The Boock Report

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Succinct Summation of the Week’s Events – 5/19

Positives

  1. Initial jobless claims totaled 232k, 8k less than expected and down 4k from last week. The 4 week average fell to 241k from 244k and that is just above the lowest level since 1973. Continuing claims, delayed by a week, fell by 22k to match the lowest level since also 1973.
  2. The Philadelphia manufacturing index rose almost 17 pts to 38.8 which was well above the forecast of 18.5. The internals though were MUCH more mixed. New orders fell 3 pts to the lowest since December while backlogs were up a modest 2.4 pts to 9.0 after falling by almost 8 pts in April. Inventories plunged by 16.4 pts. Shipments spiked by almost 16 pts but that’s backward looking. The employment component was down by 2.6 pts while the Workweek was up 3 pts. Prices paid fell 9.5 pts to the lowest since October and prices received was down by 1.3 pts to the weakest since December. Also not correlating with the headline number, the 6 month outlook fell 10.6 pts to 34.8, the lowest since November. The 6 month outlook for new orders, shipments, backlogs, inventories, employment and workweek all fell m/o/m. Also, capital spending plans fell 3.9 pts but is still above its 6 month average.
  3. US Industrial production in April saw a 1% m/o/m gain, well above the estimate of up .4% but unnecessary inventory building was a key influence. The main factor in the upside was on the manufacturing side due to a 5% m/o/m jump in auto production after a 3.6% decline in March. This brings the y/o/y increase to 4% and over inventoried dealer lots don’t need any new cars/trucks right now. The production of machinery was up by .9% m/o/m and 2.8% y/o/y while computers/electronics grew by .1% m/o/m and 4.6% y/o/y. Utility output also helped to boost the headline figure with a .7% rise as weather plays around with this component. The mining sector added 1.2% m/o/m of production and 7.3% y/o/y after a tough few years. Overall capacity utilization rose to 76.7% from 76.1% and that is the most since August 2015 but still remains well below its long term average of around 80%. Within auto’s, capacity utilization stood at 84%, the most since it printed 84.4% in July 2015. It peaked at 80.7% in the mid 2000’s expansion and 85.6% in January 2000.
  4. The May NAHB builder sentiment index rose 2 pts to 70 which is also 2 pts more than expected. The Present Situation was higher by 2 pts too after dropping by 3 pts in April and spiking by 6 pts in February. Smoothing this out puts the 6 month average at 74. The Future Outlook was higher by 4 pts to 79 and is also 2 pts above the 6 month average. Prospective Buyers Traffic was down by 1 pt to 51, which is about flat line with 50 being breakeven. The NAHB is saying simply that with existing home inventory remaining tight, “we can expect increased demand for new construction moving forward.”
  5. Foreigners in March finally got interested again in US notes and bonds. Buying totaled a net $24.39b, the most since March of last year and follows a steady stream of selling that saw net liquidations of $326b in 2016 and $20.5b in the first two months of this year. This follows net selling of $20.3b in 2015. Most of the swing came from the Japanese who stepped up with $31.2b of buying of notes and bonds after 7 straight months of selling. The Chinese were net sellers of notes and bonds but still increased their total holdings of US Treasuries by $28b due to the purchases of short term bills.
  6. Japan’s economy in Q1 grew by 2.2% q/o/q annualized, the best in a year but it was all due to a drop in inflation. Nominal GDP q/o/q was unchanged and down .1% annualized (due to rounding). Real business spending surprised to the upside while personal spending was one tenth light. Net trade added to growth.
  7. To the delight of the BoJ, April PPI in Japan rose 2.1% y/o/y. Taking out the influence of the April 2014 VAT hike, it last touched 2% in January 2014. Energy, steel and electricity prices led the way. The estimate was for a gain of 1.8%.
  8. China’s latest round of trying to contain its property bubble resulted in less cities reporting price gains in April m/o/m. For new apartments, home prices rose in 58 cities vs 62 in March and fell in 8 vs 4 in March. However, prices were still up in 69 of the 70 cities surveyed vs 68 last April.
  9. The French mainland unemployment rate saw a sharp 4 tenths m/o/m decline to 9.3% and that was 3 tenths less than expected. It’s also the lowest rate since Q1 2012.
  10. After a tough Q1 which saw the worst sales figures since 2010, UK retail sales ex auto fuel rose 2.3% m/o/m and 4% y/o/y in April, about double the estimate. As Easter came in April vs March last year, estimating the influence has messed with the numbers even though these figures are seasonally adjusted. The UK Statistics office said better weather helped.
  11. Job growth in the UK for the 3 months ended March was much better than expected as 122k net new jobs were added, well more than the estimate of 21k and this brought the unemployment rate down one tenth to 4.6%. This is the lowest since August 1975. The percentage of 16-64 yr olds employed is at a record high of 74.8%.
  12. The UK CBI industrial orders index in May rose 5 pts to 9 vs the estimate of no change. The CBI said “The summer sun has come out early for Britain’s manufacturers. Robust demand at both home and abroad is reflected in strong order books, and output is picking up the pace. On the other side of the coin though, we have mounting cost pressures and expectations for factory gate price rises are running high.”
  13. The German ZEW index which measures German investor confidence in the German economy rose to 20.6 from 19.5. While that was below the estimate of 22, it still is at the highest level since August 2015 while the Current Situation component rose to the best level in almost 6 years. Also of note, the ZEW survey for the entire euro area was higher by almost 10 pts to the highest since August 2015. The President of ZEW said “The latest figures on the GDP confirm that the German economy is in good shape. ZEW indicators have been pointing to this trend for some time. The prospects for the eurozone as a whole are gradually improving, further strengthening the economic environment for German exports.”
  14. The euro region’s trade surplus widened to a record high in March on a non seasonally adjusted basis. The record dates back to when the euro was created in 1999. Goods exports were up by 13% y/o/y with imports higher by 14%.

 

Negatives

  1. The political noise reached a new decibel.
  2. The MBA said mortgage applications to buy a home fell 2.7% w/o/w but is still up 9.2% y/o/y which certainly points to a spring season that has been pretty good but still constrained by inventory and pricing issues. Refi applications fell 5.7% w/o/w and are down 37% y/o/y.
  3. April housing starts totaled 1.172mm, well below the forecast of 1.26mm and down from 1.203mm in March which was revised down slightly. This is the slowest pace of starts since November. The main factor in the miss was the drop in multi family starts by 34k to 337k while single family starts were higher by 3k to 835k. The permit side was disappointing in the single family space as it fell 37k to 789k and that’s the lowest since November when it printed 786k. Multi family permits rose by 6k to 440k.
  4. The NY manufacturing May index fell to -1.0 from +5.2 in April. That was well below the estimate of +7.5 and is back below zero for the first time since before the election in October. Post election it peaked at 18.7 in February. The internals were also soft with new orders in particular falling 11.4 pts to -4.4, the worst since September. The 6 month business activity outlook did hold steady at 39.3 vs 39.9 last month. The 6 month average for this figure though is 43. Disappointingly in the outlook was the sharp drop in the Capital Spending plans component which plunged by 14.3 pts to 13.4, the weakest since November.
  5. Notwithstanding that core inflation has likely topped out for now due to a slowdown in rent growth, the demand for inflation protection in the 10 yr TIPS auction was literally off the charts. The yield was 2 bps below the when issued, the bid to cover of 2.56 was well above the average since last year of 2.35, and non dealer bidders took almost 90% of the auction, the most ever.
  6. Wage growth in the UK continues to be mediocre as they rose just 2.1% y/o/y ex bonus’ for the 3 months ended March and while in line with the estimate, it’s still the slowest pace of gain since July. This compares with CPI running at 2.7% in April. The April claims number rose 19.4k which is the 2nd biggest increase, after the one seen in March, since 2011 which means the March jobs spike might not be sustainable. The estimate was up 7.5k.
  7. April CPI in the UK rose 2.7% y/o/y, one tenth more than expected and up from 2.3% in March. It matches the highest print since July 2013 and it wasn’t just the 7% y/o/y rise in energy prices. Services prices rose 3% y/o/y which drove a 2.4% rise in core CPI with airline prices spiking which could be a timing issue with Easter as it was in April this year vs March last year. Industrial goods prices were up by 2.4%. The Retail Price Index was higher by 3.5% y/o/y, a level last seen 5 years ago. As for wholesale price gains, PPI input prices were up by 16.6% y/o/y which is actually the slowest rate of gain since December.
  8. The eurozone consumer inflation data for April was left unrevised with headline CPI up by 1.9% y/o/y and the core rate higher by 1.2%. The core rate gain is the quickest since 2013. That said, the timing of Easter vs last year did mess with the numbers and if we average the March and April core reads, it is no different than the 3 prior months. The German Deputy Finance Minister Jens Spahn said this week, “Unless monetary policy starts normalizing soon, negative side effects will become more damaging.”
  9. German PPI in April rose .4% m/o/m, double the estimate and the y/o/y gain of 3.4% was the most since December 2011. It was more than just energy as basic goods prices rose 4.3% y/o/y and non durable goods prices were higher by 3.2% y/o/y. Capital and durable goods prices were up a more modest 1%.
  10. In China, retail sales in April rose 10.7% y/o/y, one tenth less than expected and down from the 10.9% y/o/y pace seen in March. Industrial production slowed to 6.5% growth from 7.6% in March and that was 5 tenths below expectations. Fixed asset investment ytd y/o/y was up by 8.9%, 3 tenths lower than the prior month and also 2 tenths below the forecast. Foreign direct investment fell 4.3% y/o/y.
  11. We lost one of the greatest rock and roll voices of all time this week in Chris Cornell. This was my favorite of his with Soundgarden: