
Positives
1) The Fed hiked interest rates, continuing its slow drag of taking the fed funds rate ever closer to the rate of inflation.
2) The steel tariffs are getting watered down with the exemptions totaling about 70% of the initial target.
3) Core durable goods orders in February surprised to the upside with a 1.8% m/o/m jump, double the estimate of up .9%. January was revised down just one tenth to a decline of .4%. The shipments of core goods rose 1.4% m/o/m, well more than the estimate of up .5% and January was revised up by 2 tenths. This will likely help boost Q1 GDP estimates.
4) With a 40 bps increase in mortgage rates from early January to the end of February, contract signings of new homes in February totaled 618k annualized, about spot on with the estimate of 620k but off a higher base as January was revised up by 29k to 622k. Home sales at a 3 month average of 631k vs the 6 month average of 643k and 12 month average of 617k is still below the 25 year average of 716k. Home prices with new homes are pretty volatile m/o/m but they did rose 9.7% y/o/y in February after a 3.1% gain in January and 4% in December.
5) Existing home sales measuring closings totaled 5.54mm in February annualized, 140k more than expected and up from 5.38mm in January. This level of sales is about in line with the 6 month average of 5.51mm and is identical to the 2017 average of 5.54mm. There was an increase in the number of homes for sale but still remained very low as the inventory to sales ratio held at 3.4. There was a 5.9% y/o/y price increase, triple the level of consumer price inflation. This is a main reason why first time buyers only made up 29% of overall purchases, the same level as seen in January. All cash buyers, who first time buyers can’t compete with, increased in number to 24% of total closings, the most since February 2017.
6) With mortgage rates holding at a 4 yr high, purchases applications to buy a home rose 1.4% w/o/w and 6.2% y/o/y.
7) In the UK, versus the estimate of 84k new net jobs, 168k were created and that is the most since July. Their unemployment rate fell one tenth to 4.3% and that matches the lowest level since 1975. Also of note, wage growth ex bonus’ rose 2.6% y/o/y, matching the estimate but up one tenth from December and that is the best since November. If we include bonuses, wage growth is the best since September 2015.
8) Also in the UK, headline CPI was higher by 2.7% in February, one tenth less than expected and down from 3% in January. The core rate slowed to 2.4% from 2.7%. The estimate was 2.5%. We also saw a drop in input producer prices vs January as headline PPI was up 3.4% y/o/y from 4.5%. The forecast was a gain of 3.8%. Output charges came in at 2.6% from 2.8%.
9) In Germany, February PPI unexpectedly fell .1% m/o/m instead of rising by .1%. The y/o/y gain slowed to 1.8% from 2.1% and this is the first print below 2% since December 2016. A slowdown in energy price gains was the main reason for the drop but prices ex energy still moderated to 1.9% from 2.1%.
10) In China, versus last year there was no change m/o/m in February in the number of cities reporting an increase in both new and existing apartments. But versus January there was. For new apartments, 44 cities said there were price increases vs 52 in January and 57 in December. That is a 5 month low. For existing homes, 49 saw price gains vs 45 in January and 47 in December. Looking at the major cities, existing home prices in Beijing fell 4.6% y/o/y, the 5th straight month of y/o/y declines. Last summer they were rising by 13%. Shanghai prices were up just .2% y/o/y vs above 7% in July.
11) Japan’s trade data for February was a bit better than forecasted. Exports rose 1.8% y/o/y (tough comp) vs the estimate of up 1.4% and imports jumped by 16.5% vs expectations of up 16%. Taking out the influence of the stronger yen, export merchandise volume fell 2.1% y/o/y but some of that is related to the Chinese Lunar calendar.
Negatives
1) As measured by LIBOR, the cost of capital is higher again this week with 3 month LIBOR at 2.285% vs 2.20% last Friday and vs 1.69% on the last day of trading in 2017.
2) We added tariffs on another 100+ China products that US consumers buy. China retaliates on the steel and aluminum tariffs and we await what’s next. The dollar amounts are small but the symbolism is not.
3) The NY Fed’s Underlying Inflation Gauge for the ‘full data set’ rose to 3.06% in February from 3.01% in January. This has now risen 9 months in a row and started at 2.51% on this streak last May. It’s also the highest since 2006. This includes ‘prices only’ of 223 price series and adds “macroeconomic and financial variables for a total of 346 series.” The ‘prices only’ measure was up to 2.2% from 2.17% in January. It’s been 2%+ for 15 straight months and was up 2.06% last May. It’s amazing that some dovish Fed members solely get their inflation information by looking at PCE.
4) On the inflation theme, General Mills this week said in their earnings release, “we’re seeing sharp increases in input costs, including inflation in freight and commodities.” On the former, the CEO said on the call “We are seeing an unprecedented rise in logistics costs.”
5) The US March manufacturing and services composite index from Markit fell to 54.3 from 55.8 with a drop in services offsetting a modest gain in manufacturing which did improve to a 3 yr high. At 54.3, it’s about in line with the 12 month average of 54.4. Markit bottom lined the report by saying the current data is consistent with 2.5% GDP growth in Q1 according to their estimate. On inflation, Input buying rose at the fastest pace since September 2014 “which a number of survey respondents linked to pre purchasing and stock building ahead of expected raw material price rises (particularly steel related items).” The underline is mine. What followed was this, “Efforts to boost pre production inventories also led to intense pressure on supply chains where lead times lengthened to the most since early 2014.” This then lead to higher inflation as “manufacturers signaled a steep and accelerated rise in their average cost burdens in March, which was overwhelmingly attributed to rising raw material prices. The overall rate of input cost inflation was the fastest since September 2011.”
6) Initial jobless claims rose 3k w/o/w to 229k and that is 4k above the estimate. These are still historically very low reads. The 4 week average rose to 224k from 222k and which is just off the lowest level since 1973. Continuing claims, delayed by a week, fell by 57k to the lowest since 1973.
7) The 4 yr high in mortgage rates continues to weight on refi’s as they fell 4.5% w/o/w and 19% y/o/y.
8) While the BoJ wants to see higher inflation for its citizenry, I don’t and they don’t either. Japanese February CPI printed up 1% y/o/y in February as expected and up from .9% in January. That is the quickest pace of gain since the VAT induced spike in 2014 and early 2015. Not including that the rate of gain is a 10 yr high. Headline CPI was up by 1.5% and the core/core rate (ex energy too) was up by .5% y/o/y as forecasted vs .4% in January.
9)Markit reported its manufacturing PMI for Japan and that fell almost 1 pt to 53.2 from 54.1. Markit said “Output, new orders and employment growth all slowed, while longer lead times continued to impact supply capacities. That said, with new business increasing for an 18th straight month, firms raised output prices to a quicker extent.”
10) Even with overwhelming reason to hike rates as their estimate of a big economic decline post Brexit vote was woefully bad and in the face of consumer price inflation rising to 3% in January the Bank of England still could not find the urge to hike rates this week. We now await and expect one in May.
11) The Eurozone manufacturing and services composite index fell to 55.3 from 57.1 and that was 1.5 pts below the forecast. It’s also the weakest since January 2017 with declines seen for both Germany and France. Markit did their best to try to explain the moderation. “At least some of the slowing may be ascribed to bad weather in some northern regions and, perhaps more importantly, growing pains resulting from the strength of the recent growth spurt. Supply chain delays and raw material shortages were often reported to have stymied production in manufacturing.” They also cited for both manufacturing and services “growing incidences of skill shortages.” Also of note, Markit said “other factors are clearly at play. The fact that export order book growth has more than halved since the end of last year suggests the stronger euro is taking an increasing toll on export performance. Survey responses also highlighted how political uncertainty also appears to have intensified, dampening demand.” Prices pressures remained intense but moderated m/o/m for both sectors.
12) The German IFO business confidence figure for March fell .7 pts m/o/m to 114.7 and that was about as expected. Both current conditions and expectations fell and the IFO said simply, “The threat of protectionism is dampening the mood in the Germany economy.”
13) The March ZEW index which measures German investor expectations of the German economy fell to 5.1 from 17.8 and that was well below the forecast of 13. Current conditions fell by 2.6 pts but was a touch above the forecast. US trade tariffs didn’t help. ZEW said “Concerns over a US led global trade conflict have made the experts more cautious in their prognoses. The strong euro is also hampering the economic outlook for Germany, a nation reliant of exports. Combined with the experts’ continued positive assessment of the current situation, however, the outlook is still largely positive.”
14) UK retail sales ex auto fuel in February was slightly below expectations when taken with the downward revision to January. It would have been worse if there wasn’t a jump in food sales. The ONS said “The underlying 3 month picture is one of falling sales, mainly due to strong declines across all sectors in December.” Online spending was solid while non food retail sales fell.
15) The March UK CBI industrial orders figure fell to 4 from 10 and that was half the estimate. Positively was the 7 pt decline in selling prices as inflation pressure abates. CBI said “Looking ahead, strong global demand and the lower pound will continue to underpin demand for the manufacturing sector. But we expect consumer facing companies and retailers to continue to struggle while household incomes remain under pressure from higher inflation.”