As we are one day away from another rate hike before the reigns are passed to Jerome Powell, I just wanted to post two equity valuation charts as we close 2017 and ahead of an intensification of monetary tightening next year. These charts are not meant on my part to call a top because who knows when valuations will matter but just to reflect the comparison to March 2000 which we’ve now basically now achieved on these two metrics. The first chart is from Bloomberg and the 2nd one from my friend Stephanie Pomboy.
S&P 500 PRICE to SALES RATIO
Now that tax reform looks like a done deal (with details to be determined), small business optimism kicked up another gear in November. The NFIB index jumped to 107.5 from 103.8. That level is the best since September 1983. We saw the jobs components last week and the big improvement in Plans to Hire. The disappointment continues to be in the capital spending plans though as they fell by 1 pt to 26% which is below the 6 month average of 28%. Hopefully the immediate expensing of capital expenditures in the tax plan will change this. Expectations for a Better Economy, Higher Sales and that it’s a Good Time to Expand all improved. Plans to Increase Inventory was up 3 pts but after falling by 3 pts last month. Of note, those expecting Higher Selling Prices rose 2 pts to the most since July 2014. Those expecting a better earnings trend rose 2 pts but is still below its 6 month average. I’ll repeat again my belief and worry that higher cyclical inflation next year will be a main surprise.
The NFIB said “Small business owners are exuberant about the economy, and they are ready to lead the US economy in a period of robust growth.” They bottom lined the main reason: “The change in the management team in Washington has dramatically improved expectations.” The reason being within this is because “They continue to list taxes as their number one problem, but they now have clear expectations that Congress and the President will address that problem.” The 2nd biggest problem is “finding qualified workers” and that will likely remain a big problem. We can also be sure that the new regulatory regime has also added to confidence. Again, with all these business confidence figures, they are just measuring the direction of attitudes, not the degree.
On my theme of potentially higher cyclical inflation, Japan reported that November PPI rose .4% m/o/m and 3.5% y/o/y, both 2 tenths more than expected. Versus last year, this is the highest print since September 2014 (juiced by VAT hike and the quickest increase since October 2008 before this). Higher commodity prices was certainly the main catalyst and it seems that until it shows up in CPI, markets just don’t care. JGB yields actually fell but the yen was up a touch. Also of note, export prices jumped by 3.5% y/o/y and import prices were higher by 6.6%. Imagine for a minute if the BoJ gets the inflation it wants, let alone the Fed and the ECB.
Asian stock markets were mostly red across the board and have really been choppy over the past few weeks. I didn’t see any specific news though today.
On the inflation theme and in one of the other bastions of monetary madness, Switzerland reported that November CPI jumped 1.9% y/o/y, two tenths more than expected, up from 1.7% in October and that’s near the most in 6 years. In response, rates are spiking there but still remain firmly negative. The 1 yr bill yield is up by 13 bps to -.77%. The Swiss Franc though is little changed. The SNB meets on Thursday along with the ECB.
Consumer price inflation accelerated further in November in the UK. CPI was up 3.1% y/o/y vs 3% in October and vs the estimate of 3%. The core rate though held at 2.7% as expected. Input prices at the wholesale level also jumped more than expected as they were up 7.3% y/o/y vs the forecast of up 6.7%. Yields in the UK are up modestly as their bond market continues to jerk back and forth on inflation, Brexit and how the BoE will respond in 2018.
German 10 yr inflation breakeven is up 2 bps to 1.28% and that is the highest since February. French breakvens are at a 9 month high. The UK 10 yr inflation breakeven is up by 1 bp to 3.08% which is basically what its averaged this year.
The German ZEW investor expectations index on the German economy fell a touch m/o/m to 17.4 from 18.7 and that was a bit below the estimate of 18. The current situation though improved slightly. Don’t pay too much attention to this figure as the IFO is more relevant. The ZEW said this, “Overall, the outlook for the German economy in the coming six months remains positive. The current state of uncertainty surrounding the government formation in Germany has not had any significant impact on the assessment of the economic outlook. Financial market experts, however, expect to see negative effects resulting from this with regard to the Brexit negotiations as well as EU reforms.”