The Boock Report

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Succinct Summation of the Week’s Events – 7/14/17

Listen to this week’s Podcast here

Positives

  1. Headline CPI was flat m/o/m and up .1% at the core, both one tenth below the estimate. Due to rounding though, the y/o/y core rate of 1.7% was as expected while headline CPI was up by 1.6%. Energy prices fell m/o/m for the 4th month in the past 5 while food prices were flat but I expect to start ticking higher. Services ex energy prices were up .2% m/o/m and 2.5% y/o/y. The two key components within this, rents and healthcare saw a pickup in pricing. Owners’ equivalent rent, which understates actually rent growth, was up by .3% m/o/m and 3.2% y/o/y. Actual Rent of Primary Residence which bizarrely is weighted less than OER (8% vs 25%) was up by .3% m/o/m and 3.9% y/o/y. Out of pocket medical expenses were up by .4% m/o/m and 2.7% y/o/y. Used car prices fell .7% m/o/m and 4.3% y/o/y and of course is the new worry for the new car market and the $1T auto loan market. New car prices fell .3% m/o/m and were flat y/o/y. To what Fed members keep referring to, wireless prices dropped another .8% m/o/m and are down 13.2% y/o/y but make up only a very small portion of this index.
  2. Headline PPI and core were both up by .1% m/o/m and 2% y/o/y and 1.9%. The headline numbers were in line while the core rate was one tenth below the forecast. On the goods side, a .6% m/o/m jump in food prices (lead by meat) offset the .5% drop in energy prices. Service inflation, the sticky side of things, was up by .2% m/o/m and services ex trade was up by .3% m/o/m and 2.2% y/o/y. There was a 1.2% m/o/m jump in ‘food and feed’ in the intermediate stage of production category.
  3. Industrial production in June rose by .4% m/o/m, one tenth more than expected but the .2% increase in the manufacturing component was as expected. It was the mining component that was the catalyst for the headline surprise as rig counts continue to rise. Mining rose 1.6% m/o/m and 9.9% y/o/y. Utility output was flat m/o/m. Within manufacturing, motor vehicle/parts were up by .7% but are up just 1% y/o/y as the industry digests excess inventories and slowing sales. The production of computers/electronics fell for the 2nd month but are up 4.9% y/o/y. The production of machinery equipment rose .6% m/o/m and is up 1.7% y/o/y. Manufacturing production has basically gone nowhere over the past 3 years and remains well below the 2007 peak. Capacity utilization at 76.6% still remains well below the long term average of about 80% and this in the 9th year of this expansion. Auto’s in particular saw capacity utilization was 82% vs 81.5% in May and 83.3% in April.
  4. The Bank of Canada followed thru with a rate hike of 25 bps to .75%, taking back one of the two emergency rate cuts in 2015 after the oil price collapsed.
  5. Money supply as measured by M2 in June slowed in China to 9.4% y/o/y growth from 9.6% in May and one tenth less than expected. With data going back to 1996, this is the slowest pace of gain ever seen even though the PBOC said that we “shouldn’t read too much into slower M2 growth.” They are trying to get a grip on excessive credit growth.
  6. The Chinese inflation stats were about as expected in June. Consumer prices were up by 1.5% y/o/y for a 2nd straight month but the core rate did pick up one tenth to 2.2%, the quickest pace of gain since January. Also of note, food prices fell 1.2% y/o/y but that is the least negative since January. Producer prices rose by 5.5% y/o/y as forecasted.
  7. In the UK, 175k net jobs were created for the 3 months ended May which was well above expectations of 120k and that helped bring the unemployment rate down one tenth to 4.5%, the lowest since 1975. On the wage side, weekly earnings ex bonus’ grew by 2% y/o/y, one tenth more than expected and up from 1.8% in the prior month. These gains are only modest though, especially against CPI which is running 50% higher. The June jobless claims figure rose by 6k after rising by 7.5k in May and which is a 4 month low.
  8. EU industrial production for May was up by 1.3% m/o/m, 3 tenths more than expected but was offset by a downward revision to April. Call it a push.
  9. German exports jumped 1.4% m/o/m in May, well better than the forecast of up .3% and to a record high.
  10. Eurozone exports in May rose 12.9% y/o/y to the 2nd highest ever. Imports were up by 16.4% y/o/y.

 

Negatives

  1. Retail sales in June declined across the key components (headline, ex auto’s, ex auto and gasoline and the control group). Looking directly at the control group which also takes out building materials saw a sales decline of .1% instead of rising by .4% as expected and expect a cut to Q2 GDP estimates as a result. This m/o/m decline comes after no growth in May. The y/o/y sales gain in this core category were up just 2.4% which matches the worst read since January 2014 and has basically flat lined over the past 4 months. This is on top of a slowdown in auto sales.
  2. Initial jobless claims totaled 247k, 2k more than expected and last week was revised up by 2k to 250k. As a print of 238k drops out, the 4 week average rose to 246k from 244k and that is quietly a 3 month high. After rising by 5 straight weeks and by 46k, continuing claims, delayed by a week, fell by 20k.
  3. The Fed’s Labor Market Conditions Index (derived from 19 labor market indicators) in June fell to 1.5, the lowest level since December.
  4. The average 30 yr mortgage rose 2 bps w/o/w and are up 9 bps over the past two weeks to 4.22% vs 3.6% last July. Refi’s plunged as a result by 13% and are down 58% y/o/y. Purchase applications fell 2.5% w/o/w and are now down in 4 of the last 5 weeks while still higher by 3.5% y/o/y.
  5. The preliminary UoM consumer confidence index for June fell 2 pts to 93.1 vs the expectation of 95. This is at the lowest level since October when it printed 87.2 and vs September at 91.2. The November election jump took it to 93.8. The components however were mixed as Current Conditions rose .7 pts to 113.2 which matches the highest level since July 2005 but was more than offset by a 3.7 drop in the Expectations component to 80.2, the lowest since October and is now below the 2016 average of 81.8. One year inflation expectations did rise one tenth to 2.7% and matches the highest since April 2016. Consumers don’t get to hedonically adjust their cost of living. Positively, those expecting Higher Income rose 2 pts to 40 which matches the best level since 2000. The negative though was the higher income expectations did nothing to help the feelings about one’s household finances which fell. Also, employment expectations fell 10 pts to match the lowest level in a year. There were mixed answers with buying intentions with auto’s down, home buying and selling intentions up and household items getting back almost what it lost last month.
  6. Business inventories in May rose .3% m/o/m as expected after falling by .2% in April. Of note in May, inventories in the auto space at the retail level continued to grow with a 1.1% m/o/m and 7.5% y/o/y rise. As overall sales fell .2%, the inventory to sales ratio ticked up to 1.38, the highest since November.
  7. The number of job openings in May totaled 5.67mm, almost 300k less than expected and down from 5.97mm in April. Positively, hiring’s did pick up and the hiring rate was 3.7% vs 3.5% in April and 3.6% in March. It matches the best since March 2016. Also good was the jump in quitters and the quit rate went back to 2.2% after falling to 2.1% in April.
  8. The NFIB June small business optimism survey index fell .9 pts to 103.6 which is the lowest since November when it printed 98.4 and vs 94.9 in October. There was a 10.9 rise in this index in November and December to 105.9 and that was pretty much it with the response to the US election where regulatory, health and tax reform were the obvious hoped for wishes of small business. Job and wage figures moderated as did future expectations. Capital spending plans was the bright spot. The NFIB simply said “Small business optimism has been flying high for months based on the expectation that Congress will cut taxes and reform healthcare. Washington has not delivered on the small business agenda yet, and small business owners are paying attention.”
  9. Out late Friday last week, C&I loans were up just 1.8% y/o/y. It was 7% in 2016. Slowing loan growth was echoed in Q2 earnings reported today. JPM said total loans rose 4% y/o/y vs 6% growth in Q1 and 7% in 2016. In auto lending, Wells Fargo auto loan originations fell 45% y/o/y.
  10. The ever rising trend of nonrevolving credit outstanding continued in May and sits at $2.82T, up $11b m/o/m and running up by 4.7% annualized. Its 71% higher than the peak in July ’08 with student loan growth leading the way. Revolving credit has revived for better (consumers more confident) or worse (taking on more debt to meet daily expenses), rising at an annualized rate of 8.7% in May with a $7.4b m/o/m rise outstanding to $1.018T. That is just $2b from the record high touched on April ’08 (not inflation adjusted).
  11. Aggregate Financing in China in June rose 1.78T yuan, 280b above expectations, up from 1.06T in May and higher by 8% y/o/y. Of this, 1.54T were lent from banks with the ‘shadow side’ delivering the balance. A PBOC spokeswoman tried to square the circle on discrepancy between slowing M2 growth and still robust loan data by saying “Financial institutions’ off book expansion has slowed, leading to slower deposit creation and M2 growth, which is the result of financial deleveraging” and that slower money supply growth will be the “new normal.” They are trying to shift loan growth to the banks from the shadow side.
  12. Japanese machine orders fell 3.6% m/o/m in May, well below the estimate of up 1.7% and follows a 3.1% drop in April. A Japanese Cabinet official did not sound optimistic that things will get much better soon, “Machinery orders probably won’t be very strong in the coming months. We can’t say they will significantly worsen, but we don’t hear companies saying they will start recovering in July-September.”
  13. Singapore’s Q2 GDP grew .4% q/o/q SAAR, well worse than expectations of up 1.1%. Growth was 2.5% y/o/y, two tenths below the estimate.