Positives
1) Jay Powell seems to be trying to wean the economy and markets from the addiction of many years of excessively cheap money and away from this seemingly endless regime of negative real interest rates and the legacy of QE.
2) Initial jobless claims were about as expected at 214k vs 206k last week. This brings the 4 week average to 222k from 225k. Continuing claims, delayed by a week, did rise by 27k.
3) Existing home sales in November, mostly reflecting contract signings in the August thru October time frame when mortgage rates went from around 4.80-5.10%, totaled 5.32mm, 120k more than expected and up from 5.22mm in October. This brings the year to date average to 5.37mm but the 3 month average is down to 5.23mm and the 6 month average is 5.29mm. With the number of homes for sale dropping, as they always do this time of the year, months’ supply fell to 3.9 from 4.3. The median home price rose 4.2% y/o/y which marks the 6th month in a row of below 5% home price gains where above was the norm for the past few years. The first time buyer made up 33% of total purchases which is an uptick from the 31% seen in October and 32% in September. The NAR said “A marked shift is occurring in the West region, with much lower sales and very soft price growth. It is also the West region where consumers have expressed the weakest sentiment about home buying, largely due to the lack of affordable housing inventory.”
4) November housing starts totaled 1.256mm annualized, 28k more than expected, partially offset by a downward revision of 11k in October. So, combined, a touch above the estimate but all due to multi family construction. Single family starts fell 40k m/o/m to 824, the least since May 2017. Multi family starts, always volatile month to month, rose 79k to 432k, the most since March. Multi family also drove the permit number higher. Single family permits were basically unchanged at 848k, up 1k from October. Multi family permits spiked by 62k to 480, the highest number since April.
5) The PCE inflation figure for November rose .1% m/o/m and 1.8% y/o/y, about as expected. The core rate was also up by .1% m/o/m and higher by 1.9% y/o/y, about as forecasted too. On a 3 month annualized basis, core PCE is up 1.5% as is the headline figure. The headline figure will of course start to be hugely influenced by energy. The core rate 3 month annualized figure is now below 2% for the 4th straight month.
6) Personal spending was higher by .4% m/o/m, one tenth more than expected and October was revised up by 2 tenths. This should lead to an uptick in Q4 GDP forecasts. The savings rate thus did fall to 6% from 6.1% and that is the lowest since March 2013 and this is what is helping to drive holiday spending rather than any notable increase in wage growth.
7) According to the Treasury TIC data, foreigners bought a modest $1.7b of US treasuries but with China and Japan again both reducing their stash.
8) In November in Japan, core CPI (just ex food) was up .9% y/o/y, one tenth less than expected and down one tenth from October. The core/core rate (ex food and energy) was higher by just .3% y/o/y, also one tenth less than expected and down from .4% in the month prior.
9) UK retail sales ex auto fuel in November did exceed expectations with a 1.2% m/o/m rise vs the forecast of up .2%. Black Friday helped.
10) The UK said November headline CPI rose 2.3% y/o/y while the core rate was higher by 1.8%. Both were as expected and down one tenth from October. At the headline level, this is the 22nd month in a row with a 2%+ print. Wholesale inflation, juiced by the weak pound, continues to be a problem with PPI up 5.6% y/o/y, above the estimate of up 5%. Output prices were up only 3.1% with the difference continuing to be a margin squeeze.
11) The December UK CBI industrial orders survey fell 2 pts m/o/m to 8 but that was 2 pts better than expected. The CBI said “The UK’s manufacturing sector enters the Christmas period with a small upswing, with output growth gathering further pace. The firming in export orders is also particularly welcome.” This is likely helped by the weaker pound. They said this about Brexit, “But uncertainty over Brexit still casts a long shadow over this sector and the rest of the economy. Politicians must finally stop the endless infighting and come together to secure a workable solution, or we’re in danger of edging closer to a no-deal Brexit.”
12) The Swedish Riksbank finally took a step towards getting out of NIRP with an unexpected 25 bps hike to -.25%.
13) Italy and the EU finally came to an agreement on the Italian 2019 budget.
14) The final November Eurozone CPI figure was revised down by one tenth to 1.9%. That follows 5 months in a row of 2%+ prints. The core rate though was left unchanged at 1%. Mario Draghi should take heed from the French protests that people don’t want a higher cost of living.
15) Australia said job growth was better than expected in November but all because of a big jump in part time jobs. Full time jobs fell but after a sharp rise in October. The unemployment rate did tick up by one tenth to 5.1%.
16)
//www.youtube.com/watch?v=zjFDEhpDcvM
Negatives
1) Jay Powell seems to be ignoring the growing economic weakness overseas, softness in US housing, plateau in auto sales and sharp decline in commodity prices. The weakness in the markets is mostly due to the tightening so I’m not going to get into the negative feedback loop of ‘monetary tightening leads to a tightening of financial conditions’ and the latter results in the Fed backing off from the former.
2) Core durable goods orders in November fell .6% m/o/m, well less than the forecast of up .2% but most of that was offset by a 5 tenths upward revision to the October print. Versus last year this core measure is still up 6.6% y/o/y which is about in line with the average seen this year of 6.8% in response to the accelerated depreciation provision in the 2017 tax bill. But also, easy comparisons should be noted as companies held out late last year until knowing for sure whether the bill was going to pass. As for the GDP calculation, shipments of core orders were 3 tenths less than expected but more than offset by a 5 tenths upward revision to October so we might see a modest upward tweak in the Q4 estimates.
3) The December Philly manufacturing index fell to 9.4, the weakest since August 2016 from 12.9 and that was below the estimate of 15. Notwithstanding the headline drop, the internals were mixed. As for the 6 month business activity outlook, it rose 4.5 pts after dropping by 6.6 pts last month. Capital spending plans fell a slight .4 pts after jumping by 11 pts in October. The Philly Fed said “Manufacturing activity in the region continued to grow but remained subdued.”
4) The NY manufacturing survey for December fell to 10.9 from 23.3 and that was about half the forecast of 20. The is also the weakest print since May 2017. New orders, backlogs, inventories, and shipments all fell. The labor market was the bright spot as the Employment component rose 12 pts to the most on record dating back to 2001. While the 6 month overall business activity outlook did fall 3 pts after rising by 4.6 pts in November, there was also another bright spot outside of employment. That was in the capital spending plans. Capital expenditure plans rose to the most since February and tech spending plans rose to the best since January. The NY Fed summed up the report by saying that “business activity continued to expand, though growth was noticeably slower than in recent months.”
5) While the average 30 yr mortgage rate fell for a 4th week to 4.94%, mortgage applications fell 5.8% w/o/w. Purchases were down by 6.8% w/o/w but up a slight 1.8% y/o/y. Refi’s fell by 2.3% and are lower by 33% vs last year.
6) The NAHB home builder index for December fell 4 pts to 56, below the forecast of no change. Go back to May 2015 the last time this number was this low and it’s now fallen 12 pts in the past two months. The Present Situation fell 6 pts to 61 and the Future Outlook was down by 4 also to 61. Prospective Buyers Traffic fell further below 50 (the level of breakeven), down by 2 pts to 43. The NAHB said “We are hearing from builders that consumer demand exists, but that customers are hesitating to make a purchase because of rising home costs…The fact that builder confidence dropped significantly in areas of the country with high home prices shows how the growing housing affordability crisis is hurting the market. This housing slowdown is an early indicator of economic softening, and it is important that builders manage supply side costs to keep home prices competitive for buyers at different price points.”
7) Personal income in November rose .2% m/o/m, one tenth less than expected. Importantly, private sector wage and salary growth was higher by 4.5% y/o/y, no acceleration but about in line with the trend seen this year.
8) As The Financial Times reported this week, “Not a single company has borrowed money through the $1.2T US high yield corporate bond market this month.” If this continues throughout December, it would be the first month since November 2008 “that not a single high yield bond priced in the market, according to data providers Informa and Dealogic.”
9) FedEx put reality and quantification behind the economic slowdown going on overseas. They said in their press release “While the US economy remains solid, our international business weakened during the quarter, especially in Europe…Global trade has slowed in recent months and leading indicators point to ongoing deceleration in global trade near term.”
10) In response to the fuel tax protests, French consumer spending fell .3% m/o/m, only slightly below the estimate of no change and October was revised up by one tenth.
11) The December German IFO business confidence index fell 1 pt to 101 and that was slightly below the estimate of 101.7. Both the Current Assessment and Expectation components fell m/o/m. The index now stands at a 2 year low. The usually succinct IFO said this: “The German economy faces a lean festive season.”
12) Germany said its PPI figure for November rose 3.3% y/o/y, two tenths more than expected, holding at the October pace and matching a 7 year high. This will soon change though because much has to do with higher energy prices.
13) French business confidence did weaken by 3 pts in November to 102 as expected but that’s the lowest since November 2016. The retail component was where the particular weakness was, falling 7 pts m/o/m and we have to assume it’s in direct response to the protests. The manufacturing component was down 1 pt to match the lowest since December 2016.
14) Economic sentiment in Italy in December softened to the lowest since December 2016 too. Manufacturing, construction and services all fell but there was an uptick in retailers confidence to the best since March.
15) Japan said its exports in November were basically unchanged y/o/y, rising just .1%. That’s below the estimate of a 1.2% gain. Exports to China were up just .4%, to the US by 1.6% and Europe by 3.9%. Actual trade volumes fell by 1.9% y/o/y. Imports were up by 12.5%, slightly above the forecast of 11.8%.
16) Reflecting the slowdown in global trade, Indonesia reported its November exports fell 3.3% y/o/y instead of rising by 3% as expected. That’s the first drop since June 2017. Imports did rise by almost 12% but that’s the slowest since March.
Peter is the Chief Investment Officer at Bleakley Advisory Group and is a CNBC contributor.