Positives
- Lowering the corporate tax rate to 21% will better position US companies in competing with the rest of the world. Allowing companies to immediately expense capital spending will hopefully incentivize a greater level of expenditures. Higher wages for employees might be upon us.
- The December Philly manufacturing index rose 3.5 pts m/o/m to 26.2 and that was 5 pts above the estimate. The average year to date is 27.3. The internals though were mixed and I can’t explain why capital spending plans fell to 4.1 from 32.6.
- November existing home sales, likely capturing contracts signed in the August thru October time frame (and thus impacted by the storms), totaled 5.81mm, well more than the forecast of 5.53mm and up from 5.50mm in October. This is the highest total since December 2006. There was a big jump in the South post hurricanes. Sales though did rise too in the Northeast and Midwest but fell out West. Inventories remain tight as months’ supply fell to 3.4 from 3.9 because the number of homes for sale fell sharply m/o/m. Another 5.8% y/o/y price gain continues to price out the first time buyer as they made up just 29% of all purchases, back to the low levels of this cycle. The NAR said “The odds of closing on a home are much better at the upper end of the market, where inventory conditions continue to be markedly better.” The NAR highlighted the problem, “Price appreciation is too fast in a lot of markets right now. The increase in homebuilder optimism must translate to significantly more new construction in 2018 to help ease these acute inventory shortages.”
- Housing starts in November totaled 1.297mm, 47k above the estimate but was about offset by a 34k downward revision to October to 1.256mm. Most positive was the jump in single family starts to 930k from 883k in October, 832k in September right after Houston and in the midst of Florida and vs 871k in August. Smoothing this out puts the 6 month average at 869k vs the year to date average of 850k and up from 784k in 2016. We are still below however the 25 year average of 1.025mm. As for multi family starts, they were little changed m/o/m at 367k and which is above its 25 year average of 299k. With the forward looking permits data, they totaled 1.298mm, 28k more than expected and October was revised up by 19k. Single family permits rose 12k m/o/m to 862k and smoothing this out for the storms, the 6 month average is 826k vs the year to date average of 818k. Multi family permits fell by 30k m/o/m but remains on trend when averaged out.
- The NAHB home builder survey in December rose 5 pts m/o/m to 74. Reminding us all that while very strong, this is only measuring the direction of optimism as this is the highest level since 1999. The peak in the huge bubble was 72 in 2005. Both Present Conditions and the Future Outlook improved. Notably, Prospective Buyers Traffic jumped by 8 pts to 58 and finally firmly above 50 and the best level since late 1998. The NAHB is attributing part of the improvement in confidence to “new policies aimed at providing regulatory relief to the business community.”
- New home sales in November totaled 733k annualized, well more than the forecast of 655k but that was almost completely offset by the 61k downward revision to October to 624k and the 10k lower revision to September to 635k. Smoothing out the storm impact, the 6 month average is 622k vs the year to date average of 617k. The main gains were seen in the South and West with modest m/o/m gains in the Northeast and Midwest. With the number of homes for sale remaining unchanged, months’ supply fell to 4.6 from 5.4.
- The November PCE inflation headline print of up .2% m/o/m and 1.8% y/o/y were as expected. Thanks to energy, that headline read matches the highest since February. The core rate was also in line with a .1% m/o/m and 1.5% y/o/y rise. The core rate matches the most since April and again is driven by service prices which rose 2.3% y/o/y.
- November personal spending was up by .6% m/o/m vs the estimate of up .5% but October was revised down a tenth so basically a push. Energy spending helped as ‘non durable goods’ spending jumped by 1.2% m/o/m. Spending on goods was flat. Spending on services also contributed and healthcare is a growing portion of this category.
- While the headline personal income number rose .3% m/o/m, one tenth less than expected in November, private sector wages/salaries grew by .4% m/o/m and 4.5% y/o/y vs 3.6% in October and 2.8% in September. Some of this is surely a post storm rebound but let’s hope it’s the beginning of something more.
- German November PPI slowed to .1% vs the estimate of up .2%. The y/o/y gain was 2.5%. PPI ex energy was higher by 2.3% y/o/y.
- The final eurozone CPI print for November was left unrevised with a 1.5% headline y/o/y gain and a .9% core rise. The revision is typically no different than the preliminary report.
- French business confidence in December rose 1 pt as expected.
- The Riksbank said that QE is over but they will still be reinvesting maturing securities to maintain the size of their balance sheet. They also said that negative interest rates will start to reverse in the middle of 2018. We’ve reached peak NIRP and imagine the upcoming losses for many on the $10T of negative yielding securities over the next two years as the ECB reverses itself too in 2019.
- The UK industrial CBI orders index for December was unchanged with November at 17 and that was 2 pts above the estimate. The CBI was upbeat, “As we head towards the end of 2017, UK manufacturers’ total order books remain at a near 30 yr high, with export order books remaining at their strongest since the mid 1990’s.” On inflation, “While the lower level of sterling continues to support exporters, cost pressures remain intense.”
- Narendra Modi’s party won a key election in his previous bastion of Gujarat, the Indian Sensex ended the week at a record high.
- In China, there was little change in the news on apartment prices for November. For new ones, 59 cities of 70 surveyed saw price gains y/o/y vs 60 in October but that is the lowest since last year. For existing ones, prices rose in 65 cities vs 64 in October. Versus October, the same number of cities for new and existing apartments saw gains.
- Japanese exports rose 16.2% y/o/y vs the estimate of 14.7%. On a merchandise volume basis, exports were higher by 5.5% with most of the strength to Asia, particularly to China. Volume exports to the US were up by 4.8% but fell to the EU by 1.8%. Imports were good too, up 17.2% y/o/y but that was a touch below the estimate of up 18%.
Negatives
- Getting rid of the SALT deduction is double taxation and will be a major hit for about 1/3 of the US economy as those with higher incomes contribute a large percentage of total consumer spending. Of course too the finances of these states should further deteriorate. Company profit margins might compress as wage costs rise. Higher interest rates are upon us if US growth picks up, inflationary pressures grow and the US government ramps up Treasury issuance next year because of rising budget deficits. On the latter, JPM estimates that in 2018, net issuance of government debt is set to rise to $1.3 Trillion, the most since 2010 just as the Fed is shrinking their balance sheet and foreigners have dramatically slowed their pace of Treasury purchases over the past few years.
- Initial jobless claims rebounded to 245k this week, up 20k and 12k above expectations. The 4 week average rose to 236k from 235k and are near 44 year lows. Continuing claims rose by 43k after two weeks of declines.
- Core durable goods orders fell .1% m/o/m in November instead of rising by .5% as expected but that was about fully offset by a 5 tenths upward revision to October. Shipments were about in line with expectations.
- The US savings rate fell to just 2.9% in November from 3.2% in October. That is the lowest in 10 years and joins the amount of credit card debt outstanding that is just shy of the 2008 peak in nominal terms. If wages don’t start accelerating (which hopefully they are), the recent strength in retail sales is running on fumes.
- The MBA said mortgage applications to buy a home fell 5.5% w/o/w and the y/o/y gain has slowed to about nothing, up just .8%. Refi applications were down by 3.2% w/o/w and 14.4% y/o/y. Again, take with grain of salt this time of the year. Of note, Bankrate said mortgage rates jumped 10 bps this week coincident with the rise in Treasury yields.
- The final UoM consumer confidence index for December was 95.9, below the estimate of 97.2, down from 96.8 initially and vs 98.5 in November. The reason for the m/o/m decline was the Expectations component which fell to the lowest level since July. Current conditions rose a touch. One year inflation expectations were 2.7% vs 2.5% in November but one tenth below the first December print. Expectations for income growth rose 7 pts from last month but were 3 pts below the preliminary December read. Expectations for lower unemployment fell 3 pts. Spending intentions all fell from the 1st December report. Those expecting an increase in the stock market over the coming 12 months rose to 62.4 from 62.2 and 2.1 pts off the record high.
- It’s old news but Q3 GDP was revised down by one tenth to 3.2%.
- Germany’s IFO business confidence index for December fell a touch to 117.2 m/o/m from 117.6 in November. The estimate was 117.5. The components though were mixed as Expectations fell by 1.5 pts while the Current Assessment was up by almost 1 pt. The IFO said simply, “German businesses are full of festive spirits.”
- German import prices in November rose .8% m/o/m and 2.7% y/o/y, both one tenth more than expected and up from October.
- PPI in France, Spain, Finland and Sweden all moved higher from October.
- Labor costs in the eurozone in Q3 rose 1.6% y/o/y which is down from 1.8% growth in Q2 but is pretty much in line with the 3 year average of 1.5%.
- The BoJ remains firmly addicted to QE and NIRP and just can’t let go of the 2% dream.
For those that celebrate this weekend, have an amazing holiday. Happy 2018 too. I also want to thank all of you that have read my work this year and suffered thru my occasional rants and unconventional viewpoints. I very much appreciate your time and many of the kind words. I’m signing off for the year.