1) Jay Powell’s testimony and Q&A in front of Congress was uneventful but short rates are closing the week at fresh 10 year highs as for now he will keep on keeping on. No need yet to commit to a December hike. Rate hike odds are about 60% for two more.
2) Initial jobless claims totaled 207k, 13k below estimates and down from 215k last week. This is the lowest level of weekly claims since December 1969 and continues to reflect the scarcity of qualified workers. The 4 week average fell to 221k from 223k. Do keep in mind there are seasonal issues with the calculation in early July due to auto plant shutdowns. Continuing claims, delayed by a week, did rise by 8k and up for a 3rd straight week.
3) The Philly manufacturing index rose to 25.7 from 19.9 and that was 4.2 pts better than expected. The year to date average is 24.8. The internals though were mixed.
4) The July NY manufacturing index, the first July industrial number to be reported, fell 2.4 pts to 22.6 but that was a touch above the estimate of 21. Notably, backlogs fell to zero from 9.3 and that is the lowest since December. Inventories went negative to -4.3, the weakest since October from +5.4. Delivery times moderated (shorter lead times, maybe supply constraints easing) by 7.2 pts to a 6 month low. Prices paid, helped by lower commodity prices, fell 10 pts but prices received were down only by 1 pt.
5) In the June Case Freight Index, they said “The Cass Freight Shipments and Expenditures Indices are clearly signaling that the U.S. economy, at least for now, is ignoring all of the angst coming out of Washington D.C. about the trade war.” They also said, “Demand is exceeding capacity in most modes of transportation by a significant margin. In turn, pricing power has erupted in those modes to levels that continue to spark overall inflationary concerns in the broader economy. With all of this positive news taken into account, we are seeing signs that the transportation infrastructure has reached its limit, at least in the short-term, to accommodate higher rates of volume growth.”
6) According to the just released Fed Beige Book, “Economic activity continued to expand across the United States, with 10 of the 12 Federal Reserve Districts reporting moderate or modest growth. The outliers were the Dallas District, which reported strong growth driven in part by the energy sector, and the St. Louis District where growth was described as slight.”
7) Refi’s bounced by 2.2% w/o/w but after three straight weeks of declines and they are still down 28% y/o/y.
8) The July NAHB home builder index was 68 as expected, unchanged with June. Present conditions saw no change but interestingly, the Future outlook component fell 2 pts to match the lowest level since November 2016. Prospective Buyers Traffic did rise 2 pts off the breakeven level of 50. The NAHB said the demand side remains good (“steady job growth, income gains”) but builders “continued to be burdened by rising construction material costs.”
9) EC President Juncker will meet with Trump in DC next week to discuss lowering car tariffs. We put a 2% tariff on their cars and a 25% tariff on their SUV’s, pick up trucks and vans and they put a 10% tariff on our vehicles. A statement from the EC said “President Juncker and President Trump will focus on improving trans-Atlantic trade and forging a stronger economic partnership.”
10) The UK headline inflation rate was higher by 2.4% y/o/y in June, the same level seen in May but that was two tenths less than expected. The core rate slowed to 1.9% from 2.1% and the estimate was for no change. The ONS said “falling prices for clothing and games, toys and hobbies provided the largest downward effects” while higher energy and utility prices were the main factor to the upside. Price pressures still remain as PPI was up 10.2% y/o/y and only a fraction of that was passed on as output prices were up just 3.1% y/o/y.
11) In the final revision to June CPI from the eurozone, the headline gain of 2% held as is but the core rate was trimmed by a tenth to a rise of .9%.
12) We saw a miss in UK retail sales for June relative to expectations. Retail sales ex auto fuel fell .5% m/o/m instead of rising by .2% as forecasted. The y/o/y gain of 2.9% is still good and the 2nd best since last Spring. I’m going to guess that many were watching the World Cup and not shopping at the same time.
13) China’s economy grew by 6.7% y/o/y in Q2 as expected and a one tenth down tick from Q1. Retail sales in June picked up the pace from the lowest level since 2003 seen in Q1. They grew by 9% y/o/y (so now the 2nd slowest since ’03) vs 8.5% last quarter and slightly above the estimate of up 8.8%.
14) The Chinese proxy that is Australia reported a much better than expected jobs figure for June. Employment grew by 50.9k, well more than the estimate of up 16.5k. The unemployment rate though held at 5.4% as the participation rate rose.
15) For sports fans out there, congrats to Jim Kelly for winning the 2018 Jimmy V award at this years ESPY awards. He’s a true battler and his speech was great, inspirational and a true perspective on life, //www.youtube.com/
1) “The first rule of Fight Club is: you do not talk about Fight Club. The second rule of Fight Club is: you DO NOT talk about Fight Club!” I’m hoping that Jay Powell doesn’t become the next G William Miller. Without low inflation you will never have healthy growth. History is littered with bad outcomes when that basic concept has been forgotten. Look at Turkey now.
2) Retail sales in June ex auto’s, gasoline and building materials (the so called control group) saw no gain m/o/m vs the estimate of up .4% but that was mostly offset by a 3 tenths upward revision to May. Driving the headline figure continues to be the jump in gasoline prices as gasoline station sales were up by 21% y/o/y. The y/o/y gain of 4.9% was down from 5.5% in May but a better pace than seen over the past few years as consumers see lower taxes and higher wages in most of their pay checks. The savings rate is also very low and the usage of credit cards as seen in May really spiked to an annualized growth rate of 11%.
3) While the Philly manufacturing index saw a headline gain m/o/m, the forward looking internals were softer. The 6 month Business Activity outlook fell 6 pts to the lowest level since March 2016. New orders fell to the least since February 2016. Capital spending plans fell 5.1 pts to 31.4 and is back below its 6 month average of 33.1. Employment plans dropped to the weakest since February 2017. Plans to increase in inventories fell to the lowest since November 2016. The outlook for backlogs is at the lowest since February 2016. Expectations for pricing moderated as well.
4) Within the NY manufacturing index, the business outlook fell 7.8 pts m/o/m after rising by the exact same amount in June. Unfortunately, capital spending plans fell 10 pts to the lowest level since August. Tech spending plans dropped by almost 8 pts to the least since August 2017 too.
5) After a bounce of 6.5% in the number of mortgage applications to buy a home last week, they dropped by 5.2% w/o/w and are now up just 1% y/o/y.
6) Housing starts in June totaled 1.173mm, well less than the estimate of 1.32mm and May was revised down by 13k to 1.337mm. The contribution to the miss was from both single family starts and multi family. Single family starts in particular fell to the lowest level since December at 858k. Also of note was the 78k m/o/m drop in multi family construction which fell to 315k, the least since August 2017. The level of permits softened m/o/m as well but it was all due to a drop in multi family as they fell by 35k to 423, the lowest since last year. Single family permits rose 7k m/o/m after dropping by 20k in May.
7) When including the downward revision to May, the June US industrial production figure was a touch below the forecast. The manufacturing component was as well. After a Ford factory fire related sharp drop in auto production in May, it rebounded in June and the y/o/y gain is now 3.7%. Taking this out of the manufacturing section of the report saw a gain of .3% m/o/m and 1.8% y/o/y.
8) Chinese industrial production in June did slow to 6% y/o/y growth from 6.8% in Q1 and that was below the estimate of up 6.5%. That also matches the slowest rate of gain since December 2015. fixed asset investment in the ytd June was higher by 6% as forecasted but that is the slowest pace since at least 1999 that I have records on.
9) While the US dollar has strengthened against a variety of currencies, the particular weakness in the yuan will be a challenge if it continues and I wish I had a clue as to where this is all going.
10) Indonesian exports in June rose 11.5% y/o/y but that is below the estimate of up 15.6% and is off a very easy comparison last year as they fell by 11.7% in June 2017. Slower exports of non oil and gas products was the main reason for the miss.
11) Right before steel and aluminum tariffs hit the EU, they reported a smaller than expected trade surplus in May (just measuring goods and not services) as exports dropped and imports rose. The surplus shrunk to 16.5b euros from 19.3b one year ago. This data point follows the moderation seen in the European economy year to date vs the robust growth seen last year.
12) June exports out of Singapore slowed to just 1.1% y/o/y growth from 15.5% in May.
13) Japan reported that its exports in June rose 6.7% y/o/y, about in line with the forecast of up 7%. The yen was a help. Exports to China jumped 11.1% while falling to the US by .9% (first drop to the US in 17 months). Imports grew just 2.5% y/o/y, half the forecast.
14) The BoJ is barely closer to getting to its inflation goal as the June core CPI figure rose .8% y/o/y as expected, up one tenth from May. The core-core rate which also takes out energy .2% y/o/y, down one tenth. When will Kuroda throw in the towel on his nonsensical goal? A government official said “We probably won’t see core-core inflation rise strongly ahead.”