The Boock Report

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Succinct Summation of the Week’s Events – 12/1/17

Positives

  1. I’m leaving the tax reform debate and Flynn headlines out of this.
  2. The PCE inflation index rose .1% at the headline level in October and .2% at the core m/o/m and 1.6% and 1.4% y/o/y respectively. All were about in line with expectations while the core rate however was revised up by one tenth in September. Higher energy prices helped to drive the headline gain y/o/y but was down m/o/m after the spike in the two prior months while durable goods prices fell again. Services inflation remained steady, rising by 2.2% y/o/y.
  3. Income growth in October was up by .4% m/o/m, one tenth better than expected. The y/o/y gain in income was 3.4%, matching the best since December 2015. Private sector wages and salaries in particular were up by .3% m/o/m and 3.8% y/o/y, the best since February. The spending increase of .3% m/o/m was as forecasted but September was revised lower by one tenth. Spending is still dealing with the hurricane aftermath as durable goods spending fell m/o/m after the spike in September (auto related). Non durable goods spending rose led by energy while spending on services was up by .3% and has been driven by healthcare as seen in the GDP report for Q3. Off the lowest level in about 10 years, the savings rate rose two tenths to 3.2.
  4. Q3 GDP growth was revised to 3.3% from 3%. Spending on healthcare services was the biggest component of personal consumption.
  5. Initial jobless claims fell 2k w/o/w to 238k. The estimate was 240k. It seems that the claims issue with Puerto Rico and the US Virgin Islands have cycled thru but it’s now showing up in continuing claims. Continuing claims rose by 42k, after being up by 47k in the week prior. The total level is the most since early September after the lowest level seen since 1973 a few weeks ago.
  6. These comments on labor and wages are good for employees, not so much for profit margins:
    Dallas: “Labor shortages persisted, and there were widespread reports of increased wages.”
    St. Louis: “Labor market conditions remain tight, as most firms reported raising starting wages and salaries as a way to attract new workers.”
    Boston: “Labor markets remained tight and some employers reported modest wage increases.”
    Cleveland: “Upward pressure increased further on wages, non-labor input costs, and selling prices.”
    Richmond: “Labor markets tightened further, which drove up wages for some workers.”
    Atlanta: “Tightness in the labor market persisted and wages grew modestly.”
  7. Pending home sales in October jumped 3.5% m/o/m, well more than the estimate of up 1% while September was revised down by 4 tenths. Let’s call this pent up demand after the hurricanes as there was a 7.4% jump in sales in the South after 3 months of declines. Sales in the Midwest were up by 2.8% but fell out West and were up just .5% in the Northeast. The index level of 109.3 is about where the average is for the year at 108.8 and the NAR said “Last month’s solid increase in contract signings were still not enough to keep activity from declining on an annual basis for the 6th time in 7 months. Home shoppers had better luck finding a home to buy in October, but slim pickings and consistently fast price gains continue to frustrate and prevent too many would be buyers from reaching the market.” We’ve seen a housing PRICE recovery but much less so a housing TRANSACTION recovery.
  8. The MBA said purchase applications to buy a home rose 1.8% w/o/w after a 5.3% rise last week. The index was up 6.2% y/o/y and continues a pretty good pace of activity. The index at 244.7 is just above the one year average of 236.9.
  9. Home price gains y/o/y accelerated in September to 6.2%, the quickest since July 2014, according to the Case-Shiller index. This is great if one is a seller and tougher for those looking to buy. The 20 city seasonally adjusted index is now 5% above the 2007 bubble peak.
  10. New home sales in October totaled 685k, 58k more than expected but partially offset by a downward revision of 22k in September to 645k. The South saw strong sales as the area continues to rebound from the storms. With sales rising faster than homes for sale, the inventory to sales ratio fell to 4.9 from 5.2 months and that is the lowest since July 2016. The median home price was up by 3.3% y/o/y but this figure is very volatile month to month. The average home price was up by almost 14% y/o/y to $400,200, the highest on record and 21% above the nominal peak in March 2007.  Underline mine. Please Fed, stop telling us about your worries and the mysteries about low inflation.
  11. The Conference Board Consumer Confidence index for November rose to 129.5 from 126.2. That was 5.5 pts better than expected and is at the highest level since November 2000. A key reason for the improvement in confidence was the answers to the labor market questions where those that said jobs were Plentiful rose for a 2nd month while those that said jobs were Hard to Get fell for a 4th straight month. Those expecting Higher Income fell .2 pts while most expect it to stay the same. There was an almost 4 pt rise in those expecting more overall employment. Spending intentions were mixed. The Conference Board bottom lined the report by saying “Consumers are entering the holiday season in very high spirits and foresee the economy expanding at a healthy pace into the early months of 2018.”
  12. Construction spending in October jumped by 1.4% m/o/m but it almost all was public spending on nonresidential building which spiked by 3.9% m/o/m. Private residential and nonresidential spending was up a more modest .6% m/o/m after 3 straight months of declines.
  13. China’s November state sector weighted manufacturing PMI was up slightly to 51.8 in November from 51.6. The estimate was 51.4.
  14. The PMI in Taiwan rose 2.7 pts to 56.3, South Korea’s was up 1 pt to 51.2, Japan’s was higher by .8 pts to 53.6, Thailand was up a hair to exactly 50 from 49.8, India was up by 2.3 pts to 52.6, the Philippines PMI rose by 1.1 pts to 54.8 while Vietnam fell a touch to 51.4 from 51.6.
  15. In Japan, the October jobs to applicant ratio rose to 1.55 from 1.52 and that is the highest since 1974. The unemployment rate held at 2.8%, the lowest since 1994. A few days ago the FT reported on this labor shortage and said “Japanese companies are scouring the country for workers and offering more attractive permanent contracts as they struggle to overcome the worst labor shortages in 40 years. Companies across a range of sectors from construction to elderly care have warned in recent days that a lack of staff is starting to hit their business.” The comments being a negative of course of an extremely tight labor market.
  16. October Japanese core/core CPI (ex food and energy) rose .2% y/o/y as expected and unchanged with September. Just taking out food, which is their core rate, it was up by .8% y/o/y (led by energy) which is the most since March ’15. Yeah?! The more up to date November Tokyo CPI saw a core rate increase of .6% and core/core of .2% as expected. The latter is actually the highest since October 2016.
  17. The Bank of Korea begins to lighten up its foot on the monetary pedal with a 25 bps rate hike to 1.50%, its first since 2011 but as expected.
  18. The Eurozone manufacturing PMI index was revised a hair to 60.1 from 60 from 58.5 in October and that’s the best since April 2000. Export orders rose to a record level since this survey began in 1997 (who cares about a stronger euro). Price pressures, as stated here many times, are intensifying. “Input costs rose at the quickest pace in 6 ½ years, while output charges increased to the greatest extent since June 2011. Increased input costs reflected a combination of rising commodity prices and a sellers’ market developing for certain inputs. The latter factor was further highlighted by the trend in supplier delivery times, which lengthened to one of the greatest extents in survey history.”
  19. UK manufacturing improved in November with the PMI index up to 58.2 from 56.6 vs the estimate of 56.5. This is the best in about 4 years. Markit said “The expansion remained broad based by sub sector.” Employment rose to the best in 3 ½ years. Rising inflation pressures continued: “November saw purchasing costs rise at a pace close to October’s 7 month high, reflecting increased commodity prices, exchange rate effects and higher vendor prices due to supply chain constraints. The latter was also highlighted by a further substantial lengthening in average supplier delivery times. Output charges continued to rise at a substantial clip, the fastest for 7 months and among the highest during the past 6 ½ years. Companies linked the latest increase to stronger demand boosting their pricing power and the pass thru of rising costs to clients.”
  20. The eurozone CPI rose 1.5% in November vs 1.4% in October but that was one tenth less than expected. The core rate held at .9% vs the estimate of up 1%. Higher energy prices was the main reason for the headline lift as it was up 4.7% y/o/y while services inflation was unchanged at 1.2% as was non energy industrial goods prices which remained up .4%. For the year to date, headline inflation has averaged 1.6% and has ranged between 1.3-2.0%. Price stability.
  21. The Euro area unemployment rate fell a tenth to 8.8% in October and that is the lowest since January 2009. Step by step it is getting closer to its pre recession trough of 7.3% and gets further away from its 2013 peak of 12.1%.
  22. The European Commission said its Economic Confidence index rose .5 pt to 114.6 as expected but to a 17 year high. This is a very coincident indicator keep in mind.
  23. The ECB said loans given to private sector companies in the eurozone rose 2.9% y/o/y, a pick up from 2.4% in September. Household loan growth was 2.7% for a 2nd month. Money supply growth as measured by M3 was up 5%, about as expected but down from 5.2%  in September.
  24. German unemployment fell by 18k in November, more than the estimate of down 10k. The unemployment rate held at 5.6%, the lowest since reunification.
  25. Canada blew away the estimate of its November jobs figure. Employment grew by 79.5k vs the estimate of 10k. Their unemployment rate fell 4 tenths to 5.9%, the lowest since February 2008.

 

Negatives

  1. The November ISM manufacturing index fell .5 pt to 58.2 m/o/m and that was about in line with the estimate of 58.3. It’s down for the 2nd month and at the lowest since July but is still at an elevated level. Of the 18 industries surveyed, 14 saw growth vs 16 in October. The aftermath of the hurricanes is still impacting parts of the number such as inventories, prices and with auto’s, chemicals, lumber, etc…
  2. Refi’s fell 7.7% w/o/w after falling by 4.8% last week. Because the comparisons though get easier, the y/o/y decline was just 18%.
  3. Even though US interest rates keep rising, particularly on the short end, we saw three really weak Treasury auctions.
  4. A larger than expected goods deficit and a sharp drop in wholesale inventories in October led to sharp cuts to Q4 GDP estimates. The Atlanta Fed in particular went from 3.5% on Monday to 2.7% yesterday. Also trimming it was the slight upside in Q3 GDP but also a cut in personal spending forecasts for October.
  5. Out last Friday but for the week ended November 15th, commercial and industrial loan growth has slowed to just about zero, up just .7% y/o/y.
  6. The private sector weighted Chinese Caixin index for November fell to 50.8 from 51. The estimate was 50.9 and it’s at a 5 month low. Markit said “Output and new orders rose only modestly, leading to a softer expansion in buying activity….Efforts to cut costs contributed to another fall in staffing levels, with the rate of decline quickening to a 3 month record.” On inflation, “companies faced a further sharp increase in average input costs, that led to a notable rise in selling prices.”
  7. Hong Kong exports in October rose by 6.7% y/o/y, below the forecast of up 10.1% and the slowest rate of gain since May. The increase was mostly from Asia and Europe as exports to the US slowed to about nothing y/o/y. Imports were up by 7.9% vs the estimate of up 9.5% and here too, imports from the US were up just .4% y/o/y.
  8. South Korea’s industrial production figure fell 1.1% m/o/m vs the estimate of up .2%. Versus last year, it dropped by 5.9% which is the worst since February 2013. A 17.5% y/o/y drop in auto’s was the main reason after a sharp rise in September.
  9. Japan’s industrial production index for October was up by .5%, well below the estimate of up 1.8%. As seen in yesterday’s weak retail sales report, the Economic Ministry is blaming the typhoons as impacting shipments and inventories.
  10. Japanese retail sales were flat m/o/m in October vs the estimate of up .2% and they fell by .2% y/o/y instead of rising by .2% as forecasted. This follows a negative personal spending number within Q3 but the Japanese Economy Ministry is again blaming weather as saying two typhoons kept people from the stores.
  11. Consumer spending in France in October was disappointing as they fell 1.9% m/o/m and .6% y/o/y vs the estimate of down .1% and up 1.4% y/o/y. Warmer weather is being blamed by INSEE (their stat service) but that’s a lame excuse as weakness was seen across the board and even with durable goods which fell 1.1%.
  12. German import prices in October jumped by .6% m/o/m after rising by .9% in September. This was 2 tenths more than expected and the y/o/y rise was 2.6% vs 3% in the month prior. Energy certainly was a key contributing to the rise but even excluding all petro products, import prices still rose .5% m/o/m and 2.2% y/o/y.
  13. German retail sales in October fell 1.2% m/o/m vs the forecast of up .3%. The y/o/y drop of 1.4% matches the worst since July 2016.
  14. Italian economic sentiment was down a touch in November. The index went to 108.8 from 109.1 which was the best since 2007. There is still a ways to go before the 2007 peak of 122 is reached.
  15. The GFK UK consumer confidence index fell 2 pts to match the weakest level since December 2013. Higher inflation and modest wage growth is not helping.
  16. I lost a good friend and we all lost a great economist and great man this week, Rich Yamarone who was an economist at Bloomberg Intelligence. He will be greatly missed. My tribute to him is this song from George Harrison called Any Road which I know Rich loved. The best line of the song, “And if you don’t know where you’re going, any road will take you there.” Also, I include this quote he put on his Bloomberg page from Coco Chanel,

    “In order to be irreplaceable, one must always be different.”

    He certainly was.