The Boock Report

By

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

Positives

  1. The Fed’s press statement is implying they are ready to hike again in June as they look past the Q1 economic softness. Getting the fed funds rate to a level closer to the rate of change in inflation continues, aka normalization.
  2. April payrolls grew by 211k, 21k more than expected and partially offset by a downward revision of 6k in the two prior months. Much of the April upside was in the government as the private sector only saw a 4k person upside at 194k while March was revised down by 12k and February was revised up by 1k. Smoothing out the recent track record has 3 month headline job growth average at 174k vs the 6 month average of 176k, the 12 month average of 186k, the 2016 average of 187k and vs 226k in 2015 and 250k in 2014. The household survey grew by 156k (of which 92k came from the important 25-54 yr old category) and because only 12k came into the labor force, the unemployment rate fell another tenth to 4.4% and the U6 rate was down a sharp 3 tenths to 8.6%. The 4.4% rate now matches the lowest level seen since the mid 2000’s. The U6 rate is the lowest since November 2007 and bottomed at 7.9% in that recovery. It was as low as 6.8% in October 2000. The participation rate did fall by one tenth to 62.9% and remains in a 4 month tight range and off the multi decade low seen last year. The employment to population ratio rose to 60.2%, the most since February 2009. Average hourly earnings were up by .3% m/o/m but from a one tenth downwardly revised March print to up .1%. On a y/o/y basis, wages were up 2.5%, two tenths less than expected but with a one tenth pick up in hours worked, average weekly earnings rose 2.5% too but that was the most since December. With most of the labor entrants being younger people and those above the age of 55, we believe it’s a mix shift that is keeping a lid on the aggregate wage data.
  3. Within the Q1 productivity report, there was a 3.9% y/o/y increase in Compensation Per Hour which matches the quickest pace since December 2012.
  4. Initial jobless claims totaled 238k, 10k less than expected and comes after a jump to 257k last week. As a similar print of 235k dropped out of the calculation, the 4 week average held at 243k vs 242k last week. Continuing claims, delayed by a week, fell by 23k to the lowest level since 2000.
  5. The US ISM services index for April rose to 57.5 from 55.2 and that was 1.7 pts higher than expected and is almost back to the post election peak of 57.6 in February. It printed 54.6 in October. Of the 18 industries surveyed, 16 saw growth vs 15 in March and the ISM said “Respondents’ comments are mostly positive about business conditions and the overall economy.”
  6. Mortgage applications to buy a home rose 4.2% w/o/w after two straight weeks of declines. This brings the y/o/y rise to 4.9%.
  7. The headline PCE inflation deflator was down .2% as energy prices fell for the 2nd straight month as expected. Food prices picked up by .4% m/o/m and the y/o/y headline gain was 1.8%. The core rate was down by .1% m/o/m but up 1.6% also as expected.
  8. The final read of the Eurozone manufacturing and composite index was 56.8, about the same as the original print of 56.7 as the services component was revised up a hair. This is a 6 year high. Markit said “that risks are moving from the downside to a more balanced situation.” On the pricing front, “price pressures remain elevated, and the survey’s price indices suggest that core inflation will trend higher in coming months.”
  9. The UK services PMI was higher by .8 pt to 55.8 and that was 1.3 pts above the forecast and the best print of the year. New orders and employment led the way while prices charged rose to the fastest pace since July 2008. Consumers are certainly feeling that as seen in the recent retail sales data. Markit “noted weakness in sectors such as hotels, restaurants and other household facing businesses.” The UK manufacturing PMI rose to 57.3 from 54.2 and well above the estimate of 54. It’s the best in 3 years. Markit said “Growth of output, new orders and employment all gathered pace, driven higher by the continued strength of the domestic market. There was also a solid bounce in new export business, as the weak sterling FX rate helped manufacturers take full advantage of the recent signs of revival in the global economy, and especially the eurozone.” Price pressures remain high but “input cost inflation has eased significantly since hitting a record high in January.”
  10. The European area economy grew by .5% q/o/q and 1.7% y/o/y which was in line with expectations.
  11. The drop in energy prices kept a lid on PPI in the eurozone as it fell .3% m/o/m, two tenths more than expected but it was still up 3.9% y/o/y.
  12. South Korea said its exports in April jumped 24.2% y/o/y, well more than the estimate of up 17%. Imports were higher by 16.6% which missed the forecast of an 18.7% rise. The trade surplus, to the dismay of the Adminstration, rose to $13.3b, the most since at least 1969 when data was kept.

 

Negatives

  1. For asset prices, the Fed’s press statement is implying they are ready to hike again in June as they look past the Q1 economic softness.
  2. Autodata said vehicle sales totaled 16.88mm SAAR vs their estimate of 17.1mm. Ward’s said it was 16.81mm. Either way, these figures compare with 17.46mm seen in April 2016. Last week JD Power said “Total incentive spending in the marketplace stands at $16.4 billion through April, up 13% from last year. On a per unit basis, spending for the average new vehicle through April was $3,814, up $460 from a year ago.  On trucks and SUVs, spending was $3,740, up $578, while on cars, spending was $3,938, up $308.” They went on to say “Despite record incentive levels, average days to turn continues to rise. Nearly 30% of vehicles sold in 2017 sat on dealer lots for over 90 days, up from 27% last year. With flat retail demand and inventory at record levels, manufacturers will continue to face a difficult choice between maintaining elevated incentives or making production cuts.”
  3. The April ISM manufacturing index dropped down to 54.8 from 57.2 in March and that was 1.7 pts below the estimate. It’s also the weakest print of the year but still is holding above its pre election October level of 52 and the year end December level of 54.5. It peaked post election at 57.7 in February. Of the 18 industries surveyed, 16 saw growth vs 17 in March. The only industry to report a decline in business was not surprising: ‘apparel, leather and allied products.’
  4. Spending was flat m/o/m on a nominal basis in March which was two tenths less than expected. Because headline inflation was down by .2%, the real spending figure was up by .3% (rounding). With respect to income, they were about in line if we include the February revision. Digging within saw private sector wages and salaries that were flat m/o/m but were still up a 5.9% y/o/y (which includes employment growth). Combining the spending and income data saw the savings rate rise to 5.9%, the highest since August.
  5. Productivity in Q1 was down .6% q/o/q annualized, below the estimate but off a higher than expected base as Q4 was revised up. Stripping out this noise saw productivity up by 1.1% y/o/y for a 2nd straight quarter. The 4 quarter run rate is only up .5%. Also of note was the 2.8% rise in unit labor costs y/o/y and is around in line with the 4 quarter average of 2.7%.
  6. Refi’s fell 4.7% w/o/w and are down 33% y/o/y.
  7. The March trade deficit totaled $43.7b, $800b narrower than expected and little changed with $43.8b in February but for the wrong reasons as both exports and imports were lower with the former the weakest since November. The exports of goods were down by 1.6% m/o/m and only partially offset by a rise in service exports. Imports also totaled the smallest amount since November even as petro imports jumped.
  8. China reported its state sector weighted manufacturing and services PMI’s. The former fell to 51.2 from 51.8 and that was below the estimate of 51.7 and the lowest print since September. For services, which does include property, the PMI fell to 54 from 55.1 and that also matches the weakest read since September.
  9. The Caixin April PMI services index fell .7 pts to 51.5 which is the weakest since May 2016 and combined with its manufacturing index out a few days ago brings the composite index to the lowest since June of last year. This was Caixin’s bottom line, “A turning point in growth appeared to have emerged at the beginning of the second quarter. Investors should be cautious about downward risks in the economy.” The Caixin manufacturing index for mostly private companies fell .9 pts to 50.3 and that is 1 pt worse than expected. It’s also the weakest since September. The press release said “The downward pressure on manufacturing gradually emerged in April, with all indicators weakening. The Chinese economy may be starting to embrace a downward trend in the near term as prices of industrial products decline and active restocking comes to an end.”
  10. Highlighting the worries of Chinese officials that are embarking on a more intense level of scrutiny on excessive credit growth, a PBOC senior official said today: “China’s overall leverage is reasonable but rising at an alarming pace, especially in the financial sector” and “excessive economic stimulus is harmful for China and would lead to high leverage ratios.”
  11. The South Korean manufacturing PMI was up by 1 pt but is still below 50 at 49.4. Taiwan’s PMI fell 1.8 pts to 54.4. Thailand’s was down by .4 pts to back below 50 at 49.8. India’s PMI held at 52.5 while Indonesia’s was up by .7 pts to 51.2. Japan’s composite index of both services and manufacturing fell slightly to 52.6. Malaysia’s PMI was 50.7 vs 49.5. Vietnam’s fell .5 pt to 54.1 while Singapore was up .4 pts to 52.6 and Hong Kong got back above 50 at 51.1. Bottom line, most countries in Asia have PMI’s hovering around the breakeven of 50, give or take.
  12. India’s April services PMI fell to 50.2 from 51.5 which is basically flat line. Markit said “The latest results indicate that the road to recovery from the notes ban is still bumpy and is a reminder that the sector is not out of the woods yet.”
  13. The eurozone unemployment rate in March held at 9.5% instead of falling to 9.4% as expected. This rate is still well above the pre recession low of 7.3% in 2007. It peaked at 12.1% in March 2013.