The Boock Report

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

Positives

  1. June payrolls grew by 222k, 44k more than expected and the two prior months were revised up by 47k. The private sector added 187k, 17k above the forecast as government workers added 35k to the headline number. Private sector job creation in May was revised up by 12k to 159k and by 21k to 194k for April. The household survey added 245k (185k of which came from the key 25-54 yr cohort but those aged 20-24 lost 185k jobs while those over age 55 added 178k jobs) and because the labor force grew by 361k, the unemployment rate rose one tenth to 4.4% so we can say that is a good reason for a rise. The U6 figure was up by two tenths to 8.6% as there was a pickup in discouraged workers. The participation rate rose one tenth to 62.8% after falling by two tenths in May. The employment ratio was up by one tenth to 60.1%. The pool of available labor continues to shrink to the lowest level since April 2008 but the pace slowed in June. This shrinking supply was still only good for a .2% m/o/m rise in earnings and 2.5% y/o/y. The same trends as has been seen but hours worked did tick up by one tenth which meant that average weekly earnings did accelerate to 2.8% y/o/y growth. Aggregate hours worked did rise to the highest level in this recovery but is not being reflected in faster economic growth and thus reflects weak productivity. We did see a rise to a 3 month high in those working part time for economic reasons but that was because of Slack Work, not because they can’t find full time jobs. The 6 month year to date average job growth is 180k vs 187k last year, 226k in 2015 and vs 250k in 2014. The average for the private sector year to date is 171k, the same trend as 2016 but down from 213k in 2015 and 239k in 2014.
  2. The June ISM services index rose .5 pt to 57.4 and that was a touch above the estimate of 56.5 and vs 57.5 in April. Notwithstanding the m/o/m improvement in the headline print, 16 industries of 18 surveyed saw growth vs 17 in May. Also, within the Business Activity category 14 saw growth vs 16 in May as this component rose .1 pt m/o/m to 60.8 but is slightly below the 6 month average of 61.1. The ISM bottomed lined the report by simply saying “The majority of respondents’ comments are positive about business conditions and the overall economy.”
  3. Markit’s US services index rose 1.2 pts in June which was the best since January. “Panelists linked growth to increased new orders and strong client demand.” Employment was the best since February. With respect to inflation, “input prices increased at a solid rate that was the quickest in 2 years. Many respondents linked input price inflation to higher raw material and staffing costs.” Underline mine.
  4. The ISM manufacturing index for June jumped to 57.8 from 54.9 in May and that was 2.5 pts above expectations. That is the best level since August 2014. Notwithstanding the m/o/m improvement seen above, there was no change in the number of industries seeing growth as for a 2nd month 15 of 18 said business was better. There was however 3 industries seeing a contraction vs 2 in May.
  5. Notwithstanding or maybe because of the w/o/w jump in mortgage rates, purchase applications to buy a home rose 3.1% w/o/w after 3 down weeks. The y/o/y gain is now at 6.3%.
  6. There was nothing new in the FOMC minutes. They are most likely tightening in some fashion in September whether via another rate hike or QT. Unlikely it will be both.
  7. Regular pay in May in Japan jumped .9% y/o/y helped by a 1.2% increase in hours worked. That is the biggest one month wage/salary increase since it did the same in March 2000. It was in 1997 the last time it rose more.
  8. The Japanese Q2 Tankan manufacturing report rose 5 pts q/o/q to 17. The estimate was 15. The services component also rose and both did too for small companies. Capital spending plans also improved.
  9. Taiwan’s June exports in particular jumped by 13% y/o/y vs the estimate of up 8.8% helped by semiconductor exports which rose 23%. Exports to China and Hong Kong made up 40% of Taiwan’s exports. The caveat though was the 3.7% growth in imports which was well below the forecast of 12% as many imports go into the finished product that is then exported.
  10. China’s state sector weighted Caixin manufacturing PMI rose .8 pt m/o/m to 50.4, .6 pts above the estimate but still basically hanging around the flat line.
  11. Hong Kong’s PMI rose up by .6 pts to 51.1 which is barely above 50 for a 3rd month. India’s composite index was up .2 pts to 52.7, the best in 8 months. Manufacturing PMI’s rose m/o/m in Taiwan (53.3), South Korea (50.1), Thailand (50.4) and Vietnam (52.5).
  12. The Reserve Bank of Australia held rates unchanged at 1.5% and purposely did not lean in any one direction on its rate intentions from here.
  13. Germany, France and Spain all reported upside surprises in their industrial production figures for May.
  14. The unemployment rate in the EU area in May held at 9.3% as expected, the lowest since February 2009 but it still remains 200 bps above the pre recession low.

 

Negatives

  1. Global interest rates continued higher and not because there was much change in the economic data but instead to you know what. The Japanese 40 yr JGB yield is at the highest level since early 2016 and same with the 10 yr German bund yield. The Italian 10 yr yield is just 6.5 bps from the highest since November 2014. The US 2 yr yield sits at the highest level since November 2008.
  2. Initial jobless claims for the week ended July 1st totaled 248k, 5k more than expected and up from 244k last week. The 4 week average was up a touch at 243k vs 242k last week. Of note, continuing claims, delayed by a week, rose for the 5th straight week. This is the longest streak since 2009 but has only totaled 37k in these 5 weeks.
  3. Markit’s US manufacturing index fell to a 6 month low at 52 from 52.7 in May. Markit said “Manufacturers reported a disappointing end to the second quarter, with few signs of growth picking up any time soon. The PMI has been sliding lower since the peak seen in January and the June reading points to a stagnation, at best, in the official manufacturing output data.” While ISM saw a rise in employment, Markit said “The survey’s employment index meanwhile suggest that factories will make little or no contribution to non farm payroll growth in June.” ISM said new orders rose to a 3 month high but Markit said “Forward looking indicators, notably a further slowdown in inflows of new business to a 9 month low and a sharp drop in the new orders to inventory ratio, suggest that risks are weighted to the downside for coming months.”
  4. Coincident with the rise in long end treasury yields, the average 30 yr mortgage rate rose 7 bps on the week to 4.20%, the biggest one week move in 3 months. Refi’s only fell .4% w/o/w but after dropping by almost 9% in the week before and are down 46% y/o/y.
  5. China said its FX reserves in June rose for a 5th straight month by a modest $3.2b to $3.057T. That was though about $4b less than expected.
  6. The Chinese private sector weighted Caixin services PMI for June fell by 1.2 pts to 51.6. That’s the 2nd lowest print since May 2016 and puts their combined composite index to the lowest level since June 2016 at 51.1 and thus barely above the breakeven line of 50. Caixin bottomed lined the report by saying “Even though the impact of slowing expansion in China’s service sector was cushioned by a slight rebound in manufacturing activity, the downward trend in the economy remains entrenched.”
  7. Singapore’s June PMI fell .7 pts to just above 50 at 50.7. That’s the weakest in 8 months. Japan’s PMI composite index fell .5 pt to 52.9 off its best level in a few years. PMI manufacturing declines were seen in Indonesia (49.5), Malaysia (46.9) and in the Philippines (53.9).
  8. Japanese consumer confidence in June fell .3 pts with the Income Growth component down .4 pts. This index is still below the Abe peak in 2013.
  9. Manufacturing production in the UK fell for the 4th month in the past 5 m/o/m led by a sharp decline in auto production.
  10. The June UK services PMI index fell to 53.4 from 53.8. It’s down for the 2nd month and sits at a 4 month low. The estimate was 53.5. New orders fell to a 9 month low but employment rose to a 14 month high while business optimism dropped to the 2nd weakest since December 2011. Also, “June data pointed to a sharp and accelerated increase in average cost burdens…Greater operating costs were linked to a combination of rising staff salaries and increased raw material prices (particularly food and imported items).” Profits though are getting squeezed as “survey respondents noted that intense competition for new work continued to place pressure on pricing power.”
  11. UK manufacturing PMI fell 2 pts m/o/m to 54.3 where the estimate was for no change. It’s at a 3 month low.
  12. German factory orders in May rose 1% m/o/m but that was below the estimate of up 1.9% and after falling by 2.2% in April.
  13. The Eurozone manufacturing and services composite index fell to a 4 month low but Markit said “The dip in the PMI in June certainly doesn’t look like the start of a slowdown. Growth of new orders accelerated very slightly to reach the 2nd highest in just over 6 years, and companies are struggling to satisfy this increase in demand.” As to the ECB focus on generating higher inflation, “Rising demand is also boosting firms’ pricing power, both for goods and services. While price pressures have cooled since earlier in the year, linked mainly to lower global commodity prices, this is still the strongest period of inflationary pressure that the region has seen for six years.”