Positives
- The Fed continued on with their gradual path of rate hikes. The dissents from Neel Kashkari and Charlie Evans prove their very narrow and limited viewpoint on inflation and the nonsense of a 2% arbitrary and made up target.
- The HKMA and PBOC followed with rate hikes of their own by 25 bps and 5 bps respectively.
- November retail sales ex auto’s, building materials and gasoline (aka, control group), rose .8% m/o/m, twice the forecast. Separating out what was due to the rebuilds from the hurricanes is tough to know.
- Initial jobless claims totaled 225k, 11k less than expected and down from 236k last week. The 4 week average fell to 235k from 242k and that is near the lowest level since the early 1970’s. Continuing claims, delayed by a week, fell by 27k.
- The NFIB index jumped to 107.5 from 103.8. That level is the best since September 1983. The NFIB said “Small business owners are exuberant about the economy, and they are ready to lead the US economy in a period of robust growth.” They bottom lined the main reason: “The change in the management team in Washington has dramatically improved expectations.” The reason being within this is because “They continue to list taxes as their number one problem, but they now have clear expectations that Congress and the President will address that problem.” The 2nd biggest problem is “finding qualified workers” and that will likely remain a big problem.
- The Duke CFO survey optimism index rose the to the best level since June 2004. Also, it was driven by tax reform. This though is coming with building wage pressures as the survey “also finds the difficulty that companies are having hiring and retaining qualified employees is at a 20 yr high, and that in part will lead to higher wages.” The survey said CFO’s expect “median wage growth of about 3% over the next 12 months.” There is also healthcare inflation that is a worry as expectations are for an 8% rise next year. “Nearly half of US companies indicate that the cost of employee health benefits crowds out their ability to spend on long term corporate investment.”
- US industrial production in November rose .2% m/o/m, one tenth less than expected but more than offset by a 3 tenths upward revision in October. Manufacturing though was exactly in line with the revision. Capacity utilization was pretty steady at 77.1%.
- The headline Japanese large company Q4 manufacturing Tankan index rose 3 pts to 25, the best since 2006. The estimate was 24. The outlook though was unchanged. For large service companies, the index was unchanged but the outlook was up 1 pt. For small companies, the manufacturing index was up 5 pts and the outlook was up by 3. For small service companies, both the current index and outlook rose 1 pt. On the capital spending front, they moderated q/o/q to 7.4% from 7.7%. The forecast of 7.5%.
- The very volatile monthly Japanese machinery orders figure came in better than expected in October. They rose 5% m/o/m vs the estimate of up 2.9% and follows an 8.1% drop in September.
- Ireland reported a 4.2% q/o/q annualized increase in Q3 GDP and a 10.5% y/o/y spike (on an easy comparison). Trade was the main driver as exports jumped by almost 9% y/o/y while imports fell by 13.4%.
- The eurozone manufacturing and services composite index for December rose .5 pt to 58 and that was .8 pts above the forecast as both components rose. That’s the best in almost 7 years. They said this on inflation, “Strong demand was a key factor helping firms hike prices. Average charges for goods and services showed a slightly smaller rise than the prior two months but still recorded one of the largest increases since mid 2011. Higher prices also reflected the need to pass higher costs on to customers. Average input costs rose sharply again in both sectors, though especially in manufacturing. The overall rate of inflation dipped from November, but remained among the highest seen over the past 6 ½ years.” The euro inflation 5 yr 5 yr swap ended the week at a 9 month high. The German 10 yr breakeven is at a 10 month high.
- Industrial production for the Euro area in October did rise .2% m/o/m after falling by .5% in September. The estimate was no change. The 3.7% y/o/y gain matches the 3nd best since 2011.
- UK retail sales in November jumped sharply and much more than expected thanks to Black Friday. Because it’s a new phenomenon there, the seasonal adjustments are not good so take the upside with a grain of salt. Sales ex auto fuel rose 1.2% m/o/m vs the estimate of up .4%.
- Australia reported a 61.6k job spike in November (they only have 24mm in total population) vs the estimate of 19k. The unemployment rate though held at 5.4%.
Negatives
- Coincident with another Fed rate hike, 3 month LIBOR was up another 4 bps on the week, 60 bps on the year and higher by 135 bps off the 2014 low. Only about $350 Trillion of financial products worldwide are priced off LIBOR (denominated in many currencies).
- The HKMA and PBOC have to balance the property bubbles and excessive credit growth they have with the rise in interest rates.
- The SNB kept policy unchanged as expected and its clear they won’t do anything until after the ECB does on rates. SNB President Thomas Jordan said “It’s still early, very early, to talk about normalization…There’s no risk of inflation, also inflation expectations are very well anchored at a much lower level.” There will be many books written on this current regime of the SNB (-.75% rate, owning $85b of stocks, and a balance sheet bigger than the size of the Swiss economy) after a history of humility, stability and credibility. That reputation has been shredded.
- While the Fed is focused on the PCE and remains worried about below 2% inflation (especially Neel Kashkari and Charles Evans), the NY Fed’s Underlying Inflation Gauge rose to 2.95% in November vs 2.91% in October. The ‘prices only’ measure was tweaked to 2.21% from 2.22% last month. “The UIG measures currently estimate trend CPI inflation to be in the 2.2% to 2.95% range, with the prices only measure close to the actual 12 month change in the CPI.” For those not familiar yet with this new figure, //www.newyorkfed.org/research/policy/underlying-inflation-gauge.
- Import price inflation was up .7% m/o/m in November as expected. This brings the y/o/y gain to 3.1%, the most since April. This was mostly energy prices however as ex petro, prices rose .1% m/o/m and 1.4% y/o/y. That y/o/y ex petro rate though does match the fastest pace of gain since March 2012.
- The US November CPI rose .4% m/o/m and 2.2% y/o/y as expected. The core rate was up .1% m/o/m and 1.7% y/o/y and that was one tenth less than expected. A 3.9% m/o/m and 9.4% y/o/y rise in energy prices drove the headline. Food prices were flat from October while up 1.4% y/o/y. Services inflation ex energy rose .2% m/o/m and 2.5% y/o/y. Rent inflation remains robust while medical cost increases surprised to the downside.
- November US PPI rose by .4% m/o/m for the 3rd straight month taking the y/o/y gain to 3.1% vs the estimate of 2.9%. That is up from 2.8% and go back 6 years to see a faster pace of gain. Energy was certainly a main factor as it rose by 4.6% m/o/m but goods prices ex energy were still up .3% m/o/m while services inflation was up by .2% m/o/m after a jump of .5% in October and .4% in September. Versus last year, goods prices ex energy were up 2.6% and services ex trade was up by 2.4%. Prices in the pipeline also rose. Prices for processed goods rose .5% m/o/m. They were up 3.2% m/o/m for unprocessed goods and for services prices were up .7%.
- Asset price inflation relative to the actual earnings of working Americans hit another record high in Q3 as measured by the Fed’s flow of funds statement which was actually out last week. Net worth as a percent of disposable income is at 673% vs the previous cycle peak of 650% in March 2007 and 615% in March 2000, the peak in the prior cycle. The blame for the extreme inequality issues should not be a mystery as to where it should be mostly placed.
- The US Markit manufacturing and services composite index fell to 53 in December from 54.5. That matches the weakest level since September 2016 and was driven entirely by a decline in services as manufacturing improved. Price pressures abated within services but in manufacturing, “Higher prices for raw materials resulted in the strongest rate of input cost inflation since December 2012. There were signs that manufacturers had absorbed part of the rise in average cost burdens, as highlighted by a slower increase in factory gate charges in December.”
- The December NY manufacturing index, the 1st December industrial figure to be released, fell 1.4 pts m/o/m to 18, a 5 month low and which was slightly below the estimate of 18.7. It’s multi yr peak was 30.2 in October. The 6 month business activity outlook was lower by 3.3 pts. The positive was the outlook on employment and capital spending. Inflation pressures rose both currently and the six month outlook for both prices paid and received rose to the most since January.
- The MBA said mortgage applications to buy a home fell 1.1% w/o/w but are still up 10.2% y/o/y. Refi apps fell 2.5% w/o/w and are down 9% y/o/y as comparisons have gotten much easier. Take this data with a grain of salt during the holidays.
- Job openings in October totaled 5.996mm, below the forecast of 6.135mm and down from 6.177mm in September. This is the first time below 6mm since May. After two hurricane influenced months of a decline of a total 202k in hiring, hiring’s rebounded by 232k in October. Layoffs though accelerated to 115k. There was no change in the number of quitters and the quit rate held at 2.2% which matches the most since September 2005.
- Seen late last Friday, as of the week ended November 29th, C&I loan growth was up .7% y/o/y.
- The housing bubble in Sweden where prices rose 143% since 2005 is now leaking air. The OMX Valueguard-KTH Housing index fell 3% m/o/m after dropping by 1.5% in October. The index is at the lowest level since January. The Riksbank instituted negative interest rates in February 2015 and which now sits at -.50%. They also reported this week that CPI rose 1.9% y/o/y in November vs the estimate of 1.7% while their 10 yr bond yield is at .72%. What’s the Riksbank going to do now?
- While the ECB is embarking on a 50% cut in QE in 2018 and a likely end to the program, Mario Draghi clearly remains addicted to the powers of QE and NIRP.
- The German wholesale price index for November rose 3.3% y/o/y vs 3% in October.
- The German ZEW investor expectations index on the German economy fell a touch m/o/m to 17.4 from 18.7 and that was a bit below the estimate of 18. The current situation though improved slightly.
- For the 3 months ended October the UK lost jobs for a 2nd straight month. A net 56k were shed (most since 2015) vs the estimate of -40k. The unemployment rate though did hold at 4.3%, the lowest since the 1970’s because more left the labor force. Positively, there was a one tenth uptick in weekly earnings ex bonus’ to 2.3% which was also one tenth more than expected but this is still well below the rate of inflation. Also reflecting on the softness in job creation, November jobless claims did rise by 5.9k after an upward revision to October of 5.4k.
- Consumer price inflation accelerated further in November in the UK. CPI was up 3.1% y/o/y vs 3% in October and vs the estimate of 3%. The core rate though held at 2.7% as expected. Input prices at the wholesale level also jumped more than expected as they were up 7.3% y/o/y vs the forecast of up 6.7%.
- Japan’s December manufacturing PMI rose to 54.2 from 53.6, the best in almost 4 years. New orders and exports helped out. Inflation is bubbling here too, “the inflationary trend in output charges was extended to a full year. Selling prices were increased by manufacturers at the fastest pace since July 2014.”
- Japan reported that November PPI rose .4% m/o/m and 3.5% y/o/y, both 2 tenths more than expected. Versus last year, this is the highest print since September 2014 (juiced by VAT hike and the quickest increase since October 2008 before this).
- There is no such thing as deleveraging going on in China. There is just a shifting around of who extends it. Total loans given in November totaled 1.6 Trillion yuan, 350b yuan above expectations with almost all the upside at the bank level. Bank loans totaled 1.12 Trillion vs the forecast of 800b. For the first 11 months of 2017, loan growth is up 12.8% y/o/y. It is possible that the November spike in lending is a year end thing as loan growth in November 2016 was 1.833 Trillion but it’s still clear in the y/o/y change how robust debt growth has been. M2 growth was 9.1% y/o/y, up from the record low of 8.8% in October and above the estimate of 8.9%. This rise could reflect a slowdown in wealth management products which are shifting instead to standard deposits which show up in M2. Lastly, 620b of the loan growth was to households vs 450b in October with corporate loans totaling 523b vs 214b in the month prior.
- November retail sales in China slightly missed expectations while industrial production and fixed asset investment were as expected. The Shanghai index closed at a 4 month low.