Positive
1) With the UK Parliament now likely taking some control over the negotiating process, I believe the odds of a no deal/hard Brexit shrinks to almost nothing.
2) Initial jobless claims totaled 213k, 7k less than expected and down from 216k last week for the week ended January 12th. The 4 week average fell by 1k to 221k. The BLS said that claims by federal workers for the week ended January 5th (thus delayed by a week) was higher by 10k not seasonally adjusted. The week prior it was just below 5k. Thus, as long as the shutdown continues, this claims component will continue to rise.
3) The average 30 yr rate held at 4.74% for a 2nd week, the most attractive since April. Purchases were up by 9.1% w/o/w and higher by almost 11% y/o/y. Refi’s jumped by 19% w/o/w and has trimmed its y/o/y decline to 11%. Also a help was the seasonal post holiday bounce after the typical holiday decline.
4) Easily the most hawkish member of the Fed, that being Esther George, is now expressing her opinion that “It might be a good time to pause our interest rate normalization, study the incoming evidence and data, and verify our current location…It is possible that some additional rate increases will be appropriate. But making that judgment is not urgent…”
5) The January Philly regional manufacturing index jumped to 17 from 9.1. That was well above the estimate of 9.5. New orders rose, backlogs fell and inventories went negative. Employment dropped to the least since February 2017. The six month business outlook did hold steady, rising to 31.2 from 29.9 but the new orders outlook fell 6.3 pts to the weakest since February 2016. Also, the 6 month outlook for backlogs went negative and to the lowest level also since February 2016. The outlook for hiring was up slightly. Capital spending plans fell 3 pts to a 3 month low. The outlook for prices paid and received fell sharply.
6) The January NAHB home builder index rose 2 pts m/o/m to 58 vs the estimate of no change. This index was 68 back in October. The internal components were up 1-3 pts m/o/m. The NAHB said “The gradual decline in mortgage rates in recent weeks helped to sustain builder sentiment…Builders need to continue to manage rising construction costs to keep home prices affordable.” They do remain hopeful about demand as “Low unemployment, solid job growth and favorable demographics should support housing demand in the coming months.”
7) In December, the headline PPI fell .2% m/o/m vs the estimate of down .1%. The core rate missed by 3 tenths, dropping by one tenth instead of rising by 2 tenths as expected. If we take out trade in addition to food and energy, prices saw no change m/o/m vs the estimate of up .2%. Versus last year, headline PPI was up by 2.5%, the core rate was up by 2.7% and the core rate/ex trade was higher by 2.8%. Those are unchanged from November.
8) Industrial production for December rose .3% m/o/m, one tenth more than expected and November was revised down by two tenths. The manufacturing component was particularly strong with a 1.1% m/o/m rise, well more than the estimate of up .3%. The reason for this was an inexplicable 4.7% m/o/m spike in the production of autos/parts just as the demand for them has plateaued. Capacity utilization was up slightly.
9) The final print of the December CPI for the Eurozone was left unchanged from the initial one. The headline rate rose 1.6% y/o/y while the core pace was up by 1% y/o/y. With the drop in energy prices, the headline gain was the slowest since April. The core rate increase is pretty much where it’s been for the past 5 years and has averaged up .9% in this time frame.
10) Thanks to the sharp drop in oil prices, December Japanese PPI fell .6% m/o/m, twice the estimate and the y/o/y gain of 1.5% was below the forecast of up 1.8%. This is also down from 2.3% in November.
11) Consumer price inflation in Japan remained benign in December. The headline rate was up .3% y/o/y, down from .8% in the month prior because of the sharp drop in oil and food. The rate ex both was up just .3% y/o/y, the same print seen in November. True price stability.
12) China again is planning on utilizing tax cuts to offset the softness in its economy. A statement from the Chinese government referred to it being on a “larger scale.” A JPMorgan China economist (according to South China Morning Post) estimates it will be about 1.2% of GDP which equates to 2 Trillion yuan (around $300b).
13) Aggregate financing in December totaled 1.59 Trillion yuan, above the estimate of 1.3 Trillion with all of the upside on the bank loan side which made up 1.08 Trillion of the total. We know of course they are now encouraging a pick up in lending, particularly to private companies via the RRR cut and quota provisions. M2 growth of 8.1% y/o/y was as expected but off the slowest pace since at least 1996 at 8% in November. The negative in the loan data is of course that they don’t need more debt accumulation.
Negatives
1) The government shutdown, which I originally thought was just a political nuisance that would be meaningless economically under the assumption it would soon reopen, the length now is trimming up to one tenth to GDP for every week according to the WH.
2) The Fed’s Beige Book reflects a rather uneven and ordinary economic landscape with a lot of “modest” and “moderate” adjectives thrown around. “Outlooks generally remained positive, but many Districts reported that contacts had become less optimistic in response to increased financial market volatility, rising short-term interest rates, falling energy prices, and elevated trade and political uncertainty.”
3) That even the most hawkish Fed member now believes that it’s time to pause with a fed funds rate of only 2.25-2.5% and a real rate barely above zero says a lot about the US economy’s (and stock and credit markets) addiction and sensitivity to even modest rate changes.
4) The NY manufacturing index fell to 3.9 from 11.5 and that was well below the estimate of 10. That’s also the weakest print since May 2017. New orders, backlogs, inventories and employment all weakened. The business activity 6 month outlook was almost cut in half to 17.8 from 30.6. The outlooks for new orders, inventories, backlogs, employment, shipments and delivery times all fell. Notably, capital expenditure plans fell to 17.9 from 31.2 while tech spending plans dropped to 20 from 26.1. The NY Fed summed it up succinctly, “Manufacturing firms in New York State reported that business activity expanded slightly” and “Firms were less optimistic about the six month outlook than in recent months.”
5) December import prices rose .3% m/o/m ex petro, 3 tenths more than expected and November was revised up by 3 tenths.
6) The initial January UoM consumer confidence index fell to 90.7 from 98.3 and that was well below the estimate of 96.8. This is the worst print since October 2016, the month before the presidential election. Current conditions fell by 6 pts and the expectations component was down almost 9 pts. One year inflation expectations held at 2.7%. Those expecting higher income fell by 1 pt but holding to trend over the past 4 months. Expectations on employment though fell to the weakest since July 2016 as business expectations fell sharply. Business expectations vs last year plunged by 30 pts and the outlook for this year was down by 12. The answer to the question “The country will have continuous good times over next 12 months” fell by 28 pts to the lowest since August 2014. Yes, 2014. Spending decisions on big ticket household items, cars/trucks and homes all fell. For auto’s, its the lowest since 2013. We thus don’t need all those newly built cars seen in the IP figure. The bottom line from the UoM, “The loss was due to a host of issues including the partial government shutdown, the impact of tariffs, instabilities in financial markets, the global slowdown, and the lack of clarity about monetary policies.”
7) UK headline CPI rose 2.1% y/o/y as expected in December vs 2.3% in November. That’s the 23rd straight month above 2%. It is though moderating because of the drop in fuel prices. The core rate was higher by 1.9%, one tenth more than expected and up a tenth from the prior month. Wholesale input prices rose by 3.7%, the slowest since right before the Brexit vote but in part because the comparisons have gotten tougher. Margins are still getting squeezed because output prices rose only 2.5%.
8) UK retail sales in the crucial holiday month of December was down 1.3% m/o/m ex fuel oil, worse than the estimate of down .8% and November was revised lower by 2 tenths.
9) New passenger car registrations in Europe fell 8.7% y/o/y in December. The group that releases the data said “In December 2018, the EU passenger car market declined for the 4th month in a row…continuing the downward trend that started with the introduction of WLTP in September.”
10) The German Federal Statistics Office said its economy grew by 1.5% in 2018 after growing by 2.2% in 2017. That’s the weakest pace of growth in 5 years. There is not an actual Q4 figure yet but the Office hinted that there might have been slight growth which would allow them to avoid a technical recession after the contraction seen in Q3. The Office simply said “The German economy thus grew the 9th year in a row, although growth has lost momentum.”
11) Reconciling all the weak industrial production data points that we’ve seen over the past week from individual countries, the November Eurozone IP was down by 1.7% m/o/m, a touch worse than the estimate of -1.5% and October was revised down by a tenth. The 3.3% y/o/y decline was the weakest since November 2012 and the first y/o/y drop since January 2017.
12) Core Japanese machinery orders for November disappointed as there was no growth m/o/m vs the estimate of a rise of 3%. A Cabinet Office official said that orders “aren’t on the upward trend that they once were.”
13) Chinese exports fell 4.4% y/o/y, well below the forecast of a rise of 2%. Imports, many of which eventually get converted into exports, was lower by 7.6% y/o/y, much less than the estimate of up 4.5%. The trade surplus with the US ended 2018 with the biggest on record.
14) Singapore’s December non oil exports were not pretty, falling 8.5% y/o/y, well worse than the estimate of up 2%.
15) Respect for Jack Bogle and the investing strategy he created.
Peter is the Chief Investment Officer at Bleakley Advisory Group and is a CNBC contributor.