The Boock Report

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Succinct Summation of the Week’s Events – 6/22

Positive

1) WSJ reports: “Germany’s largest auto makers back abolition of EU-US car import tariffs.” We have a 2.5% tariff on their cars and a 25% tariff on their SUV’s, pick up trucks and vans and they have a 10% tariff on our cars/trucks. Zero on all would be great.

2) Initial jobless claims totaled 218k, 2k less than expected and down from a revised 221k last week (1st print was 218k). The 4 week average of 221k is down 4k w/o/w and is near 48 year lows. Continuing claims, delayed by a week, rose 22k off the lowest since 1973.

3) While mortgage rates were unchanged w/o/w at 4.83% on average, mortgage applications did rebound from last week. Purchases grew by 4.3% w/o/w and are up 3.2% y/o/y. Refi’s were up by 6.1% w/o/w but remain lower by 31% y/o/y.

4) Housing starts in May totaled 1.35mm, about 40k more than expected and up from 1.29mm in April. We saw a lift in both single family and multi family starts with the former at the highest level since November. The breakdown here though was very concentrated as it was almost all in the Midwest. Single family starts in the Northeast were up a touch and fell slightly down South and out West.

5) To the frustration of the BoJ but to delight of the Japanese consumer, Japan reported May CPI up .7% ex food as expected and unchanged with April. Taking out both food and energy saw CPI up .3% as forecasted but down one tenth from April.

6) Japan’s manufacturing PMI for June rose a touch to 53.1 from 52.8 in May and vs 53.8 in April. Notably though, export orders went negative for the first time since August 2016. Markit said “With geopolitical risk aplenty, haven demand for the yen remains a downside risk to the country’s manufacturing exporters.”

7) The Eurozone services PMI was up by 1.2 pts m/o/m to 55. The estimate was for an unchanged read. The bright spot within services was the 10 year high in employment.

8) Greece is finally about to exit its multi year bailout and gets to further term out its debt.

9) Notwithstanding all the tariff noise, French business confidence in June held at 106 in May as expected as did the manufacturing component.

10) The UK CBI industrial orders index rose to 13 from -3 and that was well better than the estimate of +2. CBI said the rebound was “broad based, with output growing in 14 out of 17 sub sectors, with growth mostly driven by ‘Food, Drink and Tobacco’ and ‘Mechanical Engineering.’ On the other hand, “Respondents anticipate that output growth will slow slightly over the next three months.” On the inflation side, after a pretty robust run of pressure, they eased in June to the least since last summer.

11) The BoE gets a step closer to finally raising rates again as their Chief Economist voted to do so. They have failed in their only mandate of price stability. CPI has been above 2% for 16 straight months while the BoE has their benchmark rate at just .50%. Norway also laid out a plan to hike rates by September.

12) A voice of reason on Japanese monetary policy, “The last five years have confirmed that the policy hasn’t had any effect. At some point you have to give up” said an ex BoJ official.

13) Japanese exports were higher by 8.1% y/o/y, a bit better than the estimate of up 7.5% and helped in part to the recent yen weakness. Imports jumped by 14%, well more than the forecast of up 8%. Much of that however is higher energy costs which Japan mostly imports.

 

Negatives

1) More rounds of tariff threats on China and EU auto’s. Today begins the EU tariff implementation on US bourbon whiskey, Harley Davidson’s and Levi’s jeans to name a few of our export products. Daimler says they are collateral damage of Chinese tariffs on US imports.

2) The June US Markit manufacturing and services composite index fell to 56 from 56.6. The manufacturing component moderated to 54.6, a 7 month low from 56.4 while services were little changed at 56.5 vs 56.8. Manufacturing was weighed down by “intense pressure on manufacturing supply chains, with delivery times for inputs lengthening to the greatest extent since the index began in May 2007.” As for the outlook, “business expectations about the year ahead have dropped to a 5 month low, led by the weakest degree of optimism for nearly 1 ½ years in manufacturing. Exports are back in decline, showing the worst performance for over two years.” The service side held up much better and “supported by another marked rise in new work and a solid rate of job creation in June.” Inflation though came along with this. “Input costs increased at the fastest rate since September 2013. Service providers widely commented on higher prices for fuel, staff salaries and steel related items. Greater operating expenses contributed to the steepest rise in average prices charged by service sector firms for almost four years in June.” The outlook though is not as good, “Inflows of new business into the service sector have meanwhile cooled to the weakest since January” and payroll growth was the lowest for a year.”

3) The Philly manufacturing index for June weakened to 19.9 from 34.4 and that was 9 pts less than expected. It is also the lowest level since November 2016. New orders fell a sharp 22.7 pts but after spiking by 22.2 pts last month. Backlogs went negative, to -2.7 from +15.3 and that is the lowest since September 2016. Employment held at a strong level of 30.4 but the average workweek fell 10 pts. There was a 9 pt drop in delivery times (easing of supply constraints) and that led to a modest decline in prices paid and received. But, 6 month expectations for prices received spiked by 20 pts to the highest in 30 years. Capital spending plans did improve by 14 pts to 36.5 but only puts it slightly back above the 6 month average as it fell by 14 pts over the prior two months. Also of note, the 6 month business outlook did weaken by 4 pts to the lowest level since also November 2016.

4) Existing home sales in May totaled 5.43mm annualized, about 100k less than expected and down slightly from April’s level of 5.45mm. This is the lowest level since January and the 2nd weakest print since September. Months’ supply rose to 4.1, the most since September. The first time home buyer made up 31% of sales, down from 33% last month and vs 30% the month prior. The median home price rose 4.9% y/o/y with single family up by 5.2% and we now have the highest median home price in the US on record at $264,800. That is now 15% above the 2006 peak. The NAR had a good bottom line to the report, “Incredibly low supply continues to be the primary impediment to more sales, but there’s no question the combination of higher prices and mortgage rates are pinching the budgets of prospective buyers, and ultimately keeping some from reaching the market.” So we have a Fed that still owns $1.7 Trillion of mortgage backed securities and the median home is at a price never before seen. Millennials should march on the Eccles Building.

5) Housing start permits came in below the forecast at 1.3mm vs the estimate of 1.35mm. That is down from 1.36mm in April (revised up by 12k). Of note, permits to build single family homes fell to the lowest level since September as they fell in 3 out of the 4 regions. Multi family permits fell too but are very volatile month to month.

6) The NAHB home builder index in June fell 2 pts m/o/m to 68. The estimate was for no change. Each component, Present Conditions, Future Expectations and Prospective Buyers Traffic fell 1 pt from May. The NAR is citing worries about lumber tariffs as a key reason for the decline from last month. “Builders are optimistic about housing market conditions as consumer demand continues to grow. However, builders are increasingly concerned that tariffs placed on Canadian lumber and other imported products are hurting housing affordability. Record high lumber prices have added nearly $9,000 to the price of a new single family home since January 2017.”

7) For the 2nd straight month in April, foreigners were net sellers of notes and bonds. The total was $4.8b, about the same as the net sales in March. The complexion of the activity was very bifurcated however as central banks sold a total of $48.3b, more than offsetting private foreign buying of $44.6b (International agencies make up the difference). Most notable was the behavior of the Russians. They basically sold half of their US Treasury holdings, liquidating $47.4b worth in April alone, leaving holdings at $48.7b. It was April 6th that the US government put sanctions on some very well known Russian oligarchs and others and it upset the Russian government enough for them to sell a large chunk of their US Treasury bonds. China was a net seller as was Japan. Japan now holds the least amount of US Treasuries since 2011. Hedge funds were the biggest buyer as the ‘Cayman Islands’ category saw an net increase of buying of $15.2b.

8) The Eurozone June manufacturing PMI fell to 55 from 55.5 and that is the lowest print since December 2016. “Factory order inflows rose at the weakest pace in 22 months, while export growth remained close to the lowest for over one and half years” said Markit. They also said “Manufacturing is looking especially prone to a further slowdown in coming months, with companies citing trade worries and political uncertainty as their biggest concerns. Sentiment about the year ahead in the factory sector has sunk to its lowest since 2015.”

9) The IFO Institute in Germany cut its 2018 growth estimate for the country to 1.8% from 2.6% previously. They said “The economy has developed far more poorly than anticipated in the first few months of 2018…Dark storm clouds are currently gathering over the German economy…We nevertheless believe that the upturn in Germany will continue but not at the same pace as in 2017.”

10) Germany reported a hotter than expected PPI for May. The y/o/y gain was 2.7% vs 2% in April and above the forecast of 2.5%. The matches the quickest rate of gain since September. A 5.5% rise in energy prices was certainly a main factor as PPI ex energy was higher by 1.7%.