1) The core rate of capital spending (non defense capital goods ex aircraft) grew by 1.4% m/o/m in July , better than the forecast of up .5% and June was revised up by 4 tenths. Q3 GDP forecasts should get lifted as core shipments exceeded the estimate by 6 tenths. On an absolute basis core orders rose for a 4th straight month and has finally gotten back above the highs seen in 2013 and 2014 and is closely approaching the peak seen in March 2012.
2) The pace of firing’s for the week ended August 18th remained very modest with initial jobless claims coming in at 210k, 5k less than expected and down a touch from the 212k seen in the week prior. This brings the 4 week average to 214k from 216k last week and that is just off the 49 year low. Continuing claims, delayed by a week, were little changed.
3) It seems like we are days away from a new trade agreement with Mexico to replace the old one.
4) I think this was the most relevant piece from the FOMC minutes as we all watch the yield curve which continues to flatten to the lowest spread in 11 years at just 21 bps: “several participants” acknowledged that inversions typically occur before recessions but “other participants emphasized that inferring economic causality from statistical correlations was not appropriate. A number of global factors were seen as contributing to downward pressure on term premiums, including central bank asset purchase programs and the strong worldwide demand for safe assets. In such an environment, an inversion of the yield curve might not have the significance that the historical record would suggest.” I’ll say again, which side is Jay Powell on? That is an important $64k question.
5) Off the lowest level since February, the MBA said purchase applications to buy a home rose 2.9% w/o/w after 5 weeks of declines. They are basically flat y/o/y with a .9% rise. Refi’s were up by 6% w/o/w off an 18 year low but remain down by 33% y/o/y. Mortgage rates were unchanged w/o/w.
6) Powell’s speech was uneventful but I do think he is leaning towards sticking to his 3 hikes per year pace based on current data and his license is because he only focuses on PCE and not CPI with the former core rate at 2% vs the latter now running up 2.4%. Either way, real rates are still basically zero to negative in the 9th year of an economic expansion.
7) The August Japanese manufacturing PMI rose slightly to 52.5 from 52.3 but that is still the 2nd lowest print over the past year. Markit said “Overall demand improves, but export orders fail to rise for a 3rd straight month.” With exports, “weaker international sales weighed on business confidence, with panelists citing potential trade conflicts as a key risk to their outlook over the coming year. Positive sentiment eased to the lowest level since November 2016.” Inflation pressures remained evident as Markit said “input and output price inflation at multi year highs.”
8) To the benefit of Japanese consumers but to the frustration of the BoJ, July CPI ex food and energy rose .3% y/o/y as expected while thanks to higher energy prices, which they import, headline CPI rose .9% y/o/y, one tenth less than estimated. Quite a ride away from the BoJ 2% goal.
9) South Korean exports in August in the 1st 20 days of the month rose 14.9% y/o/y helped by semi’s, auto’s and petro products.
10) Taiwanese exports in July rose 8%, above the forecast of up 2.9%. As with the South Korean number too, it is tough to say what is a quickened pace of trade ahead of tariffs and what is not. Many supply chains do run thru China.
11) The Eurozone manufacturing and services PMI for August was little changed at 54.4 vs 54.3 in July. The .5 pt drop in manufacturing was offset by a slight pick up in services. Germany and France improved but was offset by weakness elsewhere. Of note, “Companies’ expectations of future growth meanwhile slipped to the lowest for nearly two years…Optimism was subdued by recent signs of cooling demand, higher prices and rising political concerns.” As seen in Japan, “new export orders registered the smallest monthly rise for two years.” Backlogs fell to a 19 month low. The employment picture was mixed as factory payroll fell to a 17 month low but services job growth rose to the best since October 2007. With inflation, “The flash surveys found price pressures to have remained elevated as higher wages were seen in some countries, alongside increased fuel, transport and commodity prices.”
12) The UK CBI retail sales index in August at 29 was much better than the estimate of 13 and up from 20 in July but the CBI was really mixed with their comments. “The summer heatwave has kept shoppers out on the high street, with consumers splurging on food and drink for barbecues and garden parties. That said, the outlook for retail remains challenging, with orders falling, prices rising, employment sliding, and investment drifting down.”
13) Greece finally exits its multi year and very expensive bailout. Now the country needs to elect Kyriakos Mitsotakis, the leader of the New Democracy party as its new leader, in next year’s election.
1) The US Markit manufacturing and services composite index for August fell to 55 from 55.7 as both components fell m/o/m. That is a 4 month low with the manufacturing index at the lowest level since November 2017 and lower for a 4th straight month. The services side fell for a 3rd month. With manufacturing, Markit saw “slower rates of output and new business growth” while “job creation and capacity pressures also moderated in August.” On the latter though, “manufacturers continued to indicate a sharp lengthening of suppliers’ delivery times, which survey respondents linked to widespread truck driver shortages.” On the services side, “new business volumes increased at the slowest pace seen so far in 2018…Weaker growth in client spending contributed to a sustained fall in backlogs of work, with the latest decline the greatest since March 2017. Moreover, service providers signaled the least marked rise in payroll numbers for 8 months.” Markit is attributing some of the weakness to: “jobs growth in manufacturing and services is being restricted by a lack of available workers, while factories are also constrained by a lack of raw materials, sometimes blamed on ‘panic buying’ of safety stocks as well as a lack of transportation to ship goods around. However, the survey also found increased cases of companies reporting the need to cut costs, in part reflecting the recent steep rise in raw material prices, often linked to tariffs and shortage related price hikes.”
2) New home sales in July totaled 627k, 18k less than expected, partially offset by a 7k upward revision to June to 638k. The 627k print is the slowest since October 2017 and brings the 3 month average to 640k vs the year to date average of 646k. With the number of homes for sale rising to the most since March 2009 at 309k which happens to be exactly the 15 year average, months’ supply rose to 5.9, the highest since August 2017. Regionally, there was a sharp drop in sales in the Northeast as they got cut in half m/o/m. Sales out West were the standout to the upside. Pricing wise, the median home price rose to the most in 4 months and the average price rose to just below a record high. On the latter, it was due to mix as home sales fell for those priced below $300k but rose for those priced above $750k (just ask Toll Brothers whose average home price is above $800k).
3) Existing home sales in July totaled 5.34mm, 60k less than expected and down from 5.38mm in June. It’s the slowest pace of closings since February 2016. Months’ supply held at 4.3, matching the highest since September 2016. Fortunately for home buyers, price growth slowed below 5% for the 2nd straight month at up 4.5%. It’s the first time in two years we’ve seen two months in a row with a 4 handle. Home price inflation over the year years has risen 2-3 times the rate as overall consumer price inflation. First time buyers made up 32% of purchases and remain stuck in the low 30% range.
4) The KC manufacturing index for August fell 9 pts m/o/m to 14 and that was also 9 pts less than expected. This is the lowest print of the year with new orders falling to 9 from 21 and the employment component falling to the lowest level since August 2017. Highlighting my worries about export growth, the export component went to -1 from +6. That is the first read below zero since November 2017. Notwithstanding the good durable goods report at the core level in July, capital spending plans fell 10 pts to the weakest level since December 2017. This regional survey follows a rise in NY and a sharp drop in Philly.
5) The US Citi Economic Surprise index is finishing the week at the lowest level since September 2017.
6) It sounds like little progress was made on trade this week in the discussions between David Malpass and his Chinese counterparts. Another $16b of already announced tariffs are officially implemented on both sides.
7) Business confidence in France fell 1 pt instead of rising 1 pt as expected. The index is now at the lowest level since April 2017. Drops in services and retail offset a 1 pt rise in manufacturing (after falling by 1 pt last month).
8) The UK CBI industrial orders index fell 4 pts m/o/m to +7, about in line with the estimate of +8. The CBI said “Manufacturing growth remains strong, supported by the lower level of sterling and strong global economy. But risks to that growth remain high in light of international trade tensions and the uncertainty caused by Brexit.”
9) No inflation in Europe? Spain reports a July PPI rise of 4.6% y/o/y and it spikes by 8.4% y/o/y in Sweden (the fastest since 1995) which also still has negative interest rates.