The Boock Report

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Succinct Summation of the Week’s Events – 4/20

Positives

  1. The Philly April manufacturing index rose slightly to 23.2 from 22.3 and that was 2.2 pts above the forecast. The internals though were much more mixed with new orders, backlogs and inventories down while the labor market components were up. Of note, Delivery Time rose to the highest level ever since this survey began in 1968 and this reflects a strained supply chain. In turn, Prices Paid jumped by almost 14 pts to 56.4, the most in 7 years and Prices Received rose by 9 pts to the highest since May 2008. The 6 month outlook for Business Activity fell by 7.2 pts to the weakest since July 2017. Disappointingly too was the Capital Expenditure component which fell 6 pts to the lowest level since June 2017.
  2. The NY Fed’s Nowcast model for Q1 was raised to 2.9% growth from 2.8%. The Atlanta Fed’s model held at 2%.
  3. With mortgage rates stabilizing as of last week, mortgage applications rebounded. Purchase applications rose 6.1% w/o/w after two weeks of declines and are up 10.2% y/o/y. Refi’s grew by 3.5% w/o/w, also after two weeks of drops. They are still down about 10% y/o/y.
  4. Housing starts in March totaled 1.32mm annualized, above the estimate of 1.27mm and February was revised up by 60k. Looking under the hood and it was all the multi family side again that drove the upside. Multi family starts totaled 452k, up from 395k in February and that is the most since December 2016. Single family starts fell by 33k m/o/m to 867k, a 3 month low. Looking at permits, the story is the same with strength in multi family and a miss with single family. Single family permits dropped by 50k to the lowest level since September. Multi family starts jumped by 82k to the most since September 2016.
  5. Apparently taking advantage of the January jump in interest rates, foreign buying of US Treasuries picked up noticeably in February totaling $43.2b. That’s the biggest one month of purchases since May 2017. The Chinese added to their inventory of notes and bonds, buying $15b worth and net of their tbill holding runoff, they added a net $8.5b of Treasuries. The Japanese on the other hand continued to sell, another $6.3b worth bringing their holdings of US Treasuries to the lowest since December 2011.
  6. Industrial production in March rose .5% m/o/m, two tenths more than expected but helped by more utility output on the colder weather. Manufacturing production was up .1% as expected but off a higher base as February was revised up by 3 tenths. Capacity utilization did tick up to 78%, the most since 2015.
  7. Business inventories in February rose by .6% m/o/m as expected and January was left alone so there should be no change to Q1 GDP estimates. Post hurricane restocking and front loading product ahead of possible tariffs were two main reasons.
  8. The inflation data in March for Japan was in line with expectations among all the key categories. CPI ex food was up by .9% y/o/y vs 1% in February. The core/core rate which also takes out energy was higher by .5% as it was in February. That .5% gain happens to match the biggest rise since the summer of 2016. Headline inflation was up 1.1% y/o/y.
  9. To the relief of the European wage earner but to the dismay of the ECB, the March Eurozone CPI was revised to a gain of 1.3% y/o/y vs the first print of 1.4% but the core rate was left alone, up 1%.
  10. The German PPI for March was up by 1.9% y/o/y, up one tenth from February but one tenth less than expected. Expect numbers to rise in coming months. German 10 yr inflation breakevens finish the week at near 4 yr high.
  11. In the UK, they added 55k jobs for the 3 months ended February which was exactly as expected while their unemployment rate fell another tenth to just 4.2%, the lowest since 1975. The tightening of the UK labor market led to a 2.8% y/o/y wage gain ex bonus’ and while as expected, it’s the best since August 2015.
  12. Fortunately for the UK citizen, March CPI slowed to 2.5% y/o/y growth from 2.7% in February and vs the estimate of 2.7%. The core rate also dipped by one tenth to a 2.3% increase. Tougher for industry, input prices remain sticky, rising 4.2% y/o/y while margins are still getting squeezed with output charges up by 2.4% y/o/y.
  13. China said that within 5 years, they will allow foreign companies to own 100% of their auto business in China without having to set up joint ventures and thus share technology. Progress on the trade front.
  14. The Chinese economy grew by 6.8% y/o/y in Q1 as expected. Also, retail sales in March beat estimates with a 10.1% y/o/y gain vs the forecast of up 9.7%. Industrial production however was light, rising by 6% vs the estimate of 6.3%. On this though, it’s tough to separate what’s shut capacity on purpose vs slower activity. Fixed asset investment was a touch below estimates.

 

Negatives

  1. Mark Carney is already getting cold feet on the timing of the next BoE rate hike off Great Depression type levels. With inflation running between 2.5-3% and their benchmark rate at .50%, hemming and hawing over a 25 bps hike seems feckless Brexit or no Brexit. Also, the ECB is wondering whether they should wait until July, and not June as the market expects, to tell us about the fate of QE past the September time frame according to BN and ECB officials.  Mario Draghi today is admitting that the latest economic data “suggest that the growth cycle may have peaked” although he still thinks “the growth momentum is expected to continue.” Risks are rising that both banks get trapped in what has afflicted the BoJ for decades because they all overstayed their welcome.
  2. Great for producers but not so by more that are users, the CRB index was up 1% on the week and 4% year to date to touch the highest level since October 2015. Aluminum’s 3 week gain touched 3t% intraday this week. Coincident with this, the implied inflation rate in 10 yr TIPS rose to the highest level since late summer 2014.
  3. Initial jobless claims totaled 232k, slightly above the estimate of 230k and little changed with 233k last week. The 4 week average which smooths out the Easter holiday is 231k vs 230k in the week prior. Continuing claims, delayed by a week, fell 15k after rising by 60k last week.
  4. Core US retail sales (ex auto’s, gasoline and building materials) in March were about as expected with a .4% m/o/m gain but off a slightly lower base as February was revised down by one tenth. Core retail sales are up just .3% in all of Q1 from December and the absolute dollar level is below where it was in November.
  5. The NY manufacturing April index fell to 15.8 from 22.5. That was below the estimate of 18.4 but just gives back much of the 9.4 jump in March. New orders, backlogs and employment all fell. Inventories and the workweek rose. Delivery Times were little changed off the highest level since 2001. Prices paid and received did moderate slightly from the highest level in years seen in March.
  6. The Fed’s Beige Book reflects legitimate concerns with tariffs and rising costs.
  7. The NAHB home builder sentiment index for April fell 1 pt to 69 and a touch below the estimate of no change. It remains high (ONLY measuring direction of sentiment, not degree) as it’s well above 50 but has now fallen for a 4th straight month and matches the lowest level since October.  Both the Present Situation and Outlook components fell m/o/m but Prospective Buyers Traffic was unchanged at 51. The NAHB said “builders are facing supply side constraints, such as a lack of buildable lots and increasing construction material costs. Tariffs placed on Canadian lumber and other imported products are pushing up prices and hurting housing affordability.”
  8. UK retail sales ex auto fuel fell .5% m/o/m in March, one tenth more than expected in March and February was revised down by two tenths. Part of the blame from the ONS is on the weather as they termed the harsher winter as the “Beast from the East.” Either way, for Q1, sales fell from Q4.
  9. Eurozone car registrations in March fell .3% m/o/m after a .6% decline in February. The y/o/y drop of 5.3% was the most since April 2017.
  10. Investor expectations in the German economy took a turn for the worse in April. The ZEW index fell to -8.2 from +5.1. That was well below the estimate of -1.0 and the worst print since November 2012, only a few months after Draghi said “Whatever it takes.” “The reasons for this downturn in expectations can mainly be found in the international trade conflict with the United States and the current situation in the Syrian war. The significant decline in production, exports and retail sales in Germany in the first quarter of 2018 is also having a negative effect on the future economic development,” says ZEW.
  11. The negative within the UK jobs data was the rise in March unemployment claims which rose by 11.6k after jumping by 15.1k in February.
  12. Job growth in March in the China proxy that is Australia disappointed with a gain of 4.9k vs the estimate of up 20k and February was revised to an outright decline of 6.3k vs the last print of up 17.5k. The unemployment rate though did hold at 5.5% as the participation rate fell.
  13. The Hong Kong Monetary Authority was successful in stemming the weakness in the Hong Kong Dollar but at the cost of rising interest rates. 3 month HIBOR jumped by 15 bps on the week to close at the highest level since December 2008 at 1.36%. Hong Kong has one of the most euphoric property bubbles anywhere.
  14. Japan’s March exports rose 2.1% y/o/y in March, below the estimate of up 5.2% and its imports unexpectedly fell .6% y/o/y vs the forecast of up 6.3%.