Markit’s measure of the US services sector saw its December index fall by 1.2 pts m/o/m to 53.4. It touched a one year high at 54.8 in October and averaged 55.9 in 2015. The internals were mixed as new orders fell slightly but employment rose for a 3rd straight month and there was “a stronger degree of optimism about the year ahead business outlook.” This did come though with higher inflation expectations as “cost pressures intensified in December, with the latest rise in input prices one of the fastest seen since mid 2015.” They cite higher raw material costs. Backlogs were higher.
Bottom line, this index is still at a good level but maybe some of the initial Trump optimism moderated a bit. Markit’s estimate for Q4 GDP growth is around 2% and they expect 2.3% growth in 2017 as the economy deals with “a shift in emphasis towards fiscal stimulus” on one hand and three rate hikes on the other. This number is never market moving as the ISM services index is much more of a focus. Key this week will be the November durable goods data on Thursday as we’ll see if there was any post election response or that will take some time to filter into capital spending decisions.
In case you missed the comment with the WSJ on Friday, Fed President Bullard said the FOMC should consider shrinking their balance sheet next year by slowing the reinvestment of securities. He also said a possibility is “the Fed could skew purchases toward short dated bonds a preparation for more active measures of balance sheet contraction.” While I don’t think any of this will happen next year, if it does we can add another factor to the bear case in bonds and this would be a big one.
In response to another round of attempts to slow the persistent rise in home prices, the number of Chinese cities that reported gains in the sales price of new and existing apartments in November fell m/o/m. For new apartments, 55 of 70 cities saw price increases, matching the lowest since February while those for existing ones saw 47 of 70 cities up, the lowest of the year. The number of cities that reported home price declines for both new and existing apartments rose. On a y/o/y basis, the problem remains in the big cities although the out of control price gains are moderating to the slowest in about a year and a half. Beijing prices were up 26.4% y/o/y vs 27.5% in October. Shanghai prices were up by 29% vs 31% last month and Shenzhen home prices jumped by 27.9% y/o/y vs 31.7% in the month prior. The peak in Shenzhen was 62.4% growth back last May. If one was unlucky to have to move to Hefei (I’ve never heard of it), they have to pay 47% more for an apartment than last year.
Bottom line, the National Bureau of Statistics referred to the .6% m/o/m gain in home prices as “apparent stabilization.” That said, China just can’t get off the hamster wheel of increasing home buying restrictions when price growth accelerates and reducing them when it slows too much. Property remains a favored investment vehicle on the part of households even though in some of them, no one may ever live in them. In a statement after the annual planning conference last week, Chinese officials said “houses are built to be inhabited, not for speculation” and they want “to establish a fundamental and long term system to curb real estate bubbles and market volatilities.”
The Shanghai property stock index fell by .7% in response with the broader Shanghai comp down by .2% and the H share index in Hong Kong down by 1%. The yuan is bouncing off its multi year low vs the US dollar. Their 10 yr yield is down after closing on Friday at a 14 month high. Copper is down by 1.5% and lower for the 5th day in the past 6. I expect China to be back in the market spotlight again in 2017 whether on its own or because Trump drags them in. Hong Kong has a massive property bubble too and they are importing US monetary policy and its higher rates.
Japanese exports in November fell by .4% y/o/y which wasn’t as much as the 2.3% decline that was expected. Exports have fallen by 14 straight months on a y/o/y basis but this decline was the least of them as the yen fell 9% in November. Looking straight at volume, exports rose by 7.4% y/o/y with particular strength to China of 16% vs last year. Volume gains were seen in semi’s, ships and auto parts. Bottom line, the slide in global trade seems to have stabilized and the weaker yen is certainly a release valve for many Japanese exporters. That said, Abenomics has proved that crushing one’s currency doesn’t lead to sustainable economic growth. The Nikkei closed flat but the Topix bank stock index was down by 1% even though their yield curve steepened.
In Europe, the German IFO December business confidence index rose .6 pts to 111 which was a touch above the estimate of 110.6 and at the best level since February 2014. Current conditions led the gain because the expectations component was little changed. The confidence boost was driven by manufacturing and construction which “continues to break records.” Thank you Mario Draghi. The IFO said “The German economy is in a festive mood.” The German economy remains the bulwark of the region and the German DAX stands at its best level since August of last year. But, it still is 8% below its record high back in April last year. Why? I’m not sure and in the face of all the ECB QE.