Positives
1) The Markit US manufacturing and services composite index held steady in January at 54.5 vs 54.4 last month. There was a 1.1 rise in manufacturing m/o/m off the lowest level since 2016 and a .2 pt drop in services. Markit said this on manufacturing: “The improvement…was driven by the fastest expansion of production since May 2018. New orders, employment and stocks of purchases also increased at faster rates in January. Survey respondents generally cited robust domestic demand, which more than offset a slowdown in export sales growth to its weakest for 3 months.” Price pressures remained intense, “Strong demand for inputs and higher imported raw materials costs related to trade tariffs led to a strong rise in input prices and another robust increase in factory gate charges across the manufacturing sector.” With respect to services, “Service providers signaled only a modest rebound in business expectations from the 12 month low seen in December. Subdued growth projections for the year ahead contributed to more cautious hiring strategies in January. The latest increase in payroll numbers was the weakest since April 2017.” Price pressures did ease.
2) Initial jobless claims fell to 199k, well below the estimate of 218k and down from 212k last week. That’s the smallest print since 1969 and brings the 4 week average down to 215k from 221k and that’s the lowest since early November. Keep in mind that the timing of the MLK holiday might have influenced the seasonal adjustment. Continuing claims, delayed by a week, fell by 24k. Looking at the impact of the partial government closure, on an unadjusted basis, claims by federal employees rose by around 15k to 25k. This is NOT reflected in the headline claims number which is on a state by state basis.
3) The BoJ got more realistic as they lowered their CPI forecast by a rather sharp 5 tenths to an increase of .9% for the fiscal year beginning April.
4) The South Korean economy did perform better than expected in Q4 with a 3.1% y/o/y increase vs the estimate of up 2.7% but the upside was mostly due to an increase in government spending.
5) With all the challenges for UK business that the political drama brings, the labor market continues to put up good numbers but with potential risks ahead. As for the backward looking figures, for the 3 months ended November a net 141k jobs were created, well more than the estimate of 87k. Also thru November, the unemployment rate fell one tenth to 4%, matching the lowest since 1975 and the tight labor market drove a 3.3% y/o/y wage ex bonus’ increase. This is unchanged with the 10 yr high seen last month and is now about 100 bps above the rate of consumer price inflation.
6) It does seem that the odds of a no deal/hard Brexit continues to shrink.
7) Congrats to Mo and Moose for getting into the HOF.
Negatives
1)The ripple effects from the partial government closure continues to widen.
2) The January Richmond region’s manufacturing survey was -2 as expected. While a 6 pt improvement from December, that December print was down 22 pts from November. This is the first time since August/September 2016, right before the election, that we’ve seen two months in a row of contraction in this manufacturing area. New orders fell 2 pts to -11 and backlogs were down by 3 pts to -21. Capital spending plans fell 8 pts and spending on equipment and software was lower by 5 pts. The only real bright spot was the employment component which rose by 5 pts while wages held unchanged. The Richmond Fed said “firms still struggled to find workers with the skills they need. Respondents expected this struggle to continue, along with employment and wage growth, in the near future.” The Richmond Fed said simply, “activity was soft in January.”
3) The KC manufacturing index did fall 1 pt to 5, the lowest level since November 2016. The KC Fed said “Regional factories had another month of sluggish growth in January. About 1/6 of the firms in the survey said the partial government shutdown had negatively affected their business…Of the firms that reported negative effects from the shutdown, most noted permit delays or trade disruptions due to federal agencies being closed.”
4) After the seasonal decline late in December and the early January bounce back, mortgage apps fell for the week ended January 18th. Purchases fell by 2.2 w/o/w but are up 13% y/o/y. Refi’s fell by 5.3% w/o/w and has narrowed its y/o/y drop to 7%. The average 30 yr mortgage rate was little changed at 4.75%.
5) Existing home sales in December, likely covering contract signings in the September thru November time frame, totaled 4.99mm, about 250k less than expected and down from 5.33mm in November. That is also the least amount of closings since November 2015. Fortunately for buyers, home prices rose 2.9% y/o/y, the slowest rate of increase since early 2012. The first time buyer made up 32% of total transactions vs 33% in November and remains in the low 30’s range seen in this recovery. As is typical at year end, there was a drop in the number of homes for sale and that led to a decline in months’ supply to 3.7 but that should rebound in early 2019. Of note, homes sat on the market for 46 days on average, up from 42 in November and 33 in October and vs 40 one year ago. The NAR is hopeful, “Now, with mortgage rates lower, some revival in home sales is expected going into spring.”
6) US corporate earnings so far are doing as they do, beating by about 70% but the size of the beat is half the recent average and revenues are only beating expectations about 1/3 of the time.
7) The German IFO business confidence index for January fell to 99.1 from 101 and that was below the estimate of little changed. That’s also the weakest print since February 2016. The always succinct IFO simply said “The German economy is experiencing a downturn.” Manufacturing was particularly soft as “The business climate deteriorated in all of the key business sectors apart from the chemicals industry.” Services weakened but performed better than manufacturing, also seen in yesterday’s PMI. Trade also fell and in construction “there was a clear setback for the first time years and the business climate deteriorated significantly.”
8) The January German ZEW economic expectations index (measuring what investors think as opposed to actual business) remained negative at -15 but that is up 2.5 pts and 3.5 pts above the estimate. It’s below zero for 10 straight months. The real disappointment was seen in the Current Situation component which fell sharply to 27.6 from 45.3. That is well below the forecast of 43 and the lowest level in 4 years.
9) Business confidence in January in France held at 102 which matches the weakest since November 2016. The market expected a one point rise. The internals were little changed with the manufacturing component in particular also holding at its lowest level since November 2016.
10) The Eurozone manufacturing and services January PMI fell to 50.7 from 51.1 with both components falling m/o/m. The estimate was 51.4 and that is the slowest pace of growth in 5 1/2 years. According to Markit, this level of activity equates to GDP growth of just .1% q/o/q. “Stall speed” in other words. They further said “ongoing auto sector weakness, Brexit worries, trade wars and the protests in France were again widely cited as factors dampening growth, but the survey responses indicate that a deeper malaise has set in at the start of the year. Companies are concerned about a wider economic slowdown gathering momentum, with rising political and economic uncertainty increasingly affecting risk appetite and demand.”
11) Mario Draghi has dug himself quite a hole. He has stuck the ECB with NIRP for a while to come and a balance sheet that is about 40% of Eurozone GDP just as the economic window to get out is closing. Expect more TLTRO’s come spring.
12) The UK CBI retail sales index did rebound to zero from -13 but that was 3 pts less than expected and is the 2nd lowest print since April. CBI said “The High Street has had another challenging month, with retail sales volumes flat and well below average for this time of the year. Pressures on the retail sector remain high, with consumer spending expected to remain fairly subdued and competition fierce.” With respect to Brexit, “There are early signs of companies bracing themselves for a no deal Brexit: some of our wholesalers are now reporting that they’re building up stocks in case the UK exists the EU without a deal.”
13) In the UK, the CBI industrial orders number fell 9 pts and went negative at -1. The estimate was +5. Business optimism fell to -23 from -16 and that’s the least optimistic since October 2016, months after the Brexit vote. The CBI said “The manufacturing sector is clearly feeling the pinch of Brexit uncertainty, with worsening business sentiment coinciding with an ongoing reluctance to invest in new facilities, machinery, innovation and training. Notwithstanding continued growth in output, these underwhelming figures in part reflect businesses’ continuing desire for clarity.”
14) The UK December jobless claims figure rose by 20.8k and marks the 4th straight month above 20k for the first time since 2009.
15) Tokyo reported its inflation stats for January and they surprised to the upside. Ex food, consumer prices rose 1.1% y/o/y, two tenths more than expected, vs .9% last month and that’s the most since 2008 if we don’t include the VAT hike a few years ago. Taking out both food and energy saw CPI up by .7% y/o/y, one tenth more than forecasted and matches the fastest rate of gain since 2016.
16) Japan’s January manufacturing PMI fell to exactly the flat line at 50 from 52.6 in November. That’s the lowest since August 2016 and Markit said “The underlying picture will raise concern given renewed reductions were seen in new orders and output. Further signs that the downturn in the global trade cycle could yet worsen were also signaled, with new export orders falling at the sharpest rate since July 2016.”
17) Japan said exports in December fell 3.8% y/o/y, about double the estimate of a decline of 1.8%. Imports were higher by 1.9%, about half the estimate of up 4%. Export volume of merchandise was down by almost 6% y/o/y driven by a 13.8% decline to China and a drop of 10.3% to all of Asia. Volumes did rise to the US and the EU.
18) In Australia its manufacturing and services composite index fell to 51.5 in January from 52.9. That is the lowest print in this 33 month survey history and was driven by weakness in services as manufacturing rose.
Peter is the Chief Investment Officer at Bleakley Advisory Group and is a CNBC contributor. Each day The Boock Report provides summaries and commentary on the macro data and news that matter, with analysis of what it all means and how it fits together.