The Boock Report

By

Succinct Summation of the Week’s Events – 6/2/17

Positives

  1. ADP said 253k private sector jobs were added in May, well more than the estimate of 180k and that is up from 174k in April (revised down by 3k). The service sector added 205k of the 253k and that is the most since November. The goods side contributed the balance with construction adding 37k of this, manufacturing 8k and commodity/mining contributing 3k. Mark Zandi referred to the months pace of hiring as “rip roaring” and “the current pace of job growth is nearly 3 times the rate necessary to absorb growth in the labor force. Increasingly, businesses’ number one challenge will be a shortage of labor.” Mark now needs to have a sit down with the BLS to reconcile their differences.
  2. The May ISM manufacturing index was essentially in line with expectations at 54.9 vs 54.8 in April (which was the lowest since December) and vs the estimate of 54.8. While the headline number was a hair better, the number of industries seeing growth slowed to 15 from 16 in April. Two reported a contraction vs just one last month. The ISM summed up the report by saying “Comments from the panel generally reflect stable to growing business conditions, with new orders, employment and inventories of raw materials all growing in May compared to April. The slowing of pricing pressure, especially in basic commodities, should have a positive impact on margins and buying policies as this moderation moves up the value chain.”
  3. The PCE inflation deflator rose .2% in April for both headline and core m/o/m with a 1.7% and 1.5% y/o/y gain respectively. All about in line with expectations.
  4. Personal income was higher by .4% m/o/m as expected and within that private sector wage and salaries were higher by .8% m/o/m and 3.7% y/o/y. That y/o/y print compares with the 6 month average of 3.3% but is down from a 4.4% pace in the two prior months. Spending also grew by .4% m/o/m but off a higher than expected base as March was revised up by 3 tenths. The savings rate held steady at 5.3% for a 3rd straight month and which is pretty much in line with the 25 year average of 5.4%.
  5. The final look at the May Markit PMI manufacturing index for the Eurozone was left unchanged at 57 as expected and holding at the highest in about 6 years. The Employment component is the best in the 20 year survey history. On the important issue of inflation for the ECB, there was “a further increase in average input costs in May, continuing the trend towards a sellers’ market developing for many items. However, there are signs that price inflationary pressures were easing from recent highs, as highlighted by slower rates of increase in both input costs (6 month low) and output charges (4 month low).”
  6. The manufacturing PMI index in the UK fell .6 pts to 56.7 which is a hair above the estimate of 56.5. The employment component reached a 3 year high. With respect to the pricing pressures, “Rates of inflation in input costs and output charges remained elevated in May, despite easing further from recent highs. Increased costs reflected the historically weak sterling exchange rate and rising raw material prices. There were also signs of a sellers’ market developing for some inputs, due to supply shortages and an associated lengthening of vendor lead times. A number of manufacturers noted that they maintained sufficient pricing power to pass on higher costs to clients. Despite easing to a 5 month low, the increase in selling prices was still among the fastest seen in the survey history.”
  7. Eurozone May CPI was higher by 1.4% y/o/y and up .9% at the core. Both were one tenth less than expected and down from 1.9% and 1.2% in April to the delight of European citizens but to the dismay of Mario Draghi.
  8. The China state sector weighted services PMI was up .5 pt to 54.5 off the lowest also since September.
  9. The Japanese unemployment rate held at 2.8% as expected, the lowest since 1984. The jobs to applicant ratio rose to 1.48 from 1.45 and higher than the estimate of 1.46. This level was last seen in February 1974.
  10. Japanese retail sales in April improved by 1.4% m/o/m, well better than the estimate of down .2%.
  11. Consumer confidence in Japan rose .4 pts to 43.6, .1 pts above the estimate but remains in the range year to date. Income growth was up by .6 pts after falling by .8 pts in April.
  12. Japan’s manufacturing PMI in May rose to 53.1 from 52 and is just off a multi year high.
  13. Because of high real rates, the Bank of Brazil had room to cut its Selic rate by 100 bps as expected to 10.25% just as they struggle with a new round of political turmoil. Also, after 8 straight quarters of declines, Q1 GDP rose 1%. From the peak, their economy shrunk by 8%.

 

Negatives

  1. So in stark contrast to the ADP report, payrolls in May grew by just 138k, well below the expectations of 182k and the two prior months were revised down by a net 66k. Within this, the private sector added 147k jobs (government shed 9k), almost 30k less than expected and the two prior months were also revised lower. Also of note, the household survey said 233k jobs were lost at the same time 429k people left the labor force and thus the one tenth drop in the unemployment rate to 4.3% was for the wrong reasons. The U6 level fell two tenths to 8.4%. The service sector added 131k jobs with the goods side contributing just 16k with construction adding 11k while manufacturing shed 1k. Retail jobs continue to be lost with another 6k in May and that’s the 4th month in a row of declines. Wages were up by .2% m/o/m and 2.5% y/o/y, in line with expectations. Hours worked stayed at 34.4 and average weekly earnings held at 2.5% y/o/y. Aggregate hours worked did hit a new high in this recovery which with still modest GDP growth means that productivity remains punk. Discouragingly, the employment to population ratio fell two tenths to 60% and the participation rate fell back to 62.7% which matches the lowest since November. Those Not in the Labor Force spiked by 608k to the most since December. Positively, those working part time because they can’t find full time work continues to drop and more people voluntary left their jobs as opposed to being fired.
  2. Initial jobless claims rose 13k to 248k and that was 10k more than expected. That is also a 5 week high and brings the 4 week average to 238k from 236k which was the lowest level since the early 1970’s. Continuing claims, delayed by a week, rose by 9k after the prior week’s 25k increase.
  3. May vehicle sales totaled 16.58mm, below the estimate of 16.9mm, down from 16.81mm in April and less than the 17.22 in May 2016. JD Power said “Enticing Memorial Day weekend discounts, resilient demand for SUVs, and an extra selling day weren’t enough to boost May U.S. car sales over last year’s results.” Peak auto’s.
  4. Pending home sales in April, a key metric in the heart of the Spring transaction season, fell 1.3% m/o/m vs the estimate of a gain of .5% and March was revised down by one tenth to a decline of .9%. Versus last year, contract signings are down 5.4% which is the biggest y/o/y decline since August 2014. The NAR said “contract activity is fading this spring because significantly weak supply levels are spurring deteriorating affordability conditions.” They said that realtors do believe that foot traffic is higher than last year “but it’s obviously not translating to more sales.”
  5. It’s great for homeowners that are increasingly utilizing mortgage equity withdrawal but affordability continues to deteriorate for home buyers as S&P/CoreLogic said home prices rose 5.9% y/o/y in March, the fastest increase (by a hair) since July 2014.
  6. MBA said purchase applications to buy a home fell 1.4% w/o/w and that is the 3rd week in a row of declines to a 5 week low. The positive was the pace of applications is still up 7% y/o/y but this starts to flatten out y/o/y over the next few months if it remains at current levels. Refi’s fell 5.6% w/o/w and are lower by 31% y/o/y.
  7. Apartment List, a rental listing company released a survey and I’ll quote the WSJ on what the results were: “Nearly 70% of young people ages 18-34 years old said they have saved less than $1,000 for a down payment… About 40% said they aren’t saving anything monthly. Even senior members of the group are falling short. Nearly 40% of older millenials, those age 25-34, who by historical measures should already own or be a few years away from homeownership, said they are saving nothing for a down payment each month.”
  8. The Conference Board’s consumer confidence index in May fell to 117.9 from 119.4. The estimate was 119.5. The index remains at a high level and is well off the 100.8 print seen in October but it peaked at 124.9 in March. It was the Expectations component that accounted for the m/o/m headline decline as the Present Situation was up a hair. The answers to the labor market questions were mixed and spending intentions on a home, a car and a major appliance were all weak. Under the Employment heading, those expecting More Jobs fell 1.3 pts to the least since November. Those expecting an increase in Income was up by .5 pt but only after falling by almost 4 pts last month and those expecting a Decrease rose. Those that expect better business conditions fell almost 4 pts to the weakest also since November.
  9. Construction spending figure in April missed badly with a 1.4% m/o/m drop vs the .5% expected increase but this was mostly offset by a 130 bps upward revision to March. Of particular note and getting to the worries over commercial real estate and the bank slowdown in lending, private non residential real estate construction fell for the 3rd straight month. Residential construction fell .7% but after a nice string of gains.
  10. Economic confidence in the euro area cooled a bit in May as this index fell to 109.2 from 109.7. The estimate was for a modest increase to 110. Within this, industrial confidence rose a touch but was more than offset by a drop in services. Retail fell while construction rose. Consumer confidence was up slightly. For perspective, the 109.2 print is still the 2nd best since 2007.
  11. The German labor market saw a 9k person drop in unemployment in May which is the 14th straight month of declines but wasn’t as much as the 15k that was expected. Even so, the unemployment rate fell one tenth to 5.7% which is a new low post East and West German reunification.
  12. The private sector weighted Caixin May manufacturing index is back in contraction territory as it fell .7 pts to 49.6 which is also below the estimate of 50.1. Caixin said “The fall in the headline index coincided with slower increases in output and new orders, while staff numbers were cut at a quicker rate. Subdued demand conditions underpinned a renewed fall in purchasing activity, albeit only slight, and the first increase in inventories of finished items in 2017 so far.”
  13. South Korea’s exports in May rose 13.4% y/o/y but that was slightly below the forecast of up 15%. It’s still a robust number but is off a very easy comparison last May when it printed down 6%. Imports did beat expectations with an 18.2% y/o/y gain vs the estimate of up 15%.
  14. South Korea reported a disappointing industrial production figure for April as it fell 2.2% m/o/m instead of rising by .6% as expected. The y/o/y gain slowed to 1.7% from 3.3% in March.
  15. South Korea’s manufacturing PMI in May remained below 50 at 49.2 vs 49.4 in April. Manufacturing PMI’s also fell m/o/m in India, Thailand, Malaysia, Taiwan, Vietnam.
  16. IP in Japan in April was higher by 4% m/o/m and 5.7%, both a touch below expectations.
  17. Japanese overall household spending in April fell 1.4% y/o/y, more than the forecast of down .9%. It’s the 14th straight month of y/o/y declines.