Positives
1)Initial jobless claims totaled 210k pretty much as expected and down from 215k last week. The 4 week average did tick up to 212k from 210k because a 202k print dropped out of the average. Continuing claims, delayed by a week, fell by 13k to the least since 1973.
2)The Philly manufacturing October index was 22.2 vs 22.9 last week but 2 pts better than expected. For perspective, the 3 month average is 19 which compares to the year to date average of 23. New orders and backlogs fell and inventories stayed below zero. Employment was up. Looking forward, the 6 month business activity outlook did moderate by 2.5 pts to a 3 month low but in the details new orders and inventories rose (maybe reflecting the year end scramble for goods?). Capital spending plans fell 1.5 pts to the least in 5 months.
3)The NY manufacturing October index rose 2.1 pts to 21.1 and that was slightly above the estimate of 20. It printed 25.6 in August and has averaged 20.3 this year. New orders rebounded by 6 pts to the best level since September 2017. backlogs though plummeted to -8.4 from +4.9 and that is the worst print since December 2017. As I’ve said before, the year end data is going to be highly distorted by year end procurement of goods to and from China, among other places that will get impacted. The business activity 6 month outlook fell 1.3 pts to 29 and that is the lowest since April. Capital spending plans fell 3.5 pts to the least since August 2017 and tech spending plans moderated by 1.4 pts to the lowest since March 2017.
4)Zillow said that “For the first time in six years, the median rent nationwide is less than it was 12 months earlier.” Portland, Oregon, Seattle, NY and Chicago saw the biggest declines. Zillow though did point out that “Despite the national trend, plenty of markets saw rent increases in September.”
5)The October NAHB home builder index rose 1 pt to 68 and that was 2 pts above the estimate. Both present and future outlook components rose 1 pt m/o/m. Encouragingly, there was a 4 pt increase in Prospective Buyers Traffic to back above 50 at 53. Helping confidence has been the pretty sharp decline in lumber prices which have basically fallen by half since the May record high. The NAHB laid out the other tailwinds and headwinds, “Favorable economic conditions and demographic tailwinds should continue to support demand, but housing affordability has become a challenge due to ongoing price and interest rate increases. Unless housing affordability stabilizes, the market risks losing additional momentum as we head into 2019.”
6)Core retail sales in October taking out auto’s, gasoline and building materials, rose .5% m/o/m, one tenth more than expected but offset by the one tenth downward revision to August which puts that month unchanged. Sales ex auto’s and gasoline though were light as they were unchanged m/o/m vs the estimate of up .3% and August was revised down a tenth. For the 2nd month (the two key back to school months), core sales rose 4.9% y/o/y about in line with the average year to date growth rate of 4.8%.
7)As of August there was a record number of job openings, totaling 7.14mm but the difficulty in filling them led to only a 71k person increase in hiring’s. The number of quitters fell but off a jump in July. The quit rate held at 2.4%.
8)US industrial production in September was up .3%, one tenth more than expected but manufacturing production was as expected. Auto production in particular was strong with a 7% y/o/y gain but we know the limitations of this with the slowdown in auto sales. Production of machinery, computer/electronics and mining also rose. Capacity utilization was 78.1%, one tenth less than expected.
9)Business inventories rose by .5% as expected and July was revised up by one tenth to a gain of .7%. These first two months of Q3 compare with an average monthly gain of about .2% in Q2. This will of course be a key lift to Q3 GDP growth as we’re seeing stocking ahead of year end tariff rate hike. At the retail level and something worth watching in light of slowing growth, auto inventories grew by 1.8% after a 1.4% jump in July. They are now up 3.4% y/o/y. With overall sales also up by .5%, the inventory to sales ratio was unchanged. We will likely see an inventory hangover in Q1.
10)Foreigners stepped up their purchases of US Treasuries in August by $63.1B with almost all of it coming from private buyers while central banks bought for the first time since March. The complexion though reflects further reductions in the holdings of China and Japan but in August that was because T-bills rolled off more than their net purchases of longer term notes and bonds. Out of nowhere Brazil and Ireland became large buyers along with the UK (but that could be any country buying via a broker there). I’ll assume Brazilian buying was ahead of the elections while Ireland is a mystery. Cayman Island buying totaled $17.9b and could be insurance companies and/or hedge funds.
11)Chinese retail sales in September came in better than expected with its 9.2% y/o/y increase, two tenths above the estimate. Fixed asset investment ytd y/o/y was up by 5.4%, one tenth better than forecasted. Foreign direct investment jumped by 8% y/o/y in September. The ytd y/o/y rise is 2.9%.
12)China reported its monthly loan and money supply data for September. New bank loans totaled 1.38T yuan, slightly above the estimate of 1.36T and up from 1.28T in August. Total loans grew to 2.21T, well more than the estimate of 1.55T and was due to a huge jump in ‘local government special bonds’ and a rise in corporate loan issuance. The Chinese have reclassified Aggregate Financing into two categories, yuan denominated loans and corporate bonds. I’m not sure if the estimate included the local government category which is new and whose proceeds are likely going towards more infrastructure. M2 money supply grew by 8.3% y/o/y as expected.
13)Japanese CPI ex food rose 1% as expected which matches the most since March 2015 when the country was still digesting the consumption tax hike. The rate ex food and energy was up just .4% but as forecasted. The 8% rise in energy prices helped headline CPI rise by 1.2%.
14)UK headline CPI was up by .1% m/o/m, two tenths less than expected. The y/o/y gain was 2.4% vs 2.7% in August. The core rate was up by 1.9% y/o/y vs 2.1% last month.
15)UK weekly earnings ex bonus for the 3 months thru August rose by 3.1% y/o/y, 2 tenths more than estimated, up from 2.9% last month and the best read since December 2008.
Negatives
1)September housing starts totaled 1.21mm, about 10k less than expected and August was revised down by 14k to 1.27mm. The year to date average is now 1.27mm. Single family starts fell by 8k m/o/m to 871k after rising by 18k in August. Multi family starts dropped by 59k after jumping by 66k last month. The hurricane likely had some impact on the data as the South saw a sharp drop in starts to the least since March. Permits were 34k below expectations but partially offset by a 20k upward revision to August. The internals here were mixed as single family permits bounced by 24k to 851k after dropping by 46k in August. Multi family permits slowed by 32k to 390k, the least since March 2016.
2)The impact of higher rates finally showed up in the weekly mortgage application data. With the 30 yr mortgage rate up another 5 bps to 5.10%, the highest since February 2011. Purchase applications fell 5.9% w/o/w and the index is at the lowest level since February 2017. Refi’s dropped by 9% w/o/w and are down 34% y/o/y and at a fresh 18 year low.
3)Existing home sales in September, likely capturing contracts mostly signed in June thru August, totaled 5.15mm, 140k less than expected and down from 5.33mm in August. This is the 6th straight month of sales declines and the pace in September is the least since November 2015. The median home price rose 4.2% y/o/y which is the 2nd slowest pace of gain since 2014. First time buyers made up 32% of purchases vs 31% in August and 32% in July and it of course has only gotten more expensive for these households to buy a home. To this for the first time buyer, the NAR said “there are simply not enough listings in their price range.” Months’ supply did tick up to 4.4 and that is the most since September 2016 but because the pace of sales fell more than the decline in inventory m/o/m (although is up y/o/y). The NAR said “Decade high mortgage rates are preventing consumers from making quick decisions on home purchases. All the while, affordable home listings remain low, continuing to spur underperforming sales activity across the country.”
4)For all the hand wringing over Italy’s forecasted 2.4% budget deficit as a percent of GDP, the US government said the fiscal year 2018 deficit totaled $779b, the most since 2012. That is 3.9% of GDP. The CBO estimates that the 2019 budget deficit (fiscal year started October 1st, 2018) will be $981b which would be an estimated 4.6% of GDP.
5)Italy and the EU are now officially in a standoff. Thanks to a late day rally today in bonds though, Italian yields are narrowing their rise on the week. The Euro STOXX bank stock index is down 2.2% on the week and lower by 30% from its 2018 high. 10% of Italian bank assets are Italian sovereign debt. Spanish and Portuguese bonds begin to feel some contagion.
6)UK retail sales in September were softer than expected as they dropped by .8% m/o/m ex auto fuel, twice the estimate. Food sales was a main reason for the fall as they declined by 1.5% m/o/m and which the ONS called a “stark slowdown.” Online retailing continues to rock though as they rose 11% y/o/y.
7)Price pressures remain robust in the UK on the wholesale side as PPI rose by 10.3% y/o/y while output prices were higher by just 3.1%. The spread is called margin compression.
8)For the 3 months ended August, the UK lost a net 5k jobs instead of gaining 15k as expected. That is the first decline since October 2017. The unemployment rate though did hold at 4% as forecasted, the lowest since 1975. The more timely September jobless claims figure saw a rise of 18.5k and that is the most since April.
9)The German ZEW investor confidence number in their economy softened to -24.7 in October from -10.6. That was well worse than the estimate of -12 and matches the lowest print since August 2012. Current conditions also weakened to 70.1 from 76. ZEW said “Expectations for the German economy are dampening above all due to the intensifying trade dispute between the USA and China. The resulting negative expectations on German exports are now beginning to show in the actual developments of exports. A further negative influence on economic and export expectations is the danger of a ‘hard Brexit’…Last but not least, the situation of the governing coalition in Berlin is perceived to have become more unstable, which also weighs on economic sentiment.”
10)China’s economic growth slowed to 6.5% growth in Q3, the lowest since Q1 2009 and down from 6.7% in Q2. The manufacturing/mining/construction sector was the particular area of moderation. Separately, industrial production slowed to a 5.8% y/o/y pace in September, the weakest since October 2015 and two tenths less than expected. Vice Premier Liu He said this on the economic situation in China, “All sorts of risks and problems accumulated in the past are now emerging, which is an inevitable process and should be viewed rationally.”
11)China said its September CPI rose 2.5% y/o/y as expected, up from 2.3% in August. That is the quickest rate of gain since February but was mostly led by higher food prices. Prices ex food and energy were up by 1.7%, the slowest since August 2016. PPI was up by 3.6% y/o/y, one tenth above the forecast but a slowdown from 4.1% in August. It’s the slowest since April as the comps get more difficult.
12)Japanese exports fell 1.2% y/o/y, worse than the forecast of a gain of 2.1%. Imports rose 7%, about half the estimate of up 13.7%. The problem though with figuring out the exact causes of the miss was Typhoon Jebi which shut an important airport where about 7% of shipments takes place from. Exports to China, the US and Europe all declined.
13)Australian job gains in September rose 5.6k, about 10k less than expected but that is because the fall in part time jobs mostly offset the rise in full time. Also, their unemployment rate fell 3 tenths to 5% where no change was expected and in part to the drop in the participation rate. That matches the lowest level since June 2011.
Peter is the Chief Investment Officer at Bleakley Advisory Group and is a CNBC contributor.