The Boock Report

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Succinct Summation of the Week’s Events – 4/21/2017

Positives
  1. Positive for labor and wages, every single one of the 12 districts surveyed by the Fed in their Beige Book mentioned labor shortages and tightness in many aspects of the jobs market. And it just wasn’t for skilled labor. Chicago in particular saw “increased difficulty filling low skilled positions.” Industries cited for shortages were in oil/gas, construction, technology, agriculture, financial services (wages for unskilled entry level positions increased markedly in SF), trucking, leisure and hospitality, manufacturing, compliance, clerical, restaurants, and housekeeping.
  2. Existing home sales in March, likely capturing contract signings mostly in January and February, totaled 5.71mm, about 100k more than expected and up from 5.47mm in February. This is the highest level in the recovery and the best print since February 2007. It’s also up 5.9% y/o/y averaging out 3 months. For perspective, we’ve seen the current level of sales back in ‘02 and the bubble peak was 7.25mm in ’05. Months’ supply remained anemic at 3.8 which is just off the cycle low of 3.5 seen in January. The median price was up 6.8% y/o/y which is great if you own but sucks if you want to buy. Pricing out the first time buyer is a key reason why they are stuck in the low 30% level as a percent of total purchases and this month at 32% which has been trend. The dearth of inventories is still a problem but the NAR said “there was enough of a monthly increase in listings in March for sales to muster a strong gain. Sales will go up as long as inventory does.” That of course assumes that issues in housing is only supply related. We can argue that there are issues on the demand side too with the greater desire to rent whether by choice or due to financial constraints.
  3. I give Theresa May a lot of credit for her smart move to call for an early election. The conservative party has a large lead, the Labour party is in some disarray and assuming the gamble is successful, the Brexit process should go more smoothly, hopefully.
  4. The European manufacturing and services composite index for April was up by .3 pts to 56.7, the best in 6 years. Germany’s index actually fell m/o/m but was offset by a gain in France. Employment in particular “rose to the highest for almost a decade as firms boosted operating capacity in line with buoyant demand and widespread optimism about future prospects. Price pressure meanwhile remained among the strongest seen over the past 6 years.” Also on the rising inflation, “supply chains also continued to tighten, signaling a growing trend towards a sellers’ market for many items…Evidence of rising wage pressures also continued to be seen.” The Trump reflation trade may be taking a breather but industrial commodity prices are still near 2 yr highs.
  5. German PPI in March was flat m/o/m vs the estimate of up .2% but the y/o/y gain of 3.1% held steady at the quickest pace since December 2011. The m/o/m change in energy is beginning to soften but remains higher by 4.5% y/o/y which also will soon start to flatten out.
  6. A mild winter and easy money sent construction in the eurozone to a 6.9% m/o/m and 7.1% y/o/y jump, the most since early 2012. Looking y/o/y, German construction spiked 11.6%, France by 9.3% and Spain by 5.4%. Italian activity remained anemic though with a rise of 1.6% and it fell in the UK as real estate in London cools.
  7. The eurozone trade surplus was 19.2b euros in February, above the estimate of 18b and up from 15.7b. The peak in this cycle was back in May 2016 when it touched 25b. In the mid 2000’s it never got above 8b and spent time in deficit. Exports are just off the recent high seen in December
  8. Japanese exports rose 12% y/o/y, double the estimate which is the fastest pace of gain since January 2015. On a merchandise volume basis, exports were higher by 6.6% y/o/y with particular strength in exports to China. Exports to the US rose 4.5% but were flat y/o/y to the EU. Overall merchandise volume exports is at the highest since March 2012. Imports jumped by 15.8% y/o/y vs the estimate of up 10%.
  9. Taken with a grain of salt, China’s economy grew by 6.9% y/o/y in Q1 vs the 6.8% rate in Q4 and one tenth more than expected. Retail sales in March grew by 10.9% y/o/y which was in line with the January/February pace and 120 bps above expectations. Industrial production also accelerated to a 7.6% y/o/y pace which is a pick up from the 6% seen in the first two months and also above the estimate of 6.3%. Fixed asset investment was higher by 9.2% ytd y/o/y, 4 tenths more than expected.

 

Negatives
  1. Negative for profit margins, every single one of the 12 districts surveyed by the Fed in their Beige Book mentioned labor shortages and tightness in many aspects of the jobs market. If you want to cite the biggest factor (outside of lowered interest expense) that drove higher profit margins post recession it is labor getting the smallest piece of the profit pie since WWII. That is now reversing.
  2. Initial jobless claims totaled 244k, 4k more than expected and up by 10k w/o/w. As a 261k print drops out, the 4 week average falls to 243k from 247k and that is the lowest since last month. Continuing claims, delayed by a week, fell by 49k, that’s down for a 3rd straight week and to the lowest level since April 2000.
  3. The April Philly manufacturing index fell 11 pts to 22 and that was 3.5 pts below the forecast. This index has gone from 8.7 in November to 43.3 in February and is now back below its 6 month average as confidence falls closer to reality. Looking forward, the 6 month Business Activity outlook fell 14 pts to the lowest since November and is now 11 pts below the recent peak seen in January. Capital spending plans though rose 2 pts and that is an encouraging aspect of the report as it’s the best in years. The Philly Fed said “Expected high sales growth and the need to replace capital goods were the most cited reasons for the increase.”
  4. The April NY manufacturing index moderated to 5.2 from 16.4 in March and which was about 10 pts below expectations. It’s the lowest since November when it was at 2.2 from -5.5 in October. Looking forward, 6 month business activity expectations was higher by 2.5 pts to 39.9 after falling by 4.3 pts in March. The 6 month average is 41.6. Capital spending plans was noteworthy as it was higher by almost 4 pts to the best level since February 2015. Technology spending expectations were also higher. On the flip side, expectations for new orders fell to the lowest since August and thus pre election. The NY Fed referred to growth in April as rising “at a more subdued pace in New York State.”
  5. Markit’s manufacturing index fell .5 pts in April to 52.8, down for the 3rd straight month and it’s below the October, pre election level for a 2nd straight month. It touched 53.4 in October. The services index was down by .3 pts to 52.5 and it’s down also for a 3rd straight month and also below the October, pre election print of 54.8. Combining the two puts the composite index at the weakest level since September. At least in this index, the Trump confidence trade is over but there is still hope in the forward looking component which improved. Internally, employment fell to the lowest level since February 2010 led by a slowdown in service hiring which is at its weakest level since July 2010. Input price inflation hit its highest level since June 2015 “at the same time, prices charged…increased only marginally and at the slowest pace since November 2016.” Markit said, They said “The survey responses indicate that some froth has come off the economy since the post election bounce seen at the end of last year. However, with inflows of new business picking up slightly in April and business optimism about the year ahead also brightening, there’s good reason to believe that growth could revive again in coming months.”
  6. Mortgage applications to buy a home fell 3.4% w/o/w and are now down 1.1% y/o/y as we are deep into the important spring time period where about half of all the years transactions take place. Refi’s were basically flat for the 2nd straight week but are still down 42% y/o/y. Coincident with the decline in Treasury yields, the average 30 yr mortgage rate fell 6 bps to 4.22%, a 21 week low. They however remain 40 bps higher y/o/y and hence the refi drop.
  7. Housing starts in March totaled 1.215mm annualized, 35k less than expected while February was revised up by 15k to 1.303mm which was the highest since October. To smooth out the mild winter, single family starts averaged 848k in February and March vs 813k in January and vs 868k seen in October before the election. The 848k compares with the 25 year average of 1.03mm. Multi family starts, the bastion of strength within housing, averaged 411k vs 428k in January and vs 452k back in October. This compares favorably with the 25 yr average of 294k in response to 4-5% annual gains in rents. On the permit side, they were slightly ahead of forecasts at 1.26mm, 10k more than expected and up from 1.215mm in February. It was all multi family as permits here bounced by 53k to 437k although is very volatile month to month as it fell by 102k in February. Single family starts fell 9k to 823 and is very volatile too. It printed 780k in November, 830k in December, 807k in January and 832k in February to make the point.
  8. The NAHB builder April index fell 3 pts to 68. The estimate was 70 but it still is well above the pre election level of 63 in October and certainly well higher than the breakeven of 50. Both the Present Situation and Future Expectation components were lower by 3 pts but are both still higher than 70. Prospective Buyers Traffic fell 1 pt to 52 and has been above 50 in 4 of the past 5 months after spending more than 11 years below it. The Chairman of the NAHB said “builders are reporting strong interest among potential home buyers” and this is reflected in the buyers traffic number but everything is relative as this component is just 2 pts above 50. On the supply/builder side, the NAHB Chief Economist said “builders are facing several challenges, such as hefty regulatory costs and ongoing increases in building material prices.”
  9. US industrial production in March was up by .5% m/o/m as expected but the internals weren’t as pretty. Manufacturing production fell .4% m/o/m instead of staying unchanged as forecasted and February was revised down by two tenths. We can blame that weakness on the auto sector as production here fell a sharp 3% m/o/m and are now essentially changed y/o/y with a 1.3% rise. The headline gain was driven my utility output while mining was flat m/o/m but up by 2.9% y/o/y. Capacity utilization did rise to 76.1% as expected from 75.7% in February but again, it was all utilities. Capacity utilization in manufacturing was down and specifically with motor vehicles it fell to 80.5%, the lowest since May 2016 from 83.1% in February.
  10. For the 10th month in the past 11 up until February, foreigners have been net sellers of US notes and bonds. In February they sold another $13.5b. Since 2014, foreigners have sold $367b worth on a net basis of notes and bonds. In February, both private owners and central banks were sellers. China added $8.6b of Treasuries but almost all of that was in bills. They bought a net $1.55b in notes and bonds but Hong Kong was a net seller of $5.6b and that could have been a conduit for mainland selling . Japan again was a seller of notes and bonds but more than offset that by buying bills. We also saw the impact of likely hedge fund liquidation in February as $18.9b of selling came from the Cayman Islands. What will happen to yields if this continues when QT begins?
  11. Due to higher inflation and wages that don’t keep up, UK retail sales ex auto fuel in March was lower by 1.5% m/o/m, below the estimate of down .5%. The y/o/y gain of 2.6% is the 2nd slowest since December 2015. These figures are a measure of volume, not price so has greater relevance in gauging the impact of price. Sales ex auto fuel on value/price was down by 1% m/o/m and up 4.7% y/o/y. Looking at volume sales ex auto fuel for all of Q1 saw sales down 1.2% q/o/q which is the 2nd biggest decline since 2010.
  12. In the bubble that just keeps on floating, of 70 Chinese cities surveyed in March, 68 saw price gains for new apartments vs last year and there were 62 cities that reported gains for existing apartments. Both are the most in a while. From February, more cities saw price gains for both new and existing apartments, 62 for the former and 64 for the latter. I counted 24 cities that saw double digit y/o/y price gains led by the city of Hefei where home prices rose 34.5 y/o/y. Price gains slowed to 17% in Shanghai and 19% in Beijing.
  13. BoJ Governor Kuroda really scares me. In case you missed his comments yesterday in an interview on Bloomberg, in response to a question about reaching monetary limits he said they own 40% of JGB’s which means there is 60% left and he doesn’t “see any constraints to BoJ policy.” Thus, taken to its extreme he believes owning 100% of JGB’s and the entire Japanese stock market will eventually get him to his 2% inflation target range. After trying to digest that alarming possibility, I would then ask him, what happens next?