1) Thanks to a 5 week low in the average 30 yr mortgage rate, buyers of homes stepped up as the MBA said purchases applications rose 6.5% w/o/w and 7.7% y/o/y.
2) China continues to sharply crackdown on any bank lending that is not being done at the bank level. Bank loans spiked by almost 700b m/o/m in June to 1.84T which was 300b more than expected. But, because of the dramatic shrinkage of lending on the shadow side, total aggregate financing was up by 420b yuan to 1.18T and that was 220b less than expectations. Also of note, money supply growth as measured by M2 saw growth of just 8% y/o/y, four tenths less than expected and is the slowest rate of gain since records were first kept back in 1996. This all has negative implications for growth in the short term but getting control of massive credit growth is a long term positive.
3) In dollar terms, Chinese exports rose 11.3% y/o/y, more than the estimate of up 9.5% with the weaker yuan definitely helping out because in yuan terms, exports were up a much more modest 3.1%. Imports were up by 14% in dollars, well less than the forecast of up 21.3%. In yuan, they were up by 6%. Of note, the trade surplus with the US rose to a record (exports to US grew by 12.6%) in June but again, there was likely a rush of exports ahead of the tariffs.
4) With myself being hopeful that the trade battle with China will end amicably and soon, China did not respond to the report that the Administration is putting together the list for another $200b of tariffs. While there seems to be no high level talks going on, BN this week said “While there are no formal talks scheduled, dialogue continues between the two countries among lower level bureaucrats, according to people familiar with the matter.”
5) Chinese FX reserves rose a touch, by $1.5b after two months that saw a decline of $31b. The reserves total $3.11T which was slightly more than anticipated. The China State Administration of Foreign Exchange (SAFE) said the rise was in part due to an increase in assets they own. They were not more specific.
6) Eurozone industrial production was a touch above the forecast with a 1.3% m/o/m increase in May, one tenth more than expected but follows a .8% drop in April.
7) As I mentioned Fastenal earnings as something to watch this week, they handled rising inflation pressures along with higher labor costs, which they acknowledged on both, just fine (impressive company and stock had a great week) but wasn’t sure yet if some of their business in the quarter was pre buying product ahead of upcoming tariffs.
8) The Bank of Canada continued to normalize interest rates relative to inflation with a 25 bps rate hike to 1.50% as expected.
9) The Office for National Statistics in the UK just started releasing monthly GDP numbers on a rolling 3 month basis. The data for May alone saw good growth of .3%.
10) German export growth in May rose 1.8% m/o/m, more than double the estimate of .7%.
1) The Institute of International Finance this week said that total global debt (households, governments, and financial and non financial companies) was $247.2 Trillion in Q1, up $25 Trillion y/o/y and up $8 Trillion q/o/q. The debt to GDP ratio rose to 318%, the first increase since Q3 2016. The IIF said “The increase in the level of debt, both in absolute terms and relative to GDP, against a backdrop of tightening financial conditions, is, of course, a cause for concern.”
2) We watch to see how psychology and uncertainty with trade tariffs will manifest itself in actual economic behavior in coming months and quarters. The CEO of Citi in their conference call said “trade war talk has created client uncertainty” but they’ve seen “little direct impact” right now. Jamie Dimon said that “trade war fears are affecting client psyche, not activity.” I don’t think these comments should surprise anyway. Businesses are watching out (see below) but none of us knows how this all plays out.
3) The UoM preliminary July consumer confidence index fell 1.1 pts to 97.1, a touch below the estimate of 98. All of the m/o/m moderation was in the Current Conditions component which was down by 2.6 pts. Expectations were little changed. One year inflation expectations fell one tenth to 2.9% after rising by two tenths last month. It is still though the 2nd highest print since 2015. The UoM said “So far, the strength in jobs and incomes has overcome higher inflation and interest rates.” However, the components on business and spending decisions showed notable weakness. ‘Business Expectations Over the Last Few Months’ fell 23 pts m/o/m to the lowest level since September 2016 right before the election. Business expectations compared to last year fell 8 pts m/o/m and looking out over one year, they dropped by 9 pts to 98, matching the weakest since September 2015. Helping to explain this the UoM said “The darkening cloud on the horizon has been due to rising concerns about the potential impact of tariffs on the domestic economy. More importantly, these concerns have greatly accelerated in early July. When asked about recent economic developments, news about tariffs rose significantly, so much so that unfavorable references to news about government policies tied the all time peak in 2013 (which was due to the Federal government shutdown).” There were declines in all three spending decision categories. Those that said it’s a good time to buy a major household item fell 4 pts m/o/m but after rising by 6 pts last month. Those that said it’s a good time to buy a vehicle dropped by 13 pts to the lowest level since November 2013. Those that said it’s a good time to buy a house fell 5 pts to the least since December 2008 as likely record high home prices along with higher mortgage rates helps to fully explain this.
4) As I don’t believe the yield curve has lost any of its predictive power, it continues to flatten. The 2s/10s spread narrows another 3.5 bps on the week to 25 bps. It was 37 bps one month ago and 98 bps one year ago. The 2s/30s is down by 4 bps w/o/w to 35 bps vs 49 bps one month ago and 156 bps one year ago.
5) Headline CPI rose .1% m/o/m which was one tenth less than expected but due to rounding, the 2.9% y/o/y increase was in line with the consensus. That matches the fastest rate of inflation since December 2011. The core rate up .2% m/o/m and 2.3% y/o/y was as expected and the core rate increase matches the quickest since September 2008. Services ex energy continues to drive the increase in inflation as it rose 3.1% y/o/y again driven by rents and medical costs. After three straight months of declines, core goods prices were flat m/o/m but still down .2% y/o/y.
6) In June, PPI jumped more than expected across the board. Headline PPI, core PPI and PPI ex food, energy and trade all rose .3% m/o/m vs the estimate of up .2% for all. The y/o/y headline gain is now up to 3.4%. November 2011 was the last time we saw a faster print. The core rate accelerated to 2.8% y/o/y from 2.4% in May and the most since September 2011. ‘Truck transportation of freight’ costs rose 1.3% in June alone from May and are now up 7.7% y/o/y. As demand is spilling over to rail from truck as companies scramble for transportation of any kind, ‘Rail transportation of freight and mail’ prices rose .9% m/o/m and 6% y/o/y. Overall goods prices ex food and energy rose .3% m/o/m for the 6th month in a row.
7) Import prices ex food and energy were up by 1.8% y/o/y, the most since 2012.
8) The drop in mortgage rates did nothing to help refi’s as they fell for a 3rd straight week, down by 3.8% w/o/w and 21% y/o/y.
9) The June NFIB small business optimism index fell .6 pts m/o/m to 107.2 off the best level since 1983 in the month prior. Of note, Positions Not Able to Fill rose to match a record high. Bottom line according to the NFIB President was this: “Small business owners continue to report astounding optimism as they celebrate strong sales, the creation of jobs, and more profits. The first six months of the year have been very good to small business thanks to tax cuts, regulatory reform, and polices that help them grow.” Finding good workers remains the “single most important business problem.” I saw no comments on tariffs but after seeing the UoM data today, expect to in the next report.
10) At least at the wholesale level the BoJ is getting what it wants. PPI rose 2.8% y/o/y as expected in June and that is the most since December. They also reported that import prices spiked by 11.3% y/o/y boosted by a weaker yen and rising energy prices.
11) In China, its PPI rose 4.7% y/o/y in June, up from 4.1% in May and two tenths more than forecasted. That is the quickest rate of gain this year. Consumer prices were up 1.9% y/o/y as expected and up one tenth from May. CPI ex food and energy was up by the same amount. This comes ahead of what will be a trend from US companies doing business there. Tesla is raising car prices exported to China by 20% and announced plans for a Shanghai plant.
12) The July German ZEW economic expectations index fell to -24.7 from -16.1. The estimate was -18.9 , was the 4th month in a row below zero and the index is at its weakest level since August 2012. The Current Situation fell 8.2 pts m/o/m to the lowest level since December 2016. The ZEW explained the softness by saying “The current survey period has been marked by great political uncertainty. In particular, fears over an escalation of the international trade war with the US have dampened the economic outlook. The positive news regarding industrial production, incoming orders and the labor market have been greatly overshadowed by the anticipated negative effects on foreign trade.”