The Boock Report

By

Succinct Summation of the Week’s Events – 3/17

POSITIVES
  1. As we soon enter the 9th year of the economic expansion, the FOMC raised interest rates to the range of .75-1.00% and finally got off the snail’s pace of once each December seen the last two years.
  2. The preliminary UoM consumer confidence index for March rose to 97.6 from 96.3 in February and that was slightly above the estimate of 97.0. Since the October one yr low of 87.2, we saw it get as high as 98.5 in January. Almost all of the gain came in the Current Conditions component which rose 3 pts to the best level since 2000 while Expectations was up just .2 pts. UoM said “Among Democrats, the Expectations Index at 55.3 signaled that a deep recession was imminent, while among Republicans the Index at 122.4 indicated a new era of robust economic growth was ahead. Interestingly, those who self-identified as Independents had an Expectations Index of 88.3, which was nearly equal to the midpoint of the partisan gap.” After rising to a multi month high in February at 2.7%, one year inflation expectations fell 3 tenths to 2.4% and back to where it was in September thru November. Those expecting Higher Income rose 2 pts to 37 and that’s where it stood in November right after the election vs 32 in October. The employment component saw a nice gain of 6 pts and stands at the best level since 1984. With respect to buying intentions, those that said it’s a good time to buy a major household item rose 2 pts but after falling by 4 pts last month. It still though is up 6 pts since October. Those that said it’s a good time to buy a vehicle was up by 6 pts to the highest since May. Those that said its time to buy a house was unchanged after falling by 6 pts last month.
  3. Industrial production in February was unchanged m/o/m vs the estimate of up .2% but because January was revised up by two tenths we can call it in line. The amazingly mild winter has caused a sharp decline in utility output which has impacted the headline figure. Manufacturing production rose .5% as expected but off a better than expected base as January was revised up by 3 tenths. The y/o/y gain is still a very modest 1.2% but we are at the best level of this expansion. Capacity utilization for manufacturing did improve to 75.6% from 75.3% and that is the best since August 2015 but still remains below its long term average of around 80%.
  4. Initial jobless claims totaled 241k, about in line with the estimate of 240k and vs 243k last week. The 4 week average was little changed at 237k. Continuing claims delayed by a week fell by 30k.
  5. The Philly manufacturing March index fell to 32.8 off the spike last month to 43.3. That was a touch above the estimate of 30. The forward looking 6 month business activity was higher by 6 pts to near the best level in 3 years. Encouragingly, capital spending plans jumped by 12.4 pts to 34.5.
  6. The March NY manufacturing index, the 1st March industrial number out, was 16.4 vs 18.7 in February but that was a hair above the estimate of 15. This number printed -5.5 in the month before the election. The 6 month overall outlook fell 4.3 pts to a 4 month low. Capital spending plans rose 1.5 pts but only after falling by 2.8 pts last month. The NY Fed referred to business activity in March as growing “at a solid clip.”
  7. February housing starts totaled 1.288mm, slightly ahead of the estimate of 1.264mm and January was revised up by 5k. There was an increase of 53k to 872k in the amount of shovels hitting the dirt for single family homes. That’s the most in this cycle but is still 15% below the 25 year average. Multi family starts fell a touch but is still near its long term average. As for permits and the forward looking nature of them, single family permits rose by 25k to 832k but was more than offset by a drop of 105k for multi family.
  8. Home builder confidence jumped to 71 in March, up from 65 in February and vs expectations of no change. This is the highest level since June 2005 when this figure peaked at 72. Remember, this measures direction, not the degree of change. Present conditions rose by 7 pts to 78 and the Outlook was higher by 5 pts to 78. Also of note, Prospective Buyers Traffic was higher by 8 pts to 54 and the best level since July 2005. The NAHB said “Builders are buoyed by President Trump’s actions on regulatory reform, particularly his recent executive order to rescind or revise the waters of the US rule that impacts permitting.” Here are the caveats: “Builders continue to face a number of challenges, including rising material prices, higher mortgage rates, and shortages of lots and labor.”
  9. The 10 bps move up in the average 30 yr mortgage rate to 4.46%, the highest since April 2014 did not impact mortgage applications as maybe people rushed to lock in. Mortgage applications to buy a home rose 2.3% w/o/w and are higher by 6.1% y/o/y. Refi apps were up by 4.1% w/o/w but remain down by 27% y/o/y.
  10. US Core retail sales in February which takes out auto’s, gasoline and building materials rose .1% m/o/m vs the estimate of up .2% but January was revised up by four tenths so it’s coming off a higher than forecasted base. Auto sales fell for a 2nd month and nice weather helped to lift building materials. Online sales were again great while restaurant and bar sales lagged. This measures nominal spending so should be read in conjunction with the recent inflation numbers.
  11. Slightly more jobs were created in the UK for the 3 months ended January than expected and February saw another decline in jobless claims. The job gain totaled 92k, 5k above the estimate and jobless claims were lower for a 3rd month by 11.3k. The unemployment rate fell one tenth to 4.7% which matches the lowest since 1975.
  12. The German ZEW March economic confidence expectations index rose to 12.8 from 10.4 last month, vs 16.6 in January and about in line with the estimate of 13. It stood at 6.2 in October. Current conditions did match a nearly 6 yr high. The comments from ZEW were somewhat mixed: “The fact that the ZEW Indicator of Economic Sentiment only shows a slight upward movement is a reflection of the current uncertainty surrounding future economic development. With regard to the economic situation in Germany, no clear conclusions can be drawn from the most recent economic signals for January 2017. While industrial production and exports witnessed a positive development, the figures for incoming orders and retail sales were less favourable. The political risks resulting from upcoming elections in a number of EU countries are keeping uncertainty surrounding the German economy at a relatively high level.”
  13. There were no political surprises out of the Netherlands.
  14. In China, industrial production grew by 6.3% ytd y/o/y, a hair above the estimate of 6.2% and up from 6% in January. Also, fixed asset investment ytd y/o/y grew by 8.9%, a quicker pace than the 8.3% that was forecasted.

 

NEGATIVES
  1. Fed policy is still of an emergency nature. It is no longer Defcon 1 but with QE still ongoing via the balance sheet reinvestments and the fed funds rate at the emergency levels of Alan Greenspan in the early 2000’s it is still extreme relative to where growth and inflation is and what fiscal and regulatory policy is coming our way. Real rates remain firmly negative as hikes are just keeping up with the rise in inflation.
  2. The US February CPI index rose .1% headline and .2% core vs the estimates of flat and up .2% respectively. The y/o/y gains for both were 2.7% and 2.2%. That 2.7% print is the most in 5 years with energy prices up 15.2% y/o/y. At the core level, rents continue to drive services inflation as Rent of Primary Residence continued its steady .3% monthly gains and is up 3.9% y/o/y. The faux measure of rents titled Owners’ Equivalent Rent was up by .3% m/o/m and 3.5% y/o/y. Medical care rose .1% m/o/m and 3.5% y/o/y and is the other main factor driving the 3.1% y/o/y rise in services ex energy inflation.
  3. Headline PPI rose .3% m/o/m in February after a .6% rise in January, above the estimate of up .1% and this brings the y/o/y rise to 2.2% up from 1.6% last month. That’s the biggest gain since March 2012. The core rate also ran above expectations with a .3% m/o/m rise vs the forecast of up .2%. The y/o/y core rate was up by 1.5% vs 1.2% in January. There is also a core/core number that takes out food, energy and trade which also saw a .3% m/o/m rise and 1.8% y/o/y gain, a 2 ½ yr high.
  4. It’s just one opinion but one that gets press each week. The Atlanta Fed has lowered its Q1 GDP estimate to .9% from 1.2%. We expect a nice rebound in Q2.
  5. The February NFIB small business optimism index moderated a touch to 105.3 from 105.9 in January and vs 105.8 in December. It still though is pretty much holding its gains post election where the October print was 94.9 and November saw 98.4. There is one very important component that has not seen any improvement and that is plans for Increased Capital Spending which stands at 26% vs 27% in January and 27% back in October. The NFIB CEO made clear that “The sustainability of this surge and whether it will lead to actual economic growth depends on Washington’s ability to deliver on the agenda that small business voted for in November. If the health care and tax policy discussions continue without action, optimism will fade.”
  6. For the 10th straight month foreigners were net sellers of US notes and bonds in January. Central bank selling offset private buying by $6.9b and this follows total net selling of $343b in 2016 and $20.3b in 2015. Foreigners bought over $400b in each of 2011 and 2012.
  7. Eurozone exports fell in January m/o/m and with the rise in imports, their trade surplus fell to 15.7b euros from 23.1b in December.
  8. There was little new out of the BoE meeting but Mark Carney is falling into the trap of the late 1970’s in not making price stability his main prerogative even though it’s his mandate. “Attempting to offset fully the effect of weaker sterling on inflation would be achievable only at the cost of higher unemployment and, in all likelihood, even weaker income growth.” Markets though should be on notice that current policy may not stand for much longer however: “With inflation rising sharply, and only mixed evidence on slowing activity domestically, some members noted that it would take relatively little further upside news on the prospects for activity or inflation for them to consider that a more immediate reduction in policy support might be warranted.”
  9. UK wage growth for the 3 months ended January rose just 2.3% y/o/y ex bonus’, down from 2.6% in the prior month and below the estimate of 2.5%. This is with inflation flaring due to the weak pound and thus real wages are getting squeezed.
  10. The February Eurozone CPI was left unrevised with a 2% y/o/y increase, up from 1.8% in January, 1.1% in December and vs -.2% one year ago.
  11. Chinese retail sales in February ytd rose 9.5% y/o/y, below the estimate of 10.6%, down from 10.4% seen in December and the slowest pace of gain since December 2003. The blame is being attributed to a drop in auto sales y/o/y because of a new tax on small cars and off a higher base last year. Also taking the first two months together to smooth out the influence of the lunar holiday in China saw foreign direct investment down by 2.2% y/o/y. An almost 14% increase for the 1st two months from the EU was more than offset elsewhere.
  12. Japanese January machinery orders fell 3.2% m/o/m, well worse than the estimate of down .1% and December was revised sharply lower to a gain of 2.1% vs the initial print of up 6.7%. The y/o/y decline was 8.2%.