Positives
- Initial jobless claims totaled 221k, 11k less than expected and down from 230k last week. This brings the 4 week average down to 225k from 245k and that is the lowest level since 1973. Continuing claims, delayed by a week, fell by 33k.
- The ISM services index for January rose to 59.9 from 56 and that was 3.2 pts above the forecast. It’s also the best since 2005 with 15 industries of 18 surveyed seeing growth vs 14 in December and 16 in November. New orders jumped by 8.2 pts and employment was up by 5.3 pts. Prices paid rose 2 pts. ISM said “Overall, the majority of respondents’ comments are positive about business conditions and the economy. They also indicated that recent tax changes have had a positive impact on their respective businesses.”
- While the average 30 yr mortgage rate was up by 9 bps w/o/w to 4.50%, the most expensive mortgage since April 2014, mortgage applications held in as those that refi or purchase a home have 2 choices, be dismayed and hold off or rush to act. Purchases were flat w/o/w but are still up 8.2% y/o/y. Refinancing’s grew by .9% w/o/w and are up 1.8% y/o/y.
- China’s private sector weighted Caixin services index rose to 54.7 from 53.9 and that was better than the forecast of 53.5. This is the best level since May 2012 with the new orders component near a 3 yr high. The employment component rose to a 5 month high. In contrast to the easing of price pressures in the manufacturing index, “service providers meanwhile registered a faster rise in cost burdens, with the rate of inflation the steepest since April 2012.” Margins did get squeezed though as output charges moderated. As for the overall business outlook, it fell to a 4 month low.
- Inflation in China moderated y/o/y as expected in January. PPI rose by 4.3% vs 4.9% in December while CPI was up by 1.5% vs 1.8% last month. Of note within CPI was that inflation ex food and energy slowed to 1.9%, the lowest since February 2017.
- China exports in January were up 11.1% y/o/y, a touch above the estimate of 10.7%. The growth reflects the definite recovery we’ve seen in global trade over the past year. What was way out of whack was the 37% rise in imports vs the 10.6% forecasted gain. Explaining this is related to the calendar and the Lunar New Year timing relative to last year. Also juicing imports was a rise in commodity imports. In particular, crude oil imports rose to a record in January.
- In Japan in December, regular pay rose .6% y/o/y which doesn’t seem like much but it’s up from .3% in both October and November and is just below the recent multi decade highs. With a .9% rise in overtime pay and a .7% y/o/y increase in bonus pay, total cash earnings was up by .7% y/o/y. The average over the past 5 years is up .1%. The estimate was up .5%.
- Japan’s January services PMI rose to 51.9 from 51.1. That’s about in line with the 2017 average of 52.1. As I’ve been highlighting, here is the commentary on inflation: “Japanese service sector firms raised their selling prices in January. In fact, output price inflation accelerated for the 3rd successive month to the sharpest since May 2014. That said, the rate at which input prices increased continued to outstrip that of selling charges, implying a further tightening of profit margins. The rate of inflation was sharp, quickening to the fastest since August 2008.”
- The PMI in Singapore rose 1.5 pts to 53.6 but after falling by 3.3 pts in December. Here the inflation comments are similar to others, “On the price front, survey data showed inflationary pressures intensifying in January. Input cost inflation accelerated to the greatest in nearly 4 1/2 years, driven up by higher paid prices for inputs and a sharp rise in staff costs. Notably, wage inflation was the fastest since September 2016 following a mild increase at the end of 2017. To protect their margins, companies raised selling prices further.”
- India’s services PMI rose to 51.7 from 50.9.
- In Europe, their services PMI was revised to 58 from the first January print of 57.6 and is up from 56.6 in December. This is the best level since August 2007. As for the combined manufacturing and services composite index, “France moved to the top of the growth rankings.” The inflation commentary is similar to recent reports with “Input costs and output charges both rose at the sharpest rates since mid 2011, with accelerations signaled in both the manufacturing and service sectors.”
- December retail sales in Europe were better than expected when included with the November upward revision.
- French December industrial production rose .5% m/o/m, above the estimate of up .1% and was led by an upside surprise in manufacturing. Manufacturing production was up 4.7% y/o/y.
- The Italian industrial production figure in December rose 1.6% m/o/m, double the estimate.
- German exports rose .3% m/o/m after a 4.1% jump in November. That is better than the estimate of down 1% and thus not reflecting any negative impact from the stronger euro. Imports were higher by 1.4% m/o/m vs the forecast of down .7%. For the full year 2017, the German trade surplus fell a hair vs 2016 but that was the first time it was down since 2009.
- Germany reported a solid factory order number for December as they rose 3.8% m/o/m vs the estimate of up .7%. Also, November was revised up. The German Economy Ministry said “Brisk demand from abroad brought full order books and good sentiment in companies. German industry should start strongly into 2018.”
- Positive for German workers, IG Metall, the large German labor union, negotiated a 4.3% pay raise for its members over a 27 month time frame.
- While they voted 9-0 to leave their benchmark rate at just .50% with CPI running at 3%, the BoE at least has set the stage for a rate hike at their next meeting. They said “monetary policy would need to be tightened somewhat earlier and by a somewhat greater degree over the forecast period than anticipated at the time of the November report” because “the prospect of a greater degree of excess demand over the forecast period and the expectation that inflation would remain above the target have further diminished the trade off that the MPC is required to balance.”
- Brazil’s central bank cut its Selic rate to a record low (dating back to 1999) of 6.75% as inflation continues to fall. It will likely be though the last cut for a while.
- The level of frothy stock market sentiment has finally begun to cool down as seen in the weekly II and AAII data and the daily CNN Fear/Greed poll. Looking at this from a news event perspective, the S&P 500 closed on Thursday at about the same level it stood the day the House first passed its first version of tax reform on November 16th. Lastly, we had a good reminder of the dangerous derivative products Wall Street throws our way. They work until they blow up.
Negatives
- In contrast to the 12 year high in the ISM services index, Markit’s measure of US services fell to the lowest level since April 2017. Markit did say though that its internals were “more encouraging, and suggest the pace of economic growth could accelerate in coming months.” With respect to the inflation commentary, “Average prices charged also increased further in January, with the pace of inflation quickening. Stronger client demand reportedly allowed firms to pass on greater cost burdens to customers through higher charges. Overall, output price inflation was solid and above the series trend.”
- US exports in December hit a record high, rising by 1.8% m/o/m but because imports rose at a quicker pace, the US trade deficit did rise to $53.1b, the widest since October 2008. As the estimate was $52.1b, Q4 GDP estimates might get reduced by a tenth. The aftermath of the hurricanes still flowed thru the numbers at the end of 2017.
- Job openings in December slowed to 5.81mm, 150k less than expected and the smallest amount of openings since May. Maybe reflecting more confidence with the labor market, the number of quitters rose to the most in this expansion.
- With the US savings rate at a 10 yr low approaching 2%, consumer credit borrowing continued to rise in December. Revolving credit outstanding rose to a record (not inflation adjusted), up by $5.1b and higher by 6% annualized rate after a 13% spike in November. Nonrevolving debt continues its relentless rise, up another $13.3b.
- UK industrial production in December missed expectations due to a sharp drop in oil production but the manufacturing component was about in line.
- The UK services PMI index fell to 53 from 54.2. Little changed was what was expected and this is the smallest read since September 2016. Prices pressures remain intense but did moderate m/o/m.
- German IP in December was a touch weaker than expected. The German Economy Ministry said “Industrial output was very dramatic in the course of 2017 but has lost some momentum lately. Nonetheless, production is clearly pointing upward, and in light of strong orders in December and good sentiment indicators, strong manufacturing momentum can be expected in the coming months.”
- China saw another increase (the 12th in a row) in their FX reserves in January to $3.162 Trillion, up from $3.140 Trillion in December but that was $8.5b below the estimate. A weaker dollar continues to help boost the value of their other currencies. Also boosting the reserves is the slowdown in capital leaving the country. Reserves are still about $800b below the peak in mid 2014 for perspective on this 12 month increase which added a total of $163b.
- Hong Kong’s PMI fell m/o/m while “overall input price inflation was up again in January, with the rate of increase remaining solid. While wage inflation added to higher costs, the sharp pick up in paid prices for inputs was the key driver of inflation.”
- To my continued reference to bubbling cyclical inflation pressures, //www.wsj.com/articles/new-worry-for-ceos-rising-costs-from-metals-to-meat-1518173062.
- Fiscal spending profligacy ramps up in Washington, DC. Hello $1 Trillion budget deficits again but DURING AN ECONOMIC RECOVERY.