The Boock Report

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Succinct Summation of the Week’s Events – 1/26

Positives

  1. Initial jobless claims totaled 233k, 2k less than expected and the prior week was revised down by 4k to 216k. This lowers the 4 week average to 240k from 244k and that is a one month low. Continuing claims, delayed by a week, fell by 28k after rising by 92k last week.
  2. The highest 30 yr mortgage rate in 10 months at 4.36% brought buyers off the fence as the MBA said purchase applications to buy a home rose 6.1% w/o/w and 7.4% y/o/y. Refi applications were up about 1% w/o/w and 4.8% y/o/y.
  3. National CPI in December in Japan rose 1% y/o/y vs .6% in November. While that was one tenth less than expected it is the quickest pace of inflation since the VAT spiked inflation in 2014 and 2015. Higher energy prices though was the main catalyst as CPI ex food and energy grew by just .3%, unchanged with November. The January data for Tokyo saw headline CPI up 1.3% from 1% but core/core was up only .4%.
  4. Japan’s manufacturing PMI in January rose to 54.4 from 54. This is the best since February 2014. Of note on inflation, “Strikingly, output price inflation accelerated to the fastest rate since October 2008 amid sharper rises to input costs. With a low rate of unemployment and sustained growth in official GDP data, inflationary pressures should continue to mount.”
  5. The consumer challenged UK economy due to higher inflation did see a .5% q/o/q GDP gain in Q4 which was one tenth better than forecasted. But, y/o/y growth did slow to 1.5%, the slowest pace of gain since they saw the same growth rate in Q1 2013. For all of 2017, growth was 1.8%, the slowest in 5 years.
  6. The UK reported a better than expected November (for 3 months ended) jobs figure of up 102k, well more than the forecast of down 12k. The unemployment rate held at 4.3%, the lowest since 1975. Positively, there was a slight pick up in wage growth ex bonus’ to a rise of 2.4% from 2.3% and that is the best since December 2016. With inflation running at 3% however, wage growth is still negative on a real basis. Lastly, December jobless claims rose by 8.6k after jumping by 12.2k in November.
  7. The German IFO business confidence index rose a touch to 117.6 from 117.2 The estimate was 117 but the components were mixed. Expectations moderated by 1.1 pts but was offset by a 2.2 rise in the current assessment. The current overall level matches the highest on record dating back to the 1991 reunification. The IFO said simply, “The German economy made a dynamic start to the year.”
  8. The ZEW index of German investor expectations of the German economy rose 3 pts m/o/m to 20.4 and that was almost 3 pts more than expected. The current situation also improved.
  9. The eurozone manufacturing and services composite index for January rose .5 pt to 58.6, better than the estimate of 57.9 as a rise in services offset a drop in manufacturing. This is a combined new high for the cycle. On inflation, “Supplier lead times to factories showed one of the longest lengthening’s on record, highlighting the extent to which demand has exceeded supply for many inputs. Price pressures meanwhile intensified during January, in part reflecting improved pricing power as demand outpaced supply, as well as rising oil prices. Average input costs and selling prices both showed the biggest monthly increases since April 2011, with rates of inflation accelerating in both manufacturing and services.”
  10. The UK CBI industrial orders index for January fell 3 pts m/o/m to 14 but that was a touch better than the forecast of 12. While down m/o/m, it is off the best level since 1988. “Employment grew at the fastest pace since July 2014 over the last 3 months, with further growth expected next quarter.” They too are experiencing labor shortages “with the number of firms citing skilled labor as a factor to likely limit output over the next 3 months the highest for more than 4 decades.” Price pressures intensified with average selling prices spiking by 17 pts to 40, the highest since 1984.
  11. It seems that Mario Draghi is leaning towards ending QE in September. Kuroda is becoming more confident of reaching his inflation goal. The Deputy Governor of the Swedish Riksbank said they will likely start hiking rates from below zero before the ECB does. Malaysia raised interest rates by 25 bps as expected.

 

Negatives

  1. Regardless of what was said by Trump and Mnuchin, the continued weakness in the US dollar has more negative consequences than positives. See my comments earlier this week for the list. I’ll add one more to the negative side, with the large increase in Treasury bond supply this year, we need all the foreign help we can get and a weak dollar doesn’t help that cause.
  2. The negative consequences of tariffs on solar panels and washing machines were immediately felt. LG is raising prices on US machines. SunPower said today according to Reuters that “it was putting a $20 million US factory expansion and hundreds of new jobs on hold until and unless its solar panels receive an exclusion from federal tariffs the Trump Administration imposed this week.” We also await for overseas responses on tariffs. Hopefully this will be contained.
  3. The US economy grew by 2.6% q/o/q annualized in Q4, below the estimate of up 3%. Trade and inventories were the two main drags and the reasons for the miss. Taking out the influence of inventories saw real final sales rise by 3.2% which is the best since Q2 2015. Final sales to private domestic purchasers rose by 4.6%, a solid number. The aftermath of the storms was all over this report with respect to the jump in consumer spending, the large amount of imports and big draw in inventories.
  4. Non-defense capital goods ex aircraft orders fell 3 tenths vs the estimate of a rise of 6 tenths. This was only partially offset by a 4 tenths upward revision to November. Shipments though were better than expected and could lead to an upward revision in the data above for Q4 GDP. We finish the year with core capital spending totaling less than the peak in 2014 and below where it was in 2008.
  5. New home sales totaled 625k annualized in December. That was well below the estimate of 675k, November was revised down by 44k to 689k and October was revised down by 25k to 599k. Due to the moderation in sales in December, months’ supply rose to 5.7 from 4.9 and that’s back to where it was in October. The median home price rose to a record high of $335,400. That is 28% above the peak level in the bubble.
  6. Existing home sales in December totaled 5.57mm annualized. That was below the forecast of 5.70mm and down from 5.78mm in November. These numbers compare with the average seen in 2017 of 5.55mm and 5.44mm in 2016. Weighing on closings in December was the dramatic drop in the number of homes for sale which sent months’ supply down to 3.2. That is the lowest since at least 1999 that I have data on. In turn, prices rose another 5.8% y/o/y. First time buyers made up 32% of purchases which is up from 29% in November but in line with that seen in October and December 2016. The NAR said “New listings struggled to keep up with what was sold very quickly, and buying became less affordable in a large swath of the country. These two factors ultimately muted what should have been a stronger sales pace…Affordability pressures persisted, and the pool of interested buyers at the end of the year significantly outweighed what was available for sale.”
  7. The Richmond manufacturing index for January is now the 3rd seen so far this month that reflected some moderation (after NY and Philly). The index fell 6 pts to 14 and that was 5 pts below the estimate. It touched 30 in November. The internals were very mixed. Of note and with importance for inflation (assuming not a corresponding pickup in productivity), wages rose to the match the highest level in almost 18 years.
  8. The Markit US manufacturing and services composite index fell slightly m/o/m to 53.8 in January from 54.1. It’s now at the lowest level since May and has fallen in 4 of the last 5 months. Manufacturing was up a touch (helped by weaker dollar) while services was down a touch in January. Markit was positive looking forward though and said “the forward looking indicators suggest the slowdown will prove transitory. In particular, business optimism about the year ahead improved markedly and inflows of new orders hit a 5 month high. Growth should therefore pick up again in coming months.” Importantly on the inflation story, “inflationary pressures meanwhile kicked higher, with January seeing the 2nd largest monthly increase in input costs since 2015. Higher oil prices were widely reported but, more generally, stronger demand is also helping companies push through price hikes.”
  9. French business confidence in December fell 2 pts m/o/m off the highest level since 2007. The decline in the services component offset the rise in manufacturing.
  10. Reflecting declines in real wages, the CBI UK retail sales index fell 8 pts m/o/m in January and was 1 pt below expectations. CBI said “Household spending will remain under pressure this year from higher inflation and low wage growth, which will continue to weigh on sales growth in the retail sector.”
  11. Hong Kong exports rose 6% y/o/y vs the estimate of 7.3%. Exports to the US were particularly strong to the US, Japan and Germany while modest to China. Imports though, similar to Japan, beat forecasts.
  12. South Korea’s economy unexpectedly contracted q/o/q by .2% instead of rising by .1% as expected. The y/o/y gain was still 3% but a drop in car exports and a 10 day holiday which impacted industrial production were the reasons for the quarterly miss.
  13. Japanese exports in December slowed to 9.3% y/o/y growth from 16.2% in November and that was a touch below the forecast of up 10%. As the comparison’s get more difficult, it’s the slowest gain since April. This also comes before the 3% rally in the yen seen in January. Volume exports were up by 4.5% with particular strength to China. Imports though did rise more than anticipated.

 

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