Back down again, in spite of Trumped up expectations, and going nowhere:

Highlights

Purchase applications for home mortgages fell a seasonally adjusted 5.0 percent in the January 13 week, while applications for refinancing rose 7 percent. Unadjusted, the purchase index increased 25 percent compared to the previous week, however, taking the year-on-year comparison up 17 percentage points from the prior week to minus 1 percent, a strong recovery but still sharply below the 10-percent plus readings seen in October.

All the way back down, as previously discussed:

There are Trumped up expectations and undesired auto inventory building, and then there’s the reality of a very weak economy:

Highlights

A weather-boosted 6.6 percent surge in utility output fed an outsized 0.8 percent gain in industrial production for December, one that follows however a downward revised and very sharp 0.7 percent decline in November. The monthly surge for utilities is the greatest since December 1989.

The big story in this report, however, is another soft reading for manufacturing production where volumes rose only 0.2 percent in the month. And if it wasn’t for a sharp 1.8 percent gain in the vehicle subcomponent, manufacturing would have shown no change at all.

Mining, which together with utilities and manufacturing, is a main component of the report, and production here was unchanged. Year-on-year rates show mining still at the rear at minus 2.8 percent with utilities at plus 6.2 and manufacturing no better than December’s monthly rate, only 0.2 percent higher.

Overall capacity utilization rose a sizable 6 tenths to 75.5 percent with the manufacturing component, however, up only 1 tenth to a still subdued 74.8 percent rate in a reminder that excess capacity holds down goods inflation.

The factory sector, hit by weakness in exports and also energy equipment, struggled through 2016 and apparently could not manage a solid year-end rally. But yesterday’s Empire State did offer a positive advance look on January’s conditions with the next advance look on Thursday from the Philly Fed.

Industrial Production +0.8% and Capacity Utilization 75.5% in Dec. The monthly increase was driven by a jump in consumer durables, mostly autos, which outweighed the drop in home electronics, to fuel a 1.1% gain, after a 1.0% drop in November. The main impact came from changes in Utilities output, which rebounded 6.6% in December following the 4.6% decline for November as colder weather boosted output.

Trumped up expectations starting to fade:

Highlights

Home builders are as confident as they have been since the sub-prime boom 10 years ago. The housing market index in January is 67, down just 2 points from a revised and cycle high of 69 in December.

All the components are strong but strength at the rear is the big story. Traffic held over 50, edging only 1 point lower to 51 for, along with December, the only plus-50 readings in 11 years. Traffic had been very low all cycle and this improvement is an indication of new demand for new homes.

Sales readings remain very high, at 72 for current sales and 76 for sales 6 months out. These readings hint at strength for tomorrow’s housing starts & permits report.

The West remains the favorite region for home builders with a 3-month average score of 79. The South follows at 67, the Midwest at 64, and the Northeast far back at 52 but coming out of sub-50 contraction.

The rise in mortgage rates isn’t denting any of the enthusiasm among home builders for what they see ahead as another strong year, perhaps an even stronger year.

Currently running at about the Fed’s presumed target rate of 2% due to recent hikes in energy prices:

Highlights

Energy prices are moving higher and are lifting the overall rate of consumer inflation, which now nearly matches the core rate (less food & energy). The CPI rose 0.3 percent in December to lift the year-on-year rate by 4 tenths to 2.1 percent. This yearly rate had been badly trailing the core rate for the past 2-1/2 years, since the oil price collapse in the summer of 2014. Now the overall rate compares with 2.2 percent for the core rate which rose a modest 0.2 percent in December.

Porfolio managers have driven the euro down to levels that are supporting a large and growing current account surplus, while the US current account deficit has remained elevated even with the decline of oil prices that historically would have reduced the US current account deficit. The difference is due to the decline in domestic oil output and the rise of oil imports that followed the oil price declines.

As long as the current account surplus is sustained, the euro zone economy will have that much support as indicated by the Private Domestic Balance in green below. Likewise, the near 0 US Private Domestic Balance also in green, below, indicates that domestic sector will likely remain depressed.

Should, however, the portfolio shifting run its course, the trade flows will then firm the euro vs the $ until the trade flows reverse course:

(charts from epc)

Still Trumped up expectations:

Highlights

The small business optimism index soared 7.4 points in December to 105.8, the highest reading since December 2004. The outsized increase far exceeds expectations and follows a robust 3.5-point rise in November. NFIB said business owners who expect better economic conditions accounted for about half of the overall increase, with a net 50 percent of respondents expecting that the economy will improve, a 38 point leap up from November.

In a magnified repetition of the survey results for November, all but 2 of the 10 components posted gains. The two other optimism components making a big contribution to the index were higher real sales expectations, up 20 points to 31, and the view that now is a good time to expand, which was up 12 points to 23.

Capital outlays also figured prominently, with plans to increase capital spending jumping 5 points to 29 and 63 percent of respondents reporting outlays in December, 8 points more than in November. Even earnings trends were up 6 points, but remained in negative territory at minus 14.

Optimism was somewhat subdued on the jobs front, however, as plans of owners to increase employment rose just 1 point to 16 and current job openings registered a 2-point decline, albeit to a still strong 29. According to NFIB, the labor market is getting tighter, allowing workers to ask for better wages, but small business owners are not yet confident enough to raise prices to offset any increase in labor costs. Higher interest rates apparently accounted for the drop in the other declining component, expected credit conditions, which fell 2 points to minus 6.

As previously discussed, looking like the spike is probably a one off event, same as last year:

Whatever this is, looks like it’s already rolled over…

Looks like the unsold inventory isn’t under control yet, especially autos where productions cuts are underway:

Highlights

Wholesale inventories rose very sharply in November, up 1.0 percent compared to 0.9 percent in the advance report and a draw of 0.1 percent in October. The good news is that November’s build is centered in autos (+3.2 percent) where retail sales proved very strong in December. Sales at the wholesale level rose 0.4 percent which compared to the larger gain in inventories pulled up the stock-to-sales ratio to a less lean 1.32 from October’s 1.31. Excluding autos, however, the ratio held unchanged at 1.27.

Inventories were heavy going into the fourth quarter and though September proved stable, early indications on November inventories (which also include retail and manufacturing) are pointing to a big build. Whether this build will prove a problem for production and employment in the first quarter will depend on how strong consumer spending was during the holidays. Watch for December retail sales on Friday morning followed at midmorning by the business inventories report.

Production cutbacks building as US momentum slows

OEM discipline will be tested as sales growth slows. Already there are announcements of coming production cuts to manage inventory, writes Megan Lam

Total sales (not adjusted for inflation) are still below 2014 levels:

A bit stronger than expected but the year over year rate of growth continues to be trending lower even as the debt to income ratio increases, which could possibly mean consumers are borrowing more to pay monthly bills:

Highlights

A large increase in revolving credit, one of the largest of the cycle, is likely a positive indication for holiday sales. Revolving credit jumped $11.0 billion in data for November to indicate that consumers are increasingly running up their credit-card debt. Non-revolving credit, up $13.5 billion, is also positive, here reflecting demand for vehicle financing and student loans (which are tracked in this report). Total credit rose $24.5 billion in the month, well above the consensus and also above Econoday’s high estimate. Retail sales for December, to be posted Friday, will offer definitive data on the strength of holiday spending.

Apart from the Trumped up future expectations and the sagging retail sales reports, expectations remain elevated:

Highlights

Consumer confidence shows no sign of slowing. The index is up 12.9 points since the November election in gains driven by older consumers. The level for December is 113.7 which is the highest reading since way back in August 2001.

But not all the indications from the December report point to monthly acceleration. December’s gain is centered in expectations, not in current conditions where the index, at 126.1, is still very strong but down from November’s 132.0. Within this, those saying that jobs are hard to get rose a noticeable 1.3 percentage points to 22.5 percent. This is a closely watched reading that will not heat up expectations for the December employment report.

The expectations index is very strong, up 11.1 points to 113.7. Those seeing more jobs in the months ahead jumped 4.9 points to 21.0 percent while the percentage of consumers expecting their incomes to increase rose 3.6 points to 21.0 percent. These readings are very solid.

But there is a curious negative in the report and that is a big drop in year-ahead inflation expectations, down 3 tenths to 4.5 percent which is very low for this reading. The better times that are coming will not be inflationary, at least according to the consumer.

No set of data have been showing the strength of the various consumer confidence readings. Yet this confidence didn’t help November consumer spending and how much it helped December’s spending has yet to be sorted.

Adjusted for inflation housing prices have yet to recover:

Stabilizing at the lower levels as previously discussed. The surveys indicate the number of firms reporting higher or lower numbers than the prior month. They don’t indicate magnitude:

Highlights
The Dallas Fed report joins other advance surveys pointing to year-end strength for the factory sector. December’s readings are broadly higher including a 5.0 point gain for the production index to 13.8 and a 5.3 point gain for general activity to 15.5. Importantly, new orders are up 8.7 points to 7.3 for the first positive score since August.

Held down by weak foreign demand and generally weak demand for new equipment, the factory sector did not enjoy a good year. But momentum has definitely been appearing in what is good news for 2017’s outlook.

Up mainly on Trumped up expectations and even those didn’t extend to capital expenditures:

Highlights

Manufacturing activity in the Fifth district expanded further in December, with the Richmond Fed Manufacturing Index rising 4 points to 8, after coming out of contraction in November with a strong 8-point increase. The biggest gains were registered in the backlog of orders, which rose a sharp 20 points from minus 12 to 8, followed by shipments and capacity utilization, with each rising 11 points, from 1 to 12 and minus 1 to 10, respectively. Vendor lead time lengthened in the month, moving the index component up 5 points to 9. On the employment front, hiring softened somewhat, with the number of employees falling to minus 1 from 5, but the average workweek increased, rising from 4 to 12 points, and wage increases were more widespread, with the index rising from 16 to 19 points.

Looking ahead, manufacturers were optimistic about future business conditions, anticipating robust improvement in nearly all of the conditions during the next six months. The index for expected shipments and new orders rose to a very strong 45 from 41 and to 47 from 38, respectively. Producers anticipate more increases in hiring (from 15 to 22) along with broader wage gains (from 26 to 36) and longer workweeks (from 6 to 14) in the next six months. The only expectations component that declined was capital expenditures, which fell from 27 points to 20.

Prices of raw materials rose at an annualized rate of 1.23 percent, slightly more than in the previous month, but the pace of growth in prices received slowed to a 0.22 percent annualized rate.

2016 has been even more volatile but seems to have been averaging around 0:

Just watched Steve Moore, chief Trump transition team economic advisor, on Fox, talking about ‘trillion dollar deficits as far as the eye can see’ etc. and the need for fiscal responsibility, as he then tied it into supporting the new cabinet as people who knew how to cut waste and fraud and able to run things on paygo, etc. And last week he was talking about how the $trillion of infrastructure spending would be large private infrastructure like pipelines and refineries, etc. to be encouraged by govt. policy, rather than govt. spending per se.

Yes, private sector deficit spending for said capex ‘counts’ just as much as govt. deficit spending, but this kind of effort to create incentives won’t happen overnight, and won’t kick in overnight, and in any case $1 trillion over 10 years is only $100 billion per year or about .5% of GDP per year.

Also, their spending cuts ‘to pay for it all’ will be a force in the other direction. And their proposed tax cuts have far lower multiples than their proposed spending cuts.