number of unemployed in Germany fell by 16k, 6k more than expected, marking the 17th straight month of declines and the unemployment rate fell one tenth to 5%, the lowest since reunification.
15) The Euro area Economic confidence index for November fell to 109.5 from 109.7 but that was a touch above the estimate of 109.1. It is though the weakest since May 2017. The manufacturing component rose .4 pts after falling by 1.7 pts last month. Services were unchanged as was construction. Consumer confidence weakened to the lowest level since March 2017. Retail sales rose slightly.
16) The UK CBI retail sales index improved to 19 from 5 and that was about double the estimate. CBI though didn’t sound very optimistic, “While it is encouraging to see headline retail sales growth strengthen in November after a weak out turn in October, the quarterly survey continues to paint a gloomy picture of the sector. Business sentiment remains poor, investment intentions are flat, and headcount continues to decline.”
17) The Italian 10 yr yield fell 20 bps on the week on hopes that the Italian government is showing some flexibility in its budget negotiation with the EU.
Negatives
1) Peter Navarro will be attending the Trump/Xi dinner Saturday night.
2) If the Fed is close to being done raising interest rates, it will be at a level barely above inflation and it would mean the Fed has very little in the number of basis points to make much of a difference in the next easing cycle. It would also reflect how sensitive the US economy is to modest changes in interest rates. Again, this is because we are a credit dependent economy rather than one relying more on savings because of decades of easy money policy. Either way, monetary tightening will continue as the Fed’s balance sheet will shrink by another $600b in 2019 after a reduction of $420b in 2018. This is no longer like watching paint dry.
3) Likely distorted by the Thanksgiving holiday, initial jobless claims totaled 234k, 14k more than expected and up from 224k last week. Smoothing out the holiday, the 4 week average rose to 223k from 219k and that is the highest since July. We’ve likely seen the bottom in claims. Not distorted by Thanksgiving as it’s delayed by a week, Continuing Claims rose 50k w/o/w to the most since late August.
4) Pending sales of existing homes in October fell 2.6% m/o/m, well worse than the estimate of up .5%. On a y/o/y basis, contract signings have fallen in 9 of the 10 months so far this year. The seasonally adjusted index is at the lowest level since the summer of 2014. Most of the decline was seen out West as sales there fell 8.9% m/o/m and the NAR said “The West region experienced the fastest run up in home prices in a short time and therefore, has essentially priced out many consumers.” The NAR said “The recent rise in mortgage rates have reduced the pool of eligible homebuyers.” It is why the NAR again is calling out the Fed saying “Looking at the broader economy and keeping in mind that the housing sector is a great contributor to the economy, it would be wise for the Federal Reserve to slow the raising of rates to see how inflation develops.”
5) New home sales in October totaled 544k, 30k less than expected, the least since March 2016 but that was offset by a 44k upward revision to September to 597k. Smoothing out the monthly noise in this volatile data point puts the 3 month average at 577k vs the 6 month average of 601k, the 12 month average of 629k and the 2017 average of 616k. For new homes in October, there was a 14k increase from September in the number of homes for sale to 336k, the most since January 2009 and above the 20 year average of 308k (smoothing out the spike in 2005 and 2006). This brings supply to 7.4 months of current activity from 6.5 in September and that is the most since February 2011. The median home price moderated to $309,700, the cheapest since February 2017 but the average price of $395,000 is the 2nd highest on record due to mix.
6) With a 4 bp dip in the average 30 yr mortgage rate to 5.12% off the highest level in 10 years, mortgage apps rebounded but it was all due to purchases. Purchases rose 8.8% w/o/w and are up 1.7% y/o/y. Refi’s were up .5% w/o/w after 4 straight weeks of declines. They are down 35% y/o/y.
7) The US savings rate slipped by a tenth to 6.2%, matching the lowest since 2013. The 5 year savings rate average is 7%.
8) The Dallas manufacturing November index slowed to 17.6 from 29.4 and that was 7 pts less than expected. It’s also the weakest print since July 2017. Production, new orders, backlogs, delivery times, employment, the workweek, wages and capital spending plans all fell m/o/m. Capital spending in particular is the slowest since April 2017. Coincident with the decline in oil prices, prices paid and received also dropped from October. As for the 6 month business activity outlook, it fell 10 pts to the least since October 2016.
9) The Richmond November index fell 1 pt to 14 vs the estimate of no change. It is a very volatile number but 14 is the lowest since April. New orders were the lowest since May while backlogs rose 2 pts. Capital spending plans were mixed. Employment plans slowed to the lowest since January. Of note, wages rose 6 pts to the highest since 1996. Prices paid and received though did moderate. Finally of importance, expected new order volume over the coming 6 months fell to the lowest level since July 2016.
10) Likely the rush to procure goods before a potential spike in tariff rates at year end was reflected in the jump in inventories in October. Wholesale inventories rose by .7% m/o/m, almost double the estimate of up .4% and September was revised up by two tenths. It was a 1.7% durable goods boost in inventories (those items most impacted by tariffs) that drove it while non durable goods inventories actually fell for a 2nd straight month.
11) The goods trade deficit in October was $77.2b, about as expected but that is a record high. Exports fell .6% m/o/m after the September 2% jump. Reflecting the slowdown in global trade, exports have fallen in 4 of the last 5 months. Imports were up slightly to a record high due to the need to front load inventories and also a steady pace of consumer spending egged on by lower tax rates and higher wages.
12) The Chinese manufacturing PMI for November fell to 50 from 50.2. The estimate was for no change and at 50 is dead flat line. The export component was little changed but below 50 for the 6th straight month. The services PMI fell .5 pt to 53.4 vs the estimate of 53.8. Combining both into a composite index saw it fall to 52.8, the weakest in more than a year.
13) Japan’s manufacturing PMI in November fell to 51.8 from 52.9. That’s a 2 year low as “the rate of output growth weakened and new orders for goods declined for the first time since September 2016” said Markit. They went on to say that “The underlying trend appears to be skewed to the downside. Indeed, the fall in new orders is a worrying development as easing global growth momentum coupled with a weak domestic backdrop could spell further demand woes for Q4. In fact, survey data suggest that manufacturers have already begun to pare back expectations, as confidence fell for a 6th consecutive month.”
14) Consumer confidence in November in Japan fell to the lowest level since December 2016. The ‘Income Growth’ component though did bounce back after the October drop.
15) As a great proxy of global trade, the Bank of Korea released its monthly South Korea business survey for December. The manufacturing component fell 1 pt m/o/m to match the lowest level since April 2016. The services component also dropped 1 pt to match the weakest since February 2017.
16) The euro area unemployment rate held at 8.1% in October for the 4th straight month. The estimate was for a drop to 8% but remaining at a 10 year low. Italy remains a problem and was a negative outlier as its unemployment rate jumped to 10.6% from 10.3% and the estimate was 10.1%.
17) The ECB released its loan data for October which said lending to companies rose 3.9% y/o/y, the slowest since May. It reached its peak this cycle in September when it was up 4.3%. Loans to households did remain steady with September at growth of 3.2% y/o/y. As the ECB cut its asset purchases by another 50% as of October, money supply growth actually surprised to the upside with a 3.9% y/o/y increase vs the estimate of up 3.5%.
18) The November German IFO business confidence index fell to 102 from 102.9. The estimate was 102.3 and this is the 2nd lowest print since March 2017. Both Expectations and the Current Assessment fell m/o/m and the components of manufacturing, services, trade and construction all dropped from October. IFO was pretty succinct in describing the situation, “The German economy is cooling down.”
19) German retail sales in October fell .3% m/o/m instead of rising by .4% as expected. Also, it’s off a weaker than initially forecasted baseline as September was revised down by 4 tenths.
20) What’s likely the result of the fuel tax hike induced protests in, French consumer confidence in November fell to 92 from 95 and that was 2 pts less than expected. That is also the lowest since January 2015. The ‘Standard of Living’ component saw particular weakness.
21) Consumer confidence in the UK fell to match the weakest level since July 2013.
22) Switzerland and Sweden, two bastions of the negative interest rate experiment saw both economies contract in Q3 q/o/q. The Swiss economy fell .2% q/o/q vs the estimate of up .4%. The State Secretariat for Economic Affairs said “The strong, continuous growth phase enjoyed by the Swiss economy for one and a half years was suddenly interrupted. Switzerland is thus following the significant downturn seen at the same time in other European countries, particularly Germany.” The Swedish economy also shrunk by .2% q/o/q vs the forecast of growth of .2%. This as the Riksbank is about to hike rates and begin the process to get out from underneath NIRP.