Positives
1) In coming weeks, we’ll watch a lower level get together between Chinese and US officials that hopefully will be more than just a coffee talk about the possibility of higher level trade talks.
2) Initial jobless claims totaled 212k, 3k less than expected and down 2k from last week. Due to a print of 208k dropping out of the average, the 4 week average did tick up by 1k to 216k. Continuing claims, delayed by a week, fell by 39k after rising by 34k in the week prior.
3) Single family housing permits rose by 13k m/o/m to 869k in July, the most since February and puts it back to around the 6 month average of 861k. Multi family permits rose a touch.
4) Manufacturing production in the US rose .3% m/o/m as expected in July. The production of auto’s continued to bounce for a 2nd month after two months of weakness in part due to a Ford factory shutdown. The production of machinery and computer/electronics helped also to boost production. The headline IP gain of .1% was kept in check by a decline in utility and mining production. That latter follows a sharp spike in June. Capacity utilization remained unchanged at 78.1%, still below the peak in this cycle of 79.6% back in 2014 and vs the long term average of around 80%.
5) Core July retail sales were in line with expectations in July when including the modest June revision. The so called ‘control group’ (ex auto’s, gasoline and building materials) sales rose .5% m/o/m vs the .4% estimate but June was revised down by one tenth. Core sales versus last year grew by 4.8% which is above the 5 year average of 3.5% but still below the 5%+ reads in the two prior economic expansions. Sales were particularly strong at restaurant and bars. Party on. Sporting goods sales were really weak. Fortnite.
6) The August NY manufacturing index rose 3 pts m/o/m to 25.6 and better than the forecast of 20. The components though were mixed. New orders fell but backlogs rose. Employment was up but the workweek fell. Prices paid grew but prices received dropped. As for expectations, General Business Activity 6 months out rose by 3.7 pts but after falling by 7.8 pts in July. After weakness seen in July, we did see a rebound in the capital spending plans but both are still below where they were in June.
7) US productivity in Q2 grew by 1.3% y/o/y and continues the better but still below trend in productivity growth. The average over this year is smack in line with that seen in 2017 but which was an improvement from the lame levels in the years prior. Unit labor cost growth slowed to 1.9% y/o/y vs 2% in Q1 and that compares with 2.2% average increase in 2017 but up from below 1% in 2016.
8) The July NFIB small business optimism index rose .7 pts m/o/m to 107.9 after falling by .6 pts last month. By that .1 pt, it is the best print since 1983. About 75% of small businesses surveyed have less than 20 employees. The biggest problem remains filling positions as this component rose to a record high dating back to 1973 which is leading to higher wages and maybe an increase in inflation. The NFIB said “With reports of increased compensation running at record levels, there is more pressure to pass these costs on in higher selling prices.” Overall, the CEO of the NFIB was ebullient, “Expansion continues to be a priority for small businesses who show no signs of slowing as they anticipate more sales and better business conditions.”
9) Indonesia raised interest rates by 25 bps to try to stem the decline in the rupiah and the inflationary implications of that fall. Argentina hiked by 500 bps to 45% but the peso is still down on the week.
10) Home prices in China rose 1.1% m/o/m and 5% y/o/y in July. Of the 70 cities surveyed, there was an increase in the number seeing home price gains both m/o/m and y/o/y. This could also have been put on the negative side considering the level of excess still in Chinese housing markets.
11) In the UK, retail sales ex auto fuel in July beat expectations. They grew by .9% m/o/m vs the estimate of no change and rose by 3.7% y/o/y. Online sales (rose to record high as % of total sales), food (helped by World Cup) and clothing helped.
12) While somewhat old news, the European Commission revised up by one tenth the Q2 economic performance to 2.2% y/o/y growth.
13) Investor expectations for the German economy as measured by the ZEW improved. The August print was -13.7 vs -24.7 in July and better than the estimate of -21.3. Current conditions though were little changed. The ZEW said “The recent agreement in the trade dispute between the EU and the US has led to a considerable rise in expectations for Germany and also, to a lesser degree, for the Eurozone. However, the economic outlook for Germany is now significantly less favorable than it was 6 months ago.”
Negatives
1) While the Turkish lira rose on the week after last week’s 27% collapse, there was still no response from their central bank and no new confidence gleaned from Erdogan that they have a handle on what is going on. The Euro STOXX bank index is down 4% on the week and sits at the lowest level since December 2016.
2) Italian yields continue higher to the wides of May. The MIB stock index is down 7 straight days and by 7% during this time frame.
3) There was a sharp rise in foreign net selling of US Treasury notes and bonds of $48.6b in June. It is the largest one month of selling since October 2016. It brings the year to date level of buying at $20b which compares with $20b of buying in all of 2017 and outright net selling in 2016. Back in 2011 and 2012 foreigners were buying over $400b each year. China sold notes and bonds for the 3rd month in the past 4 which takes their holdings to the lowest level since January. Japan resumed its selling after a temporary respite in May and they hold the smallest amount of longer term Treasuries since October 2011.
4) Housing starts came in at 1.168mm annualized, well below the forecast of 1.26mm and June was revised down by 15k to 1.158mm. After falling by 84k in June, single family starts only rebounded by 8k. This puts the 3 month average at 885k vs the 6 month average of 889k, the 12 month average of 884k. Thus, we’re seeing a leveling out. Multi family starts totaled 306k from 304k but that 304k number was down from 391k in May. Smoothing this out puts the 3 month average at 334k vs the 6 month at 369k and 12 month at 365k.
5) The NAHB home builder index fell 1 pt m/o/m as expected to 67. While this is still a high level with the breakeven 50, it is the lowest print since September 2017. Both the present outlook and expectation components also fell 1 pt. Prospective Buyers Traffic dipped back below 50 at 49 from 51. It’s the first time below 50 since October. The NAR says that demand is still good, “fueled by steady job and income growth along with rising household formations.” The problem however are that builders “are increasingly focused on growing affordability concerns, stemming from rising construction costs, shortages of skilled labor and a dearth of buildable lots.” For the buyer, “growing affordability concerns” are the main issue right now.
6) The MBA said mortgage applications to buy a home fell 3.3% w/o/w and that is the 5th straight week. They are also lower by 3.3% y/o/y and the index level matches the lowest since September 2017. Refi’s were unchanged w/o/w but are still down 36% y/o/y and sit at the slowest pace in 18 years.
7) The Philly manufacturing index for August fell by more than half from July to 11.9 from 25.7. The estimate was 22. New orders plunged to 9.9 from 31.4. That’s the least since September 2016. Backlogs, employment and the workweek also fell. Inventories were little changed. Delivery times moderated (easing of constraints) and that combined with the drop in commodity prices led to an 8 pt drop in prices paid. Prices received was down by 3 pts after rising by the like amount in July. After falling to the lowest level since March 2016 last month, the overall 6 month outlook rebounded by 10 pts. Capital spending plans though fell for a 2nd month and there has been no notable acceleration in capital spending plans in both this survey, the NY one and what was seen in the NFIB small business data. Noteworthy was the 6 month outlook for Prices Received and it rose to the highest level since July 1988.
8) The preliminary UoM August index fell to 95.3 from 97.9 and that was 2.7 pts less than expected. It’s also the weakest print since September 2017 and 6 pts below the high in this cycle seen in March. All of the decline was in the Current Conditions component which fell almost 7 pts. Expectations were unchanged. The UoM said the decline was “concentrated among households in the bottom 3rd of the income distribution.” One year inflation expectations stayed the same at 2.9% but keep reading. After falling last month, higher income expectations did improve as did employment expectations but household finance components fell. Business expectations also improved after falling sharply in July. What was most noteworthy in the data was the big drop in spending intentions and the UoM is attributing this to higher inflation. “The dominating weakness reflected much less favorable assessments of buying conditions, mainly due to less favorable perceptions of market prices…consumers have little tolerance for overshooting inflation targets.” Those that said it’s a good time to buy a major household item fell 15 pts to the lowest level since October 2014. Those that said it’s a good time to buy a car/truck dropped 8 pts to the least since November 2013. Lastly, those that said it’s a good time to buy a home was lower by 8 pts to the weakest since October 2008.
9) The initial Eurozone July CPI print of up 2.1% y/o/y headline and 1.1% core was confirmed.
10) UK CPI rose 2.5% y/o/y in July as expected but is just about wiping out the 2.7% y/o/y wage gains seen. The core rate (ex food, energy, tobacco and alcohol) was up by 1.9% as forecasted. Price pressures remain intense at the wholesale level as PPI was up 10.9% y/o/y vs the estimate of up 10.3%.
11) In the UK, their unemployment rate for the 3 months ended June fell to 4% from 4.2%, a fresh 43 year low but the number of jobs created missed expectations and people left the labor force. Weekly earnings growth ex bonuses rose 2.7% y/o/y as expected but down one tenth from May. Lastly, jobless claims in July rose for the 5th month in the past 6.
12 )The economic data out of China was mostly weaker than expected across the board. Aggregate Financing in July totaled 1.04 Trillion yuan, 60b below the forecast and down from 1.18 Trillion in June. Again, that was all due to the crackdown on non bank lending as bank loan growth was quicker than estimated. Chinese authorities continue on their mission to bring lending into the sunlight, aka on bank balance sheets. Money supply growth, M2, picked up by 8.5% y/o/y from 8% in June and that was 3 tenths more than forecasted. Retail sales, industrial production and fixed asset investment all missed estimates. On FAI, the 5.5% y/o/y rise was the slowest on record dating back to 1999.
13) The Shanghai comp ended the week at the lowest level since January 2016 and is just 13 pts from the weakest level since November 2014. It is also 50% below its 2015 spike rally and down for 5 straight days.
14) Japanese exports in July rose 3.9% y/o/y, below the estimate of up 6.3%. Taking out the influence of the yen and just looking at merchandise volume saw exports rise just .8%, the slowest since February and they fell by 5% to the US. This was mostly driven by a drop in auto exports to the US. Volume exports to China rose by 8%. Imports were about as expected with a 14.6% rise but some of this is the high cost of energy imports.
15) Aretha, Respect
Peter is the Chief Investment Officer at Bleakley Advisory Group and is a CNBC contributor.