Succinct Summation of the Week’s Events – 8/23

Putting aside what I think about the economy and what the Fed should do, I believe Jay Powell’s commentary will adhere to his mid cycle adjustment theme in which he’ll endorse a September rate cut but won’t commit past that. He’s already got a likely two dissents again and now it’s clear that some of the other non voters don’t want to move either.

With respect to China’s response to the upcoming tariffs, Hu Xijin, the editor in chief of the Global Times said “China has ammunition to fight back. The US side will feel the pain.” What would a deal even look like at this point?

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1) Initial jobless claims totaled 209k, 7k less than expected and down from 221k last week. The 4 week average was up slightly to 215k from 214k though as a print of 207k dropped out.

2) July existing home sales totaled 5.42mm which is a touch above the estimate of 5.40mm and up from 5.29mm in June which was revised up by 20k. Smoothing out the monthly variability puts the 3 month average at 5.36mm vs the 6 month average of 5.33mm and the 12 month average of 5.24mm. The median home price rose 4.3% y/o/y which is about in line with the slower trend in home price gains seen this year.  First time buyers made up 32% of purchases after a one month jump to 35% in June. One year ago it also was 32%. All cash buyers picked up the difference. Months’ supply fell to 4.2 from 4.4 as the number of homes for sale fell m/o/m. The NAR said “Mortgage rates are important to consumers, but so is confidence about the nation’s overall economic outlook. Home buying is a serious long term decision and current low or even lower future mortgage rates may not in themselves meaningfully boost sales unless accompanied by improved consumer confidence.”

3) In Japan, the services PMI picked up some pace at 53.4 from 51.8 in July but manufacturing was little changed below 50 at 49.5 vs 49.4. Services are “being lifted by resilient demand within the domestic economy.”

4) Because they have room, the decision making is much easier and the Bank of Indonesia responded with a rate cut of 25 bps to 5.5%. Inflation is running at 3.3%. Positive real rates are only found nowadays in the world of EM.

5) Taiwan exports in July fell 3% y/o/y, the 9th straight month of y/o/y declines. That though was not as bad as the 6% expected decline.

6) Japanese exports in July fell another 1.6% y/o/y but that wasn’t as soft as the expected decline of 2.3%. This is the 8th straight month of y/o/y drops. Exports to China, Japan’s largest trading partner, fell 9.3% y/o/y. Exports to the US rose 8.4% y/o/y. Imports were down by 1.2%, about half the forecast of down 2.3%.

7) Inflation remain low in Japan in July with the core/core rate rising .6% y/o/y, though one tenth more than expected and up one tenth from June. For the sake of its citizenry and its bond market, inflation is still far away from 2%.

8) Maybe the shift to peaceful protests in Hong Kong can lead to a productive dialogue with the Hong Kong government and keep the PLA in Shenzhen.

9) The Eurozone manufacturing and services PMI’s did improve slightly m/o/m. Manufacturing still remains below 50 at 47 from 46.5 in July and services was up .2 pts to 53.4. Combining the two puts the composite index at 51.8 from 51.5 last month. The estimate was 51.2. France led the way as its manufacturing PMI got back above 50 while Germany’s remains well below at 43.6 (from 43.2 in July). Markit said “The dynamics of the Eurozone economy were little changed in August, with solid growth in services continuing to hold the wider economy’s head above water despite ongoing manufacturing decline.”Future confidence was subdued as Markit said “The lack of a quick rebound from the recent economic slowdown has impacted firms’ confidence, with sentiment the lowest in over 6 years. It appears that companies are braced for a sustained period of weakness, and as a result are showing greater reluctance to take on additional staff.” Markit estimates the regional economy to grow by just .1% to .2% q/o/q in Q3.

10) Eurozone CPI for July was revised down by one tenth to 1% but the core rate was left unchanged at up .9%.

11) The August UK CBI industrial orders index which rose to -13 from -34 (which was down from -15 in June). The forecast was -25. The CBI said despite this, “UK manufacturers remain on the receiving end of a double whammy; the slowdown in the global economy and Brexit uncertainty. Trade tensions between nations such as China and the US only exacerbate the demand uncertainty facing UK manufacturers.”

12) While it wasn’t a positive for the German government or the ECB, I’m glad the Germans had a failed auction selling 824mm euros of 30 yr bonds at a yield of -.11% instead of the 2b intended. Someone had to say enough is enough with this negative rate thing.

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1) The August Markit PMI’s disappointed as the manufacturing PMI slipped just below 50 at 49.9 down from 50.4 in July and the services PMI is getting close as it printed 50.9 vs 53 in the month prior. The composite index, combining the two, fell to 50.9 from 52.6. This is the first time since September 2009 that the manufacturing component has fallen below 50. Markit said most of the weakness came in the new orders index where “the latest downturn in order books was the sharpest for exactly 10 years. Export orders fell to the lowest since August 2009. Inventories were trimmed “which was mainly linked to concerns about the demand outlook.” With respect to services, “Survey respondents commented on a headwind from subdued corporate spending as softer growth expectations at home and internationally encouraged tighter budget setting.” Also, “business expectations among service providers for the next 12 months eased in August and were the lowest since this index began nearly a decade ago.”

2) The August KC manufacturing index fell to -6 from -1. The estimate was for a modest rebound to +1. The KC Fed said “Regional factory activity had its largest monthly drop in over 3 years, and over 55% of firms expect negative impacts from the latest round of US tariffs on Chinese goods.” Peter Navarro, did you hear that? “However, even though many firms expect trade tensions to persist, expectations for future shipments and exports expanded slightly.”

3) Another drop in mortgage rates again did little to incentivize people to buy a home. Purchases fell 3.5% w/o/w. That is the 5th week in the past 6 with declines. Yes, purchases are still up 5.3% but it took a 100 bps decline in rates to get only that and the index level is at the lowest since March. Refi’s were basically unchanged but after a 37% spike last week and a 180% y/o/y rise.

4) In the BLS annual benchmark revisions to payrolls as of March 2019, 501k fewer jobs than initially believed were created. The monthly average will shift to about 185k from 223k.

5) As revealed in the minutes and from Fed speeches this week, it is refreshing that some are focused on the negative side effects of easing policy after so many years of easy money.

6) The UK CBI retail sales index plunged in August to -49 from -16 and that was well worse than the forecast of a slight increase to -15. This is the lowest print since December 2008 at the depths of the great recession. CBI said “Sentiment is crumbling among retailers, and unexpectedly weak sales have led to a large overhang of stocks. With investment intentions for the year ahead and employment down, retailers expect a chilly few months ahead.”

7) The Australian manufacturing and services composite index fell below 50 at 49.5 from 52.1 as this time it was weakness in services that is less than 50 that offset manufacturing which is still above at 51.3 vs 51.6. The release said, “A persistent concern is that the fallout from the US-China trade war will dent global capex and consumer spending as cautious businesses and households retreat to the sidelines.”

8) South Korea said in the first 20 days of the month exports fell 13.3% y/o/y. If negative in the next 10 days, it would be the 8th month in a row of falling exports.