Positives
1)After last week’s sharp drop in initial jobless claims to 209k, the lowest since 1969, they stayed pretty low this past week. They totaled 211k, 14k less than expected. This brings the four week average down to 222k from 229k and which is the lowest since 1973. Continuing claims, delayed by a week, fell by 77k to also the lowest since 1973.
2) Productivity growth in Q1 was up 1.3% y/o/y and brings the 4 quarter average to also 1.3%. This doesn’t sound like much, especially versus the long term average of closer to 2% but it is the best 4 quarter pace since 2010. Importantly too, unit labor costs rose by 1.1% y/o/y which is the 2nd most over the past 6 quarters. On a q/o/q basis, unit labor costs were up by 2.7%, the most in 4 quarters.
3)In March, US exports rose to a record high. They were up 2% m/o/m and combined with a 1.8% drop in imports saw the trade deficit fall to $48.9b from $57.7b. That was about $1b less than expected.
4)Looking at personal income growth in March saw private sector wages and salaries up by 4.4% y/o/y vs 4.6% growth in February and a 4.2% increase in January.
5)To the disappointment of the ECB, Eurozone CPI was up 1.2% y/o/y in April, down from 1.3% in March and one tenth less than expected. The core rate slowed to .7% growth vs 1% in March and two tenths below the forecast. The one caveat though to these figures is the timing of Easter as it was in the middle of April 2017 and on April 1st 2018 and thus the comparisons were more difficult. PPI rose 2.1% y/o/y as expected in March but up 5 tenths from February. It was up though just 1.4% ex energy.
6)The Eurozone economy did grow by 2.5% y/o/y in Q1 as expected, a solid pace of gain for them but a modest down tick from the 2.8% rate of growth in Q4 and 2.7% in Q3. The Eurozone unemployment rate held at 8.5% as expected in March and that matches the lowest level since December 2008. The low was 7.3% back in October 2007 and the peak in 2013 was 12.1%.
7)The Chinese state sector weighted manufacturing PMI was basically flat m/o/m in April at 51.4 vs 51.5 last month. The estimate was 51.3. The services PMI saw a slight improvement to 54.8 from 54.6.
8)The Caixin private sector weighted Chinese services PMI rose to 52.9 from 52.3. The expectation was for no change but comes after a 1.9 pt drop in March. New orders and employment both were up while input prices moderated. Future business expectations “improved slightly.” The manufacturing index was 51.1 vs 51.0. Caixin said “Although output rose at a slightly quicker rate, new order growth slowed amid a renewed fall in new export work. Consequently, purchasing activity rose only modestly, while firms noted higher inventories of both inputs and finished items. Staffing levels continued to decline, which in turn contributed to a further increase in unfinished workloads.” They also said “price pressures were relatively muted” and that “softer demand weighed on optimism towards the year ahead, with the degree of positive sentiment edging down to a 4 month low in April.”
9)Singapore’s PMI improved to 55.6 from 53.7 in March and vs 55.3 in February. Both domestic and export orders contributed to the growth. PMI gains were also seen in Indonesia, Thailand (still below 50), Philippines and Vietnam.
Negatives
1)Payrolls in April grew by 164k, about 30k less than expected BUT the net revisions to the two prior months were up by 30k so about in line when taken together. The unemployment rate fell by one tenth to just 3.9% but only because of a drop in the size of the labor force as the household survey had basically no job growth. The participation rate ticked down by one tenth to 62.8% and went the wrong way for a 2nd straight month. The employment to population ratio also fell one tenth but at 62.8% is still near the peak of this expansion. Service sector job growth continued to moderate while the goods producing side is still showing good growth. Average hourly earnings grew by .1% m/o/m vs the estimate of up .2% and March was revised down by one tenth. The y/o/y gain of 2.6% is unchanged for a 3rd straight month. As the average work week was unchanged at 34.5, average weekly earnings rose by a still good 2.9% vs 3.2% in March and 2.9% in February. As the unemployment rate for 16-19 yr olds fell to the lowest level since 2000 while steady for those aged 25-54 and down slightly for over 55, I’ll argue that part of the lack of acceleration in the aggregate data is more related to mix. Wage pressures are real, they are going higher, ask most businesses. The Pool of Available Labor fell to the lowest level since 2007. This shrinking pool helps to explain why job growth has slowed or at least hasn’t accelerated from a few years ago, although still remains good. The 6 month job gain has averaged 198k vs the 12 month average of 190k, the 2016 average of 195k, the 2015 average of 226k and the 2014 average of 250k.
2)Even in the 9th year of the economic expansion with real rates still negative, the FOMC remains intent with the glacial pace of rate hikes. They are now playing games with the word “symmetric” and including it twice in the statement this week (the first time it was included was one year ago). Once I guess wasn’t enough in sending a message to the markets that are not changing policy from the current path if inflation goes above 2% for a short period of time. I say “glacial” with the pace of rate hikes but they are also conducting QT which is a major liquidity drain and is turning out not to be like watching paint dry for anyone watching markets every day.
3)The ISM services index for April fell 2 pts m/o/m to 56.8 and that was below the estimate of 58. That is also a 4 month low. The internals were mixed. Prices paid rose by .3 pts to 61.9, just below the highest level since September. All 18 industries surveyed saw growth in April (whether a lot or a little) vs 15 in March. ISM said “The respondents have expressed concern regarding the uncertainty about tariffs and the effect on the cost of goods. Overall, the respondents remain positive about business conditions and the economy.”
4)The April ISM manufacturing index fell 2 pts m/o/m to 57.3 and that is less than the estimate of 58.5. It also is the lowest print since July. The breadth of growth still remained impressive with 17 of 18 industries surveyed seeing an increase in business, the same amount as March. Not a surprise to readers, the ISM bottom lined the report by saying “Demand remains robust, but the nation’s employment resources and supply chains continue to struggle.” The result is 17 of 18 industries saw price increases.
5)The PCE March inflation data was exactly as expected with a headline gain of 2% y/o/y and a core rise of 1.9%. That core rate gain matches the most in 6 years as the Fed is finally getting what they want. The breakdown remains the same as services inflation is driving things. Services inflation rose 2.8% y/o/y while goods prices were up by .3% y/o/y.
6)Spending was up by .4% in March m/o/m as expected but off a lower than forecasted base as February was revised down by 2 tenths to zero growth. For Q1, real spending was about flat vs December. The savings rate fell by 2 two tenths to 3.1%.
7)The CRB food index was up 4 out of 5 days this week and touched the highest level since August 2017. For those that drive, it was April 9th the last time gasoline prices fell. The average gallon according to AAA is at $2.82, the most since July 2015.
8)While I get the end goals of wanting new trade deals with China, the impact of the means continues to be felt in the US. This week the Bunge CEO said this about Chinese buying of soybeans, “Whatever they’re buying is non-US. They’re buying beans in Canada, in Brazil, mostly Brazil, but very deliberately not buying anything from the US.”
9)The average 30 yr mortgage rate continues its jump higher and was 4.80% for the week ended April 27th according to the MBA, matching a 7 year high and that led to a decline in mortgage applications. Purchases fell by 1.6% w/o/w and the y/o/y rise slowed to 5.1% from 11.3% seen last week. They are now at a 3 week low. Refi’s were lower by 3.5% w/o/w and down by 15% y/o/y. Refi’s now sit at the lowest level since October 2008.
10)Pending home sales in March, a leading indicator of future closings, rose by .4% m/o/m which was about half the estimate of up .8% and February was revised slightly lower to a gain of 2.8% from the first print of 3.1%. The NAR blamed colder weather to explain the decline in the Northeast but I’m not a fan of that excuse for existing homes. The NAR said “What continues to hold back sales is the fact that prospective buyers are increasingly having difficulty finding an affordable home to buy.”
11)The National Association of Credit Management’s monthly Credit Managers Index said this for April: “many of the indicators are still solidly in expansion territory, but the warning lights are starting to blink.” They said the rise in rates and “more concern over inflation and the eventual Fed reaction” is creating some caution among credit managers. The index for April fell to 53.7 (50 is breakeven between expansion and contraction), “a low not seen since May of 2017” according to the NACM.
12)The Eurozone manufacturing and services composite index was revised to 55.1 from 55.2 in March and is also the lowest since January last year. Markit referred to the moderation as “broad based fading of the eurozone’s growth spurt so far this year.” Growth in the region is still good but “backlogs of uncompleted orders grew at the slowest rate for 8 months.” And, “companies expectations about future output hit a 5 month low.” Europe is experiencing a similar situation as the US manufacturing sector: “supply constraints, including raw material scarcities, supplier delivery delays and skill shortages, have constrained production” according to Markit.
13)Euro area retail sales in March rose just .1% instead of .5% as expected but February was revised up by 2 tenths.
14)Money supply growth slowed more than expected in March in the Eurozone with a 3.7% y/o/y rise vs the forecast of up 4.1%. It is also a slowdown from 4.2% growth in February. That is the slowest rate of gain since November 2014. Loan growth did pick up slightly in March but that money supply slowdown bears watching. Loan growth to businesses though rose 3.3% y/o/y vs 3.2% in February and to households they grew by 3% y/o/y vs 2.9%.
15)German retail sales in March fell .6% m/o/m. The estimate was for a gain of .8% and that was only partially offset by a 5 tenths upward revision in February. Maybe some will chalk this up to nasty winter weather but sales have fallen for 4 straight months.
16)The UK April services PMI came in at 53.2 from 52.4 last month but the forecast was 53.5. The rebound came off the lowest since July 2016 right after Brexit was voted on. The headline of the Markit press release today said “Service sector remains in slow lane.” They were disappointed with the modest rebound off the March level plagued by “heavy snowfall.” They said “Jobs growth across services, manufacturing and construction has also slowed to its weakest since the referendum and inflationary pressures have eased. The surveys have indicated that sales, investment and hiring are being hit by uncertainty about the economic outlook as well as sluggish domestic demand, notably among consumers.”
17)The UK Markit manufacturing index for April did fall 1 pt m/o/m to 53.9 where no change was expected. That is the weakest level since November 2016 in this 1st month of Q2. Markit said “Rates of expansion eased for output, new orders and employment, in part reflecting a weakening in the pace of expansion of new work from abroad.” The export component fell to a 10 month low. “On the price front, input cost and output charge inflation moderated and, although still elevated, are below the highs seen at the turn of the year.”
18)Hong Kong’s PMI fell back below 50 at 49.1 vs 50.6 in March. Markit said “With a fall in new orders and business sentiment remaining negative, the economy seems set to slow further in the coming months.” A reason given is sounding familiar in the US and Europe too, “The decline in the PMI is perhaps not surprising, not least because of overstretched supply chains and a very tight labor market. With persistent delivery delays and growing skill shortages, output is clearly being restricted.”
19)April PMI declines were also seen in South Korea, Taiwan and Malaysia.
20)Further evidence of the change in global central liquidity, the rate of expansion in Japan’s monetary base has slowed to the lowest level since late 2012.
21)South Korean exports fell 1.5% y/o/y vs the forecast of up 3.3%. That is the first negative print since October 2016. Exports to the US and EU both fell but was strong to China. Imports were also below the consensus estimate. South Korea’s industrial production fell 2.5% m/o/m in March, well worse than the estimate of down .4% and February was revised lower.
22)The Reserve Bank of Australia held interest rates at its record low of 1.5% as expected and gave no indication of any rate hike any time soon. “Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual.” They still expect “growth to pick up, to average a bit above 3% in 2018 and 2019.” The RBA also expects inflation “to be a bit above 2% in 2018.” The Q1 CPI print was 1.9%. It’s very rare for the RBA to have negative real interest rates.
23)The Citi Global Economic Surprise index is at the lowest level since March 2016.
Peter is the Chief Investment Officer at Bleakley Advisory Group and is a CNBC contributor.