The Boock Report

By

Succinct Summation of the Week’s Events – 5/26/17

Positives

  1. Q1 GDP was revised higher to growth of 1.2% from .7% initially and vs the estimate of up .9%. It was led by personal spending particularly within services and a rise in spending on structures and intellectual property. Government spending was also less negative than initially expected. Spending on equipment and inventory building were revised lower while trade was little changed. Residential real estate building was left basically unchanged with the first release. See under the Negatives for reasons why Q2 estimates are being lowered. Corporate profits were higher by 4.3% after tax with adjustments on a very easy comparison of down 6.5% in Q1 2016. Many people just look at the S&P 500 for their profit picture.
  2. Initial jobless claims rose 1k to 234k, 4k below expectations and continues a string of low figures. Because a 257k print 5 weeks ago dropped out of the 4 week average, it fell to 235k from 241k last week. That level was last seen in 1973. Continuing claims, delayed by a week, rose 24k off the lowest level since 2000.
  3. The drop in the average 30 yr mortgage rate to the lowest since November drove refi’s 10.5% higher w/o/w but they are still down 30% y/o/y.
  4. The Markit US manufacturing and services composite index for May rose to 53.9 from 53.2 but the components were mixed. Manufacturing fell .3 pts to 52.5, an 8 month low but was more than offset by a .9 pt increase on the service side to 54, a 4 month high. For perspective, the 53.9 print compares with the pre election level of 54.9 in October and 52.3 in September. It peaked at 55.8 this past January. Markit said, “May saw an encouraging upturn in service sector growth to the fastest so far this year, buoyed by rising domestic demand. Manufacturers, on the other hand, reported the smallest rise in production since last September amid lackluster export sales.” On the future, “There were mixed signals for the outlook. Optimism about the year ahead fell slightly, but hiring remained reassuringly solid, thanks to a step up in service sector recruitment.” On inflation, “Average prices charged for goods and services meanwhile showed one of the largest rises in the past two years.” Contributing to this came from the services side (as it always seems to do) “which firms linked to rising staff salaries and higher raw material costs (particularly food).”
  5. Headline CPI in Japan in April did rise .4% as expected y/o/y, twice the pace seen in March and which is actually just one tenth away from matching the highest level in two years. It was mostly all energy though as CPI ex food was higher by .3% and it was zero ex both food and energy. Looking at inflation in May, Tokyo CPI ex food and energy was flat y/o/y.
  6. The May German IFO business confidence index reached a record high at 114.6 vs 113 in April and above the estimate of 113.1. Both the Current Assessment and Expectation components were higher m/o/m helped by the Macron victory in France. This survey dates back to 1991. The IFO said simply, “Economic activity in Germany remains very briskThe French business confidence index in May only got a 1 pt lift from the Macron win to 105 as expected. While it matches the best level since 2011, it peaked at 115 pre recession.
  7. The manufacturing and services composite index for the eurozone was unchanged at 56.8 pretty much as expected as it holds at its multi year high. Germany and France both saw higher prints but “eased across the rest of the single currency area but remained close to a 10 yr high.” Markit said “Capacity is being strained by the strength of demand, with backlogs of work showing one of the largest increases in the past six years. Job creation has surged to the 2nd highest rate in nearly a decade as firms seek to expand capacity and meet rising demand. Although selling prices have continued to march higher, there are signs of input cost pressures beginning to ease.”

 

 

Negatives

  1. Core durable goods orders saw no change in April m/o/m vs the estimate of up .5% and March was revised down by 5 tenths to also no change and this comes after just a .1% rise in February. On a y/o/y basis, core orders are up just 1.6%. Also of note, shipments of core goods which gets directly plugged into the GDP report saw a .1% drop vs the forecast of up .5% and March was revised down by 3 tenths (which will then temper the revision to Q1 we just saw). Core shipments were flat y/o/y.
  2. The goods trade balance in April widened $3.1b more than expected to $67.6b. That is the 2nd highest level since early 2015. Exports fell .9% m/o/m to the lowest level since November predominantly due to a 7.5% fall in auto exports. Consumer goods exports were lower by 4.1%. Imports did rise .7% but reflecting peak auto’s, auto imports fell 2.4% m/o/m.
  3. After a major Q1 GDP drag from inventories, April wholesale inventories fell .3% m/o/m, well worse than the estimate of up .2% and both durable and non durable goods inventories were down. Retail inventories fell .3% m/o/m but are still up 3% y/o/y with auto’s still a problem. Vehicle inventory on dealer lots fell .5% m/o/m but are still up a problematic 6.7% y/o/y.
  4. Out late last Friday, one has to go back to 2011 to see commercial and industrial loan growth this slow according to the Fed’s weekly data. The y/o/y gain moderated to 2%. It was growing at an 8% y/o/y pace around the time of the US election and the y/o/y increase was almost 11% one year ago. On an absolute dollar basis, outstanding C&I loans are at the same level they stood at 7 months ago. Total loan growth has slowed to a 3.8% y/o/y growth rate. This pace was 6.4% in 2016 and was growing at 7% y/o/y last November. The 2s/10s Treasury spread is down to 94 bps vs 100 bps on the day of the election.
  5. The Richmond manufacturing index fell from 20 down to 1 and that is well below the estimate of 15. The Richmond Fed referred to this as “manufacturers were somewhat less upbeat in May than in the prior three months.” New orders fell from 26 to zero while shipments went negative. Employment was steady, wages rose slightly while the workweek went negative. Most of the forward looking components fell but encouragingly the capital spending index was higher.
  6. Existing home sales in April totaled 5.57mm, below the estimate of 5.65mm and down from 5.7mm in March. Although the NAR again blamed low inventories, the rise in the number of homes for sale brought the months’ supply to 4.2 from 3.8 in March and that is also the most since October when it printed 4.4. Home price gains continue on with their consistent 5-6% annualized increase with a 6.1% rise y/o/y, a number that is more than double the rate of CPI. The median price rose to $287,500 which is just $2,300 from matching the record high. James Bullard, the St. Louis Fed President said overnight he’s worried about the low level of inflation since 2012 but it all depends on where you look. Other assets don’t count either in his mind. Encouragingly within the data was the rise in the number of first time buyers to 34% from 32% in the month prior.
  7. New home sales in April totaled 569k, 41k less than expected which were only partially offset by an upward revision of 21k for March. Months’ supply jumped to 5.7 from 4.9 and that is the most since September 2015 and is back to its 30 year average. In terms of pricing, there was a big drop in the number of sales for homes priced above $500k to the lowest since November. There was no change m/o/m in the number of homes sold priced below $300k which is the area of the market that most needs more supply. The median price fell 3.8% y/o/y but this number is very volatile month to month with respect to new homes.
  8. Mortgage applications to buy a home fell for the 2nd week in the past 3 in May. It was lower by .7% and are now up 3.5% y/o/y. For the month to date, applications are down 1.8% vs the last print in April. This is even as the average 30 yr mortgage rate fell to the lowest level since November.
  9. The May final UoM consumer confidence index fell to 97.1 from 97.7 initially and that is .4 pts below the estimate. It’s basically little changed from the 97 level seen in April and compares with the pre election figures of 91.2 in September and 87.2 in October and vs the post election peak of 98.5 in January. The components were mixed as Current Conditions fell 1 pt from the both the preliminary print and from April while Expectations were flat with April but down slightly from the first May look. One year inflation expectations held at 2.6% from the first read and up one tenth from April.
  10. Italian economic sentiment index for May fell .6 pts to 106.2 with the manufacturing component falling almost 1 pt and consumer confidence dropping by 2 pts. While down m/o/m, it comes off the best level since 2008 for both. Consumer confidence though is now at the weakest level since January 2015.
  11. We saw more nonsensical trade comments from our President. “The Germans are bad, very bad. See the millions of cars they sell in the US, terrible. We will stop this.” More related to peak US auto’s, BMW stock is down for the 10th day in the past 12 while Daimler is lower for 5 straight days. What did the Germans say in response to the Trump comments, the Foreign Ministry Spokesman said that he is “sometimes a bit unpredictable.”
  12. May retail sales in the UK were soft. The CBI retail index fell to 2 from 38 and below the estimate of 10. It’s the weakest since a negative print in January. Anything around zero is considered flat sales. Also of note, “y/o/y internet sales growth also slowed and fell below the long run average.” We all know the reason, shrinking real wages. CBI said that “the survey also revealed that average selling prices rose at the fastest pace in six years in the year to May.”
  13. The Chinese are backtracking on making the Chinese yuan a more freely trading currency. The China Foreign Exchange Trade System is now telling banks that when fixing the daily yuan reference levels they will need to add a “counter cyclical factor” in determining the right price for the yuan. I’ve seen no details on what the factors might be but the CFETS said they want to reduce the “herd effects” of currency movements.”
  14. Hong Kong exports in April did rise 7.1% y/o/y but the estimate was up 12.5% and off an easy comparison. This comes also as China reported a string of economic data misses for the month of April. Exports to China did rise but slowed to 4.1% y/o/y from 16% in March. Imports were higher by 7.3% y/o/y but that also badly missed the estimate of up 13.5% and the comparison it had last April was a 4.5% drop.
  15. While market irrelevant, Moody’s had a one notch downgrade of China to A1 on the “expectation that China’s financial strength will erode somewhat over the coming years, with economy wide debt continuing to rise as potential growth slows.” They seem optimistic on the reforms “to transform the economy and financial system over time” but “it is not likely to prevent a further material rise in economy wide debt, and the consequent increase in contingent liabilities for the government.” Total Chinese debt consisting of government, household and non financial corporates sits at 256% of GDP which Moody’s expects will continue to rise. They said this level is not uncommon in highly rated countries but “they tend to be seen in countries which have much higher per capita incomes, deeper financial markets and stronger institutions than China’s.”
  16. Moody’s also downgraded Hong Kong’s credit rating and said “credit trends in China will continue to have a significant impact on Hong Kong’s credit profile due to close and tightening economic, financial and political linkages with the mainland.”
  17. Japan’s manufacturing index for May fell to 52 from 52.7. It’s the lowest since November. Markit said “May’s PMI data signaled a broad based slowdown in growth of the manufacturing sector, with output, new orders and employment all rising at their slowest rates since last November.”
  18. In April Japanese exports grew by 7.5% y/o/y vs the estimate of up 8%. It’s still the 5th straight month of gains and follows 14 months in a row of declines. On a volume basis, exports were up by 4.1% y/o/y with growth to all 3 major regions. Imports were higher by 15.1%, a touch above the estimate.
  19. Another horrific terrorist attack, this time in Manchester.