Pending home sales, Durable goods orders, Dallas Fed, Bank loans, Japan

Same story, expectations trumped up but actual numbers not so good:

Bad:

Highlights

Just when existing home sales seemed to be showing lift the pending home sales index, which tracks initial contract signings, is down 2.8 percent in the January report. This points to weakness for final resales in February and March.

The West is the culprit in January’s data, with contract signings down 9.8 percent in the month for year-on-year contraction of 0.4 percent. The Midwest is also weak, down 5.0 percent in the month for 3.8 percent on-year contraction. The South and the West both show no better than low single digit monthly and yearly gains.

Adding to the bad news is a sharp downward revision to the December index, now at plus 0.8 percent vs an initial 1.6 percent. This hints at less strength for February existing home sales, sales that proved strong in last week’s January report which however is now a memory. This setback for resales follows last week’s sharp downward revision for December new home sales and together they point to a housing sector where growth is suddenly struggling.

Bad:

Highlights

Throw out the all the advance indications that show unusual acceleration in the factory sector, because the meat of the January durable goods report only shows the usual volatility behind which are sagging numbers for key readings. Aircraft, both domestic and defense, skewed durable goods orders sharply higher in January, up 1.8 percent to hit the Econoday consensus. Not hitting the Econoday consensus, however, are orders that exclude aircraft as well as all other transportation equipment. This reading fell 0.2 percent to come in well below Econoday’s low estimate for a 0.2 percent gain.

The worst news in the report is a 0.4 percent decline in orders for core capital goods (nondefense ex-aircraft). This ends 3 months of strength for this reading and pulls the rug out from expectations for a first-quarter business investment boom as indicated by business confidence readings.

Pulling the rug out from the whole factory outlook is yet another contraction for unfilled orders, down 0.4 percent and which have now fallen in 7 of the last 8 months. This is the deepest contraction since the recession and points squarely at lack of hiring for the factory sector. In other data, shipments are down 0.1 percent and inventories are unchanged to keep the inventory-to-shipments ratio unchanged at 1.61.

But aircraft is a big positive in this report though monthly gains are not likely to extend far, if at all. Upward revisions to December are a plus for fourth-quarter revisions while another positive is a 0.2 percent January gain for motor vehicles where the outlook however, given the strength of prior sales gains, is uncertain and will pivot on Wednesday’s release of February unit retail sales. Weak exports have been the Achilles heel of the factory sector and today’s report points to continued lack of demand for U.S. factory goods. Watch for advance data on goods exports in tomorrow’s trade report for January.


Ok, but check out the highlights:

Highlights

Yet another advance report, in yet another contrast with definitive data, is showing significant strength. Readings are very positive in the Dallas Fed February report including a nearly 5 point gain in production to a very strong 16.7 and a nearly 2-1/2 point gain for general activity to 24.5.

New orders, however, slowed by just more than 4 points to what is a still solid 11.6. Delivery times are taking longer and inventories of inputs are higher, both positive indications of demand. Input costs are up with wage growth solid. Selling prices are even showing traction.

This report may be getting a general lift from easy comparisons as the Dallas factory region is just emerging from 2 years of energy-related weakness. But the wider risk for anecdotal surveys like this one is that, in their low key methodology where respondents often offer general, not numerical, answers to questions, they are picking up improvement in sentiment as opposed to actual measurable improvement in dollars or volumes.

Still in deceleration mode:

Who would’ve thought ‘monetary policy’ doesn’t work (anywhere):

The World’s Most Radical Experiment in Monetary Policy Isn’t Working

Feb 26 (WSJ) — Japan is nearly four years into a Central Bank stimulus effort involving printing trillions of yen and guiding interest rates into negative territory. Bank of Japan governor Haruhiko Kuroda’s shock-and-awe stimulus, launched in April 2013, fizzled after a short-lived spurt of growth and rising prices. Japan fell back into deflation last year. In November, Mr. Kuroda postponed his goal of reaching 2% inflation. He said in a series of speeches last year that an entrenched “deflationary mind-set” stifled hope that wages or prices will rise, limiting the impact of monetary policies such as negative rates.

Auto sales, Deficit news, Budget news, Germany news, Japan news

Looks like a weak start for 2017:

From WardsAuto: Forecast: January Forecast Calls for Low Sales, High Inventory

The U.S. automotive industry is expected to a have a slow start in the new year, with January light-vehicle sales down 4.4% from like-2016. … The resulting seasonally adjusted annual rate is 17.0 million units, well below the 18.3 million in the previous month and 17.4 million year-ago.

December inventory was 9.2% above same-month 2015, the biggest year-over-year gap since the summer of 2014. Weak sales in January will keep inventory levels high, 16.0% greater than year-ago. A 93-day supply is expected to be available at the end of the month, a major jump from 62 days in December and 77 in January 2016.
emphasis added

Read more at http://www.calculatedriskblog.com/2017/01/vehicle-sales-forecast-sales-around-17.html#tsmvSK1MApIVDcKE.99

The positive, surprise zig up last month is now forecast to zag back down into negative territory, as previously discussed:

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The federal deficit remains far to small meaning the deceleration of the growth of output and employment we’ve seen over the last two years is likely to continue. That said, looks to me like tax revenues will continue to decline over the course of the next year due to earnings and employment weakness and therefore the federal deficit will be larger than this forecast indicates:

U.S. deficit forecast to shrink in 2017 but climb over next decade (Reuters) The CBO projected the deficit to fall slightly to $559 billion in fiscal year 2017, which ends on Sept. 30, compared to $587 billion a year earlier, and it was seen lower still in 2018 at $487 billion. After that, according to the CBO, deficits are expected to grow steadily over the next decade to $1.4 trillion by fiscal 2027. The CBO forecast that $8.6 trillion will be added to the federal debt over the next 10 years. The CBO also forecast U.S. real gross domestic product growth in calendar year 2017 at 2.3 percent, slowing to 2 percent in 2018.

As previously discussed, spending cuts are contractionary/deflationary, and far more potent than the proposed tax cuts:

Conservatives Try to Shape Donald Trump’s Budget Priorities (WSJ) President Donald Trump is expected to release next month the outlines of his first budget that will then be fleshed out later in March or April. Budget experts tasked to oversee the transition at OMB have been using pieces of a budget blueprint advanced by the Heritage Foundation. Altogether, the Heritage plan offers about $97 billion in discretionary spending cuts for the current year, equal to about 8% of discretionary spending and 2% of total spending. It proposed even larger cuts to automatic spending programs, including entitlements, for a combined $10.5 trillion in savings over a decade, or around 20% of all government spending.

More euro friendly news here:

Germany raises growth forecast for 2017 exports, imports (Reuters) Germany expects both exports and imports to grow faster this year than previously forecast, a government source told Reuters on Tuesday, providing an optimistic outlook despite fears of protectionism under U.S. President Donald Trump. The source in the right-left ruling coalition said the government expected exports to grow 2.8 percent in 2017, up from a previous forecast of 2.1 percent. Imports are forecast to grow by 3.8 percent, up from a previous estimate of 3 percent.

Yen friendly news here:

Japan exports up for first time in 15 months, U.S. protectionism poses risks (Reuters) Ministry of Finance data showed on Wednesday that exports rose 5.4 percent year-on-year in December. It followed an annual 0.4 percent decline in November. Shipments in terms of volume also rose 8.4 percent from a year earlier. In December, the value of exports to the United States rose 1.3 percent year-on-year. Exports to China rose 12.5 percent in December to 1.3 trillion yen ($11.44 billion). The data showed Imports fell 2.6 percent in the year to December, resulting in a trade surplus of 641.4 billion yen.

Rental tightness, Trump comments

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From the National Multifamily Housing Council (NMHC): Apartment Markets Soften in the January NMHC Quarterly Survey

— Apartment markets continued to retreat in the January National Multifamily Housing Council (NMHC) Quarterly Survey of Apartment Market Conditions. All four indexes of Market Tightness (25), Sales Volume (25), Equity Financing (33) and Debt Financing (14) remained below the breakeven level of 50 for the second quarter in a row.

“Weaker conditions are evident across all sectors as the apartment industry adjusts to changing conditions,” said Mark Obrinsky, NMHC’s Senior Vice President of Research and Chief Economist. “Rising supply—particularly during a seasonally weak quarter—is causing rent growth to moderate in many markets. At the same time, the sharp rise in interest rates in recent months was a triple whammy for the industry. First, higher rates directly worsen debt financing conditions. Second, the associated rise in cap rates also put a crimp in sales of apartment properties. Third, higher cap rates following the long run-up in apartment prices caused greater caution among equity investors.”

Read more at http://www.calculatedriskblog.com/#2WgZcWzbFIxpsveW.99

TRUMP’S VAINGLORIOUS AFFRONT TO THE C.I.A.

By Robin Wright

Jan 22 (The New Yorker) — The President’s remarks to the C.I.A. on Saturday, delivered in front of a hallowed memorial, stirred anger and astonishment among current and former agency officials.

The death of Robert Ames, who was America’s top intelligence officer for the Middle East, is commemorated among the hundred and seventeen stars on the white marble Memorial Wall at C.I.A. headquarters, in Langley, Virginia. He served long years in Beirut; Tehran; Sanaa, Yemen; Kuwait City; and Cairo, often in the midst of war or turmoil. Along the way, Ames cultivated pivotal U.S. operatives and sources, even within the Palestine Liberation Organization when it ranked as the world’s top terrorist group. In April, 1983, as chief of the C.I.A.’s Near East division, back in Washington, Ames returned to Beirut for consultations as Lebanon’s civil war raged.

Shortly after 1 p.m. on April 18th, 1983, Ames was huddling with seven other C.I.A. staff at the high-rise U.S. Embassy overlooking the Mediterranean, when a delivery van laden with explosives made a sharp swing into the cobblestone entryway, sped past a guard station, and accelerated into the embassy’s front wall. It set off a roar that echoed across Beirut. My office was just up the hill. A huge black cloud enveloped blocks.

It was the very first suicide bombing against the United States in the Middle East, and the onset of a new type of warfare. Carried out by an embryonic cell of extremists that later evolved into Hezbollah, it blew off the front of the embassy, leaving it like a seven-story, open-faced dollhouse. Sixty-four were killed, including all eight members of the C.I.A. team. It was, at the time, the deadliest attack on an American diplomatic facility anywhere in the world, and it remains the single deadliest attack on U.S. intelligence. (Only one of the thirty attacks on U.S. missions since then, in Nairobi, in 1998, has been deadlier.)

Ryan Crocker, the embassy’s political officer, had met with Ames earlier that day. Crocker was blown against the wall by the bomb’s impact, but escaped serious injury. He spent hours navigating smoke, fires, and tons of concrete, steel, and glass debris, searching for his colleagues.

“This is seared into my mind, irretrievably,” Crocker recalled for me this weekend. “There wasn’t an organized recovery plan, not in the initial hours after the bombing. I was de facto in charge that first awful night, when you dug a little and shouted out in case there was someone alive there, and then dug a bit more. Somewhere that night, I was on that rubble heap, and a radiator caught my eye. There was an object at the foot of the radiator. It looked like a beach ball, covered thick with dust. It was Bob Ames’s head.”

Ames left behind a widow and six children. He was so clandestine that his kids did not know that he was a spy until after he was killed. President Ronald Reagan and his wife, Nancy, saw the flag-draped coffins of the American victims arrive at Andrews Air Force Base, and met with the families of the deceased.

Reagan, who had known Ames, recounted the meetings in his diary, according to Kai Bird’s book about Ames, “The Good Spy”: “We were both in tears—I know all I could do was grip their hands—I was too choked up to speak.” More than three thousand people turned out for the memorial service at the National Cathedral for Ames and the other American victims.

On his first full day in office, President Trump spoke at the C.I.A. headquarters in front of the hallowed Memorial Wall, with Ames’s star on it. Since his election, Trump has raged at the U.S. intelligence community over its warnings about Russian meddling in the Presidential election. After CNN reported on, and BuzzFeed published, an as-yet unsubstantiated dossier about Trump’s ties to Russia and personal behavior, the President erupted on Twitter, “Intelligence agencies should never have allowed this fake news to ‘leak’ into the public. One last shot at me. Are we living in Nazi Germany?”

On Saturday, speaking to about four hundred intelligence officials, Trump blamed any misunderstanding on the media. “They are among the most dishonest human beings on Earth,” he said. (The official White House transcript notes “laughter” and “applause” here.) “They sort of made it sound like I had a feud with the intelligence community. And I just want to let you know, the reason you’re the No. 1 stop is exactly the opposite—exactly.”

Trump vowed greater support for America’s sixteen intelligence agencies than they had received from any other President. “Very, very few people could do the job you people do,” he said. “I know maybe sometimes you haven’t gotten the backing that you’ve wanted, and you’re going to get so much backing. Maybe you’re going to say, Please don’t give us so much backing. Mr. President, please, we don’t need that much backing.” Trump said he assumed that “almost everybody” in the cavernous C.I.A. entry hall had voted for him, “because we’re all on the same wavelength, folks.”

In his remarks, Trump made passing reference to the “special wall” behind him but never mentioned the top-secret work or personal sacrifices of intelligence officers like Ames and the others who died in Beirut, including the C.I.A. station chief Kenneth Haas, and James F. Lewis, who had been a prisoner of war in North Vietnam, and his wife Monique, who was on her first day on the job at the Beirut embassy. Nor did the President refer to any of the dozens of others for whom stars are etched on the hallowed C.I.A. wall of honor. It was like going to the Tomb of the Unknown Soldier and not mentioning those who died in the Second World War.

Trump’s unscripted remarks were, instead, largely about himself, even as he praised Mike Pompeo—a West Point and Harvard Law School graduate, Kansas congressman, and Tea Party supporter—as his choice to lead the C.I.A.

“No. 1 in his class at West Point,” Trump said. “Now, I know a lot about West Point. I’m a person that very strongly believes in academics. In fact, every time I say I had an uncle who was a great professor at M.I.T. for thirty-five years, who did a fantastic job in so many different ways, academically—was an academic genius—and then they say, Is Donald Trump an intellectual? Trust me, I’m like a smart person.”

Apparently as proof, the President noted that he had set an “all-time record” in Time magazine cover stories. “Like, if Tom Brady is on the cover, it’s one time, because he won the Super Bowl or something, right?” he told the intelligence officials. “I’ve been on it for fifteen times this year. I don’t think that’s a record that can ever be broken.” Time told Politico’s Playbook that it had published eleven Trump covers—and had done fifty-five cover stories about Richard Nixon.

Trump spoke briefly about eradicating “radical Islamic extremism,” a cornerstone of his foreign policy. But he devoted more than twice as many words to the dispute over the turnout at his Inauguration. “Did everybody like the speech?” Trump asked. “I’ve been given good reviews. But we had a massive field of people. You saw them. Packed. I get up this morning, I turn on one of the networks, and they show an empty field. I say, wait a minute, I made a speech. I looked out, the field was—it looked like a million, million and a half people.”

Crowd scientists who spoke to the Times estimated that about a hundred and sixty thousand people attended, compared with the record-setting 1.8 million who were estimated to have been at President Obama’s first Inauguration. Trump was defiant. “We caught them, and we caught them in a beauty,” he told the C.I.A. crowd. “And I think they’re going to pay a big price.”

Trump’s remarks caused astonishment and anger among current and former C.I.A. officials. The former C.I.A. director John Brennan, who retired on Friday, called it a “despicable display of self-aggrandizement in front of C.I.A.’s Memorial Wall of Agency heroes,” according to a statement released through a former aide. Brennan said he thought Trump “should be ashamed of himself.”

Crocker, who was among the last to see Ames and the local C.I.A. team alive in Beirut, was “appalled” by Trump’s comments. “Whatever his intentions, it was horrible,” Crocker, who went on to serve as the U.S. Ambassador in Iraq, Syria, Afghanistan, Pakistan, Lebanon, and Kuwait, told me. “As he stood there talking about how great Trump is, I kept looking at the wall behind him—as I’m sure everyone in the room was, too. He has no understanding of the world and what is going on. It was really ugly.”

“Why,” Crocker added, “did he even bother? I can’t imagine a worse Day One scenario. And what’s next?”

John McLaughlin is a thirty-year C.I.A. veteran and a former acting director of the C.I.A. who now teaches at Johns Hopkins University. He also chairs a foundation that raises funds to educate children of intelligence officers killed on the job. “It’s simply inappropriate to engage in self obsession on a spot that memorializes those who obsessed about others, and about mission, more than themselves,” he wrote to me in an e-mail on Sunday. “Also, people there spent their lives trying to figure out what’s true, so it’s hard to make the case that the media created a feud with Trump. It just ain’t so.”

John MacGaffin, another thirty-year veteran who rose to become the No. 2 in the C.I.A. directorate for clandestine espionage, said that Trump’s appearance should have been a “slam dunk,” calming deep unease within the intelligence community about the new President. According to MacGaffin, Trump should have talked about the mutual reliance between the White House and the C.I.A. in dealing with global crises and acknowledged those who had given their lives doing just that.

“What self-centered, irrational decision process got him to this travesty?” MacGaffin told me. “Most importantly, how will that process serve us when the issues he must address are dangerous and incredibly complex? This is scary stuff!”

Trump could have taken a page from Reagan, whom he has often invoked. In 1984, at a groundbreaking ceremony for an addition to C.I.A. headquarters, Reagan told the intelligence community, “The work you do each day is essential to the survival and to the spread of human freedom. You remain the eyes and ears of the free world. You are the ‘trip wire’ over which totalitarian rule must stumble in their quest for global domination. . . . From Nathan Hale’s first covert operation in the Revolutionary War to the breaking of the Japanese code at Midway in World War II, America’s security and safety have relied directly on the courage and collective efforts of her intelligence personnel.”

Bruce Riedel was a protégé of Ames at the C.I.A.; they travelled together in the Middle East. For more than three decades, he has made an annual visit to Ames’s grave at Arlington National Cemetery. He noted one glaring omission from Trump’s comments: a third of the stars are from deaths that have happened since 9/11, “making it more dangerous to work for the agency now than ever before.” He faulted Trump for not visiting the Counterterrorism Center, talking to the team now tracking Al Qaeda and Islamic State leaders, and seeing how drones work—all “invaluable experience when he later needs to make life-and-death decisions,” Riedel, now a senior fellow at the Brookings Institution, told me.

Paul Pillar, a Vietnam veteran, rose to become deputy director of the Counterterrorism Center and later the National Intelligence Officer in charge of the Middle East and South Asia. He, too, was anguished by Trump’s comments. “He used the scene as a prop for another complaint about the media and another bit of braggadocio about his crowds and his support,” Pillar told me Sunday. “That the specific prop was the C.I.A.’s memorial wall, and that Trump made no mention of those whom that wall memorializes, made his performance doubly offensive.”

At 7:35 a.m. on Sunday, Trump responded on Twitter to the negative reactions to his comments. “Had a great meeting at CIA Headquarters yesterday, packed house, paid great respect to Wall, long standing ovations, amazing people. WIN!”

But it’s hard to see how America’s new leader will recoup from a performance so shallow, irreverent, and vainglorious.

Payrolls, Factory orders, Foreign trade, Retailers, Boston rents

The year over year chart continues its 2 year deceleration unabated. No telling where it ends but the end will coincide with increased deficit spending, private or public:

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Highlights

Job growth may be the new economic policy but wage inflation may be the risk. Nonfarm payrolls rose a lower-than-expected 156,000 in December but, in an offset, revisions added a net 19,000 to the two prior months (November now at 204,000 and October at 135,000).

But the big story is another outsized 0.4 percent rise in average hourly earnings, the second such gain in three months. The year-on-year rate is now at 2.9 percent which is a cycle high. A 3 percent rate and above is widely seen as feeding overall inflation.

The unemployment rate is very low though it did tick up 1 tenth to 4.7 percent. Keeping the rate down is low labor participation, at 62.7 percent with the prior month revised down 1 tenth to 62.6 percent.

Sector payrolls show another sizable gain for trade & transportation, up 24,000, and a rare gain for manufacturing, up 17,000. Government added 12,000 jobs while a 15,000 rise for professional & business services is not only on the low side for this reading but includes a 16,000 decline in temporary help, a subcomponent that is especially sensitive to changes in labor demand.

There are hints of slowing job growth in this report but the wage pressure underscores the Federal Reserve’s expectations for three rate hikes during the year and raises the question whether the labor market, even before new stimulus under the incoming administration, is at an inflationary flashpoint. Other details include a lower-than-expected workweek, at 34.3 hours in December which is unchanged from a downwardly revised November.

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Jobs no longer exceeding up with population growth:

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Fewer ‘demographic’ effects here, though the average age of this group has gone up some over time:

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You can see that historically wage growth remains depressed, and in any case increased wages are more likely to reduce gross profit margins than to increases consumer prices:

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Decelerating back to recession levels:

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And, as previously discussed, I expect this get a lot more negative:

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Highlights

The nation’s trade deficit widened sharply in November, to a higher-than-expected $45.2 billion and well up from a revised deficit of $42.4 billion in October. Exports fell 0.2 percent in November while imports rose 1.1 percent.

The import side shows a significant rise in oil imports, up nearly $1 billion in the month to $9.9 billion (reflecting both an increase in volume and price). Petroleum is a key element for industrial supplies where imports rose $2.3 billion. Other readings are little changed with capital goods imports ticking lower and underscoring the nation’s lack of investment in new equipment.

And capital goods lead the downtick in exports, down $1.8 billion to underscore the lack of global investment in new equipment. Exports of civilian aircraft, which are a subcomponent of capital goods, fell $1.3 billion in the month. Exports of cars and of food products also moved lower, offset by a petroleum-related rise in industrial supplies.

By country, the deficits with Canada (-$2.6 billion) and the EU (-$14.8 billion) both widened sharply while the deficits with China (-$30.5 billion) and Mexico (-$5.8 billion) both narrowed. The deficit with Japan (-$5.9 billion) was little changed.

Today’s report represents a downgrade for fourth-quarter GDP which more and more will depend on how strong consumer spending was during the holidays. Watch next Friday for the retail sales report and the first definitive indication on December consumer spending.

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Retail sector tanks as Macy’s and Kohl’s get crushed by weak holiday sales

By Fred Imbert

Jan 5 (CNBC) – Average Boston-area rent falls for the first time in almost 7 years

Trade, Inventories, Proposals before Congress

As previously discussed, exports are falling and imports climbing, with lots more to go:

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Highlights

Trade looks to be a major negative that will be holding down fourth-quarter GDP. The advance trade deficit in goods widened sharply for a second straight month in November, to $65.3 billion following a revised $61.9 billion deficit in October that was nearly $5 billion higher than the last month of the third quarter, September.

Exports have been very weak so far this fourth quarter, down 1.0 percent in November following October’s 2.5 percent shortfall. Food exports have been especially soft as have vehicle exports, and capital goods exports fell very sharply in the latest report.

Widening the gap have been sharp increases in imports, up 1.2 percent on top of October’s upward revised 1.5 percent increase. Imports of industrial supplies posted a very sharp increase in November as did food imports. Most other readings on the import side are narrowly mixed.

Slowing sales growth caused inventories to increase, which leads to production cuts, as per the cuts in automobile production previously discussed:
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Highlights

Wholesale inventories jumped a preliminary 0.9 percent in November following an upward revised 0.1 percent decline in October. Retail inventories also jumped, up 1.0 percent in November following an unrevised 0.4 percent decline in October. The build in wholesale inventories is split evenly between durable and nondurable goods with the build on the retail side concentrated in vehicles. The increases in this report are a surprise and, though a positive for the fourth-quarter GDP calculation and an offset to this morning’s widening in the goods trade gap, will revive talk of unwanted inventories.

All of this ties into proposed trade policies designed to reduce imports and increase exports, for the further purpose of increasing domestic output and employment:

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The questions begin with what this would do to the value of the $US. Mainstream theory concludes that, all else equal, the $ would appreciate to offset the price effects of the ‘border adjustments’. While I agree $ appreciation would offset the price effects, given the forces currently at work I don’t see them pushing things in that direction.

First, mainstream theory would say the current trade balances should ‘fundamentally’ be driving the dollar lower. The US has a large and growing trade deficit, while the euro zone has a large and growing trade surplus, with China also in surplus and Japan working its way back to surplus, etc.

However, while trade has been ‘fundamentally’ working against the $, portfolio shifting, a ‘technical’ force, has been going the other way. (Personally I often use the term ‘savings desires’ to indicate the various desires to hold financial assets of a particular currency.) As previously discussed, for example, the euro area had ‘capital outflows’ of over 500 billion euro over the last year or so, which means portfolio managers of all types with euro financial assets sold them and switched to financial assets denominated in other currencies, such as $US, yen, and Swiss francs (with the Swiss National Bank then selling maybe half of the euros they bought and buying $US). This would be analogous to a crop failure such as the corn crop being reduced by drought, for example. The drop in supply would be a force that would put upward pressure on the price of corn. However, is a company with a very large warehouse full of corn decided to sell it, that selling could dominate and drive the price lower, until the warehouse was empty. Only at that point would the effects of the crop failure dominate, and then drive the price higher.

So technicals (portfolio shifting) can overwhelm fundamentals (trade balances) for long periods of time until the technical force has run its course, and the warehouse is either empty or as low as the portfolio manager wants it to be. In fact, this time around, while the trade flows were presumed to reduce the US trade deficit via lower prices for imported oil, and therefore be supportive of the $, it didn’t work out that way, however, as lower oil prices were partially ‘offset’ by reductions of global income from the lower oil prices, which reduced US exports, and increasing US consumer related imports.

Second, I’m not comfortable with the idea that US export prices will go down if the revenues are no longer taxed. Prices in this case are ‘world prices’ and to the extent the US exporters are ‘price takers’ I don’t see how a lower cost of goods will necessarily result in a drop in global prices any more than, for example, reducing income taxes on oil would cause the price of oil to fall. Yes, longer term, lower costs might bring out more supply, but that’s a different and much longer term story.

Nor do I see the quantities of US exports going up even if the proposed border tax policy results in a reduction in the price of US exports, given the general weakness of global demand. And more specifically, who would buy more US exports if prices were maybe 15% lower, for example? China? Japan? India? I don’t see it.

Third, I do see US imports softening with the proposed import tax, which means an equal reduction of $ revenues to the rest of the world, which means they are likely to buy fewer US exports. This is similar to what happened when the price of oil fell, and the US spent less buying oil from the rest of the world, and that reduction of $ income reduced the demand for US exports.

This is also a strong channel for a general reduction in global aggregate demand.

Now back to the value of the $. Yes, the border tax policy could over time reduce the US trade deficit and thereby be a fundamental force that works towards $ appreciation. However, current fundamentals- the growing US trade deficits- have been and are currently working in the other direction. So what I happening would be a moderation of the fundamental trade flows that have been and are currently working to weaken the $, even as the portfolio managers- the technical forces- continue to deplete their non $ currencies and buy $. And when those currency warehouses are depleted, current trade flows will take over and drive the $ down until they reverse, with the proposed border tax policy perhaps slowing the $’s fall.

To sum up, the way I see it is the current fundamentals overwhelmingly negative for the $, with the proposed border adjustment tax policy at best a much smaller force in the other direction.

Not to mention I’m categorically against it all for more macro reasons. Imports are real benefits and exports real costs, the difference being real terms of trade, which are optimized by running as large a trade deficit as possible. And any lack of aggregate demand for domestic goods and services that results in undesired unemployment if instead best addressed by a fiscal adjustment- lower taxes or more public spending. But in a world where that understanding doesn’t exist, we get these types of highly counterproductive proposals that ultimately and necessarily make things worse.

Post script:

Seems to me it’s just a matter of time before Trump proposes the US start buying and building foreign exchange reserves to counter the strong $, which he has said many time is about ‘currency manipulation’. With the general notion that his other proposals, such as repatriation, will also have strong $ biases, seems to me it’s just a matter of time until we see fx purchases proposed?

Redbook retail sales, Pending home sales, Stock buy backs, Spending, Japan stocks, Bank regulation, UN resolution

This is the time of year when year over year growth tends to increase, pulling up the rest of the year’s growth. But note how that increase has declined along with the general increases:

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Along with what looks to me like Trumped up expectations actual sales remain depressed:

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Any expected Trump bump in home sales didn’t materialize in contracts for homes signed in November.

Higher mortgage rates hit home sales, driving the National Association of Realtors Pending Home Sales Index down 2.5 percent in November from October, the NAR reported Wednesday. Analysts had forecast a 0.4 percent gain in the index, which is now 0.4 percent lower than a year ago and at its lowest level since January.

Stock buy backs are an alternative to paying dividends. On difference is that $ paid as dividends constitute income taxable at the going dividend tax rate, while the $ spent to buy back shares are only taxable to the sellers of the shares to the extent there are capital gains. So, just as an educated guess, with buy backs taxable income is reduced by perhaps 90%.

Also, repatriation may or may not happen, and it may or may not result in any change in investment, or even stock buy backs. All it does is reclassify income as domestic rather than foreign, which may or may not lead to further consequent actions by those corporations:

Surging Buybacks Say Stock Boom Isn’t Over

By Corrie Driebusch and Aaron Kuriloff

Dec 26 (WSJ) — Through Dec. 16, companies this month have stepped up their buybacks by nearly two-thirds over the same period last year, according to Goldman Sachs. Goldman forecast that S&P 500 companies will repatriate $200 billion of their $1 trillion in cash held overseas in 2017 and that $150 billion of those funds will be spent on share repurchases. From the start of 2009 to the end of September 2016, companies in the S&P 500 spent more than $3.24 trillion repurchasing shares, according to S&P Dow Jones Indices. In the first three quarters of the year, companies in the S&P 500 spent just over $400 billion on stock buybacks, down from the $426 billion in the same period last year, according to S&P Dow Jones Indices. For all of 2015, $572 billion went to buybacks.

Sales estimates have been revised a bit higher:

Last-minute spending surge lifts U.S. holiday shopping season

By Nandita Bose

Dec 28 (Reuters) — Brick-and-mortar sales in the week ending Dec. 24 rose 6.5 percent year-over-year after having fallen for the rest of the month, according to data from analytics firm RetailNext. Strong demand for furniture, home furnishings and men’s apparel from the start of November through Christmas Eve pushed U.S. retail sales up 4 percent, higher than the previously expected 3.8 percent, according to data from MasterCard’s holiday spending report. Craig Johnson, president of consultancy Customer Growth Partners, now estimates sales growth of 4.9 percent in November and December, up from his initial estimate of 4.1 percent.

The theory is something like “higher stock prices will help the economy”:

BOJ the top buyer of Japanese equities

Dec 25 (Nikkei) — According to data through Thursday, the value of the BOJ’s ETF purchases this year has topped 4.3 trillion yen, up 40% from 2015. Last year, the central bank bought more than 3 trillion yen worth of ETFs. While foreign investors sold more than a net 3.5 trillion yen worth of Japanese shares through Dec. 16, trust banks, including those commissioned by the Government Pension Investment Fund, bought a net 3.5 or so trillion yen worth of shares. This year, the BOJ increased its buying after doubling its annual ETF goal to purchase 3 trillion yen worth of the instruments. The value of the bank’s ETF holdings, based on purchase prices, is 11 trillion yen. Unrealized gains send the market value to 14 trillion yen.

Interesting but backwards, in my humble opinion. That is, if a foreign bank wants to give us $ we can’t pay back, and then the foreign bank fails, and we aren’t insuring their deposits, seems it’s their problem, not ours? In fact, it’s our gain?

Protectionist Walls Are Popping Up…Around Banks

By John Carey

Dec 26 (WSJ) — Financial regulators around the world have increasingly shied away from developing globe-spanning rules in favor of shoring up the financial system in their local purviews. Last month, the European Union proposed rules that would require big foreign banks to hold extra capital within EU borders, a step that echoes a recent U.S. rule for some large, non-U.S. banks. Rules with similar aims also have been rolled out in Switzerland and the U.K. The proliferation of the new rules demonstrate an increasing willingness of banking regulators to act independently of each other to protect the strength of their own financial systems.

Another view on the latest UN resolution the US didn’t veto:

The consequences of not vetoing the Israel resolution

Trade, Factory orders, Redbook retail sales, Saudi pricing, Comments on Trump tactics

Trade deficit moving back out. I expect a lot more to come this quarter and next. Oil is getting more expensive and the quantity imported is up as well. The ‘one time’ soybean export bulge is behind us, and global trade in general has slowed.

Wouldn’t surprise me if Trump responds by having the US start buying foreign currencies, which would send the dollar lower to offset ‘foreign currency manipulation’. And, of course, he’d show a ‘profit’ in fx purchases as the dollar falls:

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Highlights

The nation’s trade deficit widened substantially in October, to a higher-than-expected $42.6 billion and reflecting a 1.8 percent decline in exports and a 1.3 percent rise in imports. The nation’s trade deficit in goods totaled $63.4 billion offset only in part by a small rise in the trade surplus in services to $20.8 billion.

Goods exports were soft across the board including for foods/feeds/beverages (down $1.4 billion in the month) and also industrial supplies (down $1.0 billion). Exports of consumer goods fell $0.9 billion with exports of capital goods, barely in the plus column, held down by a $0.6 billion dip in civilian aircraft. The offset is services exports which at $63.3 billion is the highest on record and largely reflects global demand for the nation’s technical and managerial services.

The import side of the data show heavy U.S. buying, at a $231.3 billion total in the month which the highest since August last year. Details show a $1.1 billion increase in capital goods which is a negative for the national accounts but a positive for the nation’s productive investment. Imports of consumer goods shot up $2.4 billion ahead of the holidays.

By country, the gap with China narrowed by $1.4 billion to $31.1 billion reflecting unusually high U.S. exports to China. The gap with the EU widened to $13.1 billion, with Mexico to $6.2 billion and with Japan to $5.9 billion.

The widening trade deficit in October gets the net export component of fourth-quarter GDP on the wrong foot.

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As previously discussed, manufacturing is a lot smaller than the service sector, and after falling to lower levels with the collapse in oil related capital expenditures growth is resuming at the lower levels, as the lack of aggregate demand moves deeper into the service sector:

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Highlights

October was a very strong month for the factory sector as durable goods orders rose 2.7 percent. Aircraft (both civilian and defense) was October’s special strength, excluding which the gain in orders falls sharply but still comes in at a very solid 0.7 percent. Another plus in the report is a 3 tenths upward revision to September to plus 0.6 percent, a gain driven by an upgrade for aircraft orders in that month.

Core capital goods orders (nondefense excluding aircraft) did rise in October but not much, up only 0.2 percent and well short of offsetting a 1.5 percent decline in September. Weakness here points to trouble for business investment in the fourth-quarter GDP report. And shipments for this category have gotten off to a bad start in the quarter, down 0.1 percent in October.

But other readings are favorable including a useful 0.4 percent rise in total shipments and a 0.7 percent gain for unfilled orders which had been in long contraction. Inventories are not a problem in the sector, unchanged in the month with the stock-to-sales ratio holding at 1.34.

Advance readings on factory conditions in November have been mostly positive which, together with this report and a respectable 0.3 percent gain for the manufacturing component of the industrial production report point to year-end momentum for a sector that has otherwise had a flat 2016.

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120611

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Inventories still high and working their way lower:

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Growth falling back from the mini spike up. A ‘normal’ economy, before the collapse in oil capex, used to show 3-4% increases and more:

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Looks like a price cut, indicating they don’t want prices up quite this high?


*Saudi arabia cuts all Jan OSPS to US except for extra light
*Saudi Arabia raises diffs on all grades to NWEur/MED
*Saudi Jan Arab Light to Asia at -75c vs plus 45c
*Saudi cuts Jan pricing for light crudes to Asia.

The job of the executive branch, headed by the President, is to enforce the law.

And it’s perfectly legal for companies to move production, etc. to other countries.

However, the President elect is seeking to have companies that are acting legally alter their business plans by using leverage/retribution such as threatening tariffs and altering govt. contracting terms and conditions.

Unconstitutional abuse of executive power?

Chicago Fed, Japan, China, UK, US container counts, Euro area savings desires, Fed comment, Dividends comment

Still in the red:
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This is not a good sign for global demand. And Japan’s continuing trade surplus recently enhanced by the falling yen isn’t a positive for US GDP:

Japan’s trade surplus grows 4.7-fold in October

Nov 21 (Kyodo) — Japan’s trade surplus expanded 4.7-fold in October from a year earlier to 496.17 billion yen ($4.5 billion). The value of exports dropped 10.3 percent from a year earlier to 5.87 trillion yen while imports plunged 16.5 percent to 5.37 trillion yen. Exports to China fell 9.2 percent to 1.07 trillion yen while imports dived 17.9 percent to 1.42 trillion yen. Japan’s shipments to the United States dropped 11.2 percent to 1.20 trillion yen while imports fell 9.9 percent to 616.82 billion yen. Exports to the European Union declined 9.5 percent to 650.49 billion yen while imports shed 12.0 percent to 674.89 billion yen.

Weak foreign demand since the collapse of oil capital expenditures:

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Same with China, and no word yet from President Trump on ‘currency manipulation’ and ‘competitive devaluation’:

China Devalues Yuan For Longest Streak Ever To 8 Year Lows – ZeroHedge – http://bit.ly/2fwiIMc
…(6.8985 vs. Friday at 6.8796) For the 12th consecutive day, China has weakened the official fix of the Yuan against the USD, slashing its currency by over 2.2% in that time

And no push back on this statement tells me global demand can’t go anywhere but down:

UK’s Hammond says budget options constrained by high debt – http://reut.rs/2gsIZzg
…Britain’s first budget plan since the Brexit vote will not include a big new spending push because of “eye-wateringly” high public debt levels, but will have some help for the economy and struggling families, the country’s finance minister said.

The red line, imports, remain in negative territory on a year over year basis:

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As previously discussed, with govt. a large net payer of interest to the economy, rate cuts remove material levels of income from the economy, which constrains borrowing:

Negative Rates Are Failing to Halt Savings Obsession in Europe – http://bloom.bg/2g7ONK6

Why would we want to compete with billions of other consumes for real resources?

Fed’s Powell says Asian economies should boost domestic demand – http://reut.rs/2fiHF05

Consequences of the collapse in global oil capital expenditure continue:

Global dividends stumble as US growth drops to post-crisis low -Telegraph – http://bit.ly/2fwd253

Bannon, DB on repatriation, The $

The big stupid continues uninterrupted from regime to regime:

Documentary Of The Week: Stephen Bannon Explains America’s Problems

By John Lounsburry

Nov 15 (Econintersect) — Econintersect: This lecture was presented to the inaugural session of the Liberty Restoration Foundation in Orlando, FL October, 2011.

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Stephen Bannon, the CEO of Donald Trump’s successful presidential campaign and to-be Chief Strategist in the Trump White House, describes his view of what is wrong with America in 2011. He maintains that:

The U.S. cannot meet its future obligations.

The Fed makes payments by crediting member bank accounts. There is no operational constraint on this process

Government spending is sucking money out of “everything else”.

Government spends via the fed crediting a member bank account. Total dollar bank balances are increased by exactly that amount. Nothing is ‘sucked out’.

The trade deficit is the “beating heart” of our economic problems.

As for the trade deficit, imports are real benefits, exports real cost. Real wealth is domestic production + imports – exports. It’s the policy response to imports that turns a good thing into a bad thing, not the import per se. When unemployment goes up due to imports (or for any other reason), the constructive policy response is to support aggregate demand/sales/output/employment with a fiscal adjustment – lower taxes or higher public spending. That is, net imports give a nation ‘fiscal space’ to make a fiscal adjustment that sustains domestic full employment, and with better jobs than the ones that were lost. And that way we also optimize what’s called our ‘real terms of trade’, which is what we can import vs what we have to export.

The Tea Party understands what’s wrong with America because members know the price of a bag of groceries.

Whatever!!!

We are passing on zero net worth to our children.

The public debt is the total dollars spent by govt that have not yet been used to pay taxes, which constitutes the net financial assets of the economy, aka ‘net nominal dollar savings’ of the economy.

This man is the new president’s Chief Strategist.

Mercy…. :(

FROM DB:

A reform of the US corporate tax code is very high on Donald Trump’s agenda. With trillions of American corporate profits sitting offshore due to punitive repatriation rates, a potential change in policy could have material market implications. In this report we attempt to answer some frequently asked questions on the topic. While the amounts involved may be smaller than what is commonly assumed, we argue there would be material implications for both the dollar and particularly the cost of dollar funding. In the event the tax reform is permanent, it is the absence of a future pool of reliable dollar liquidity for European and other foreign banks that will likely have the biggest impact in particular.

Link: http://pull.db-gmresearch.com/p/11390-5D2D/86468804/DB_SpecialReport_2016-11-17_0900b8c08c0effb3.pdf

1. How much offshore earnings can US corporates bring back?

Answer: about $1 trillion
It is important to distinguish between unrepatriated earnings and cash. A substantial portion of US profits are re-invested into foreign operations and capital expenditure and are therefore very sticky. Cash and liquid assets are a subset of unrepatriated earnings and are the most relevant metric to look at: it is this pool of dormant savings that is the most likely to be brought back to the US in the event of a change in tax treatment.

How big are the numbers? The upper bound can be calculated by looking at re-invested earnings from the US national accounts. Cumulative re-invested earnings since 1999 currently stand at more than $3 trillion according to the BEA (chart 1). The number is not reflective of the amounts that can be brought back however. A bottom up analysis of S&P 500 companies by our equity analysts estimates that the total amount of liquid assets held offshore is closer to $1 trillion.* We would consider this as a reasonable lower bound given that S&P 500 reporting companies only account for a portion of US total market capitalization but include the vast majority of US listed multinationals. The number is also broadly consistent in order of magnitude with the “currency and deposits” item on the US international investment position, currently about $1.7trn

2. What currency are these earnings denominated in?

Answer: 90% is probably in dollars
It is difficult to provide an accurate answer to this question because the vast majority of companies don’t outline the currency composition of their holdings. Three of the largest tech companies that disclose some detail indicate that the majority of foreign earnings are already denominated in dollars. Oracle has an explicit currency breakdown in its reports with 10% of offshore profits denominated in foreign currency. Microsoft has a similar breakdown. Apple states that foreign subsidiary cash is “generally based in US dollar-denominated holdings” but doesn’t give a figure. Broadly speaking, expectations of a medium-term dollar appreciation trend, poorly yielding alternatives, the desire to avoid balance sheet mismatches and the availability of dollar-denominated assets offshore all point to most foreign profits as already being converted into USD.

3. Where are these earnings located?

Answer: mostly in Europe
Data on the location of foreign unrepatriated cash is also hard to come by. A top-down metric can be obtained from the BEA re-invested earnings data broken down by region. Cumulating earnings over the last five years, we find that the vast majority is located in the Eurozone, followed by the UK. An alternative bottom-up analysis that looked at IRS data and earnings of Fortune 500 companies leads to the same conclusion, with most profits held in the Netherlands, Ireland and Luxembourg.**

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4. How much of the earnings are in cash?

Answer: probably about 25%, with the rest in other financial assets, mostly US fixed income

Whether corporate profits are held in cash compared to other liquid assets has important market implications. There is no top-down data available, but our analysis of twelve companies with some of the largest offshore cash balances suggests that close to 75% of balances are in investments, and only 25% are held in cash or cash equivalents. These primarily consist of deposits held at major banks, tier-1 commercial paper and money market instruments with original maturities of less than 90 days. The securities that these companies invest tend to be liquid, short term instruments.

For instance, 83% of Microsoft’s investments consisting of US government and agency securities. Similarly, Oracle’s investments are ‘generally held with large, diverse financial institutions’ that meet investment grade criteria. All securities are ‘high quality’ with 28% having maturities within a year and 72% having maturities between 1-6 years.

5. What are the market implications?

Answer: it depends on the US corporate tax reform. Positive for the dollar and negative for dollar funding. The impact is less than the headline numbers suggest but still material given how large the numbers involved are.

The closest parallel to the impact of corporate tax repatriation is the 2005 US Homeland Investment Act (HIA). This temporarily allowed companies to bring back foreign profits at a 5.25% tax rate. US FDI spiked during that year and the dollar rallied by 7%. A number of lessons can be learnt from that episode. First, a temporary tax holiday is likely to have a more material upfront impact as it would force repatriation within a shorter time frame. A permanent change would lessen the immediate impact but is likely to be bigger medium-term as it would apply to future earnings as well. Second, the tax rate applied to foreign earnings matters. The lower this is the bigger the likely repatriation. Finally, the broader context and market narrative matters: a number of positive dollar stories took place in 2005, inclusive of a Fed hiking cycle.

First, a 7% dollar rally for the year isn’t all that much, and it reads like even DB agrees it can be attributed to other factors.

We see a corporate tax reform as having a material impact on both the dollar and the cost of dollar funding.

  • Dollar The indirect impact on the dollar is just as important as the direct “conversion” impact. With 90% of profits already held in the greenback we are left with an (upper bound) estimate of 100bn dollars that may need to be converted. Even if much smaller than the headline reported and even if a smaller portion is converted, this amount is material compared to an annual US current account deficit of $500bn. More importantly, the second-order effect may be even greater. A profit repatriation that boosts business confidence and is deployed into capital spending will be positive for the dollar via higher growth and Fed expectations.
  • First, earnings can be ‘repatriated’ without converting anything, as my understanding is it’s just a matter of reporting and accounting for the dollar value of past earnings as domestic income.

    Second, I see no reason why any company would increase capital spending just because foreign earnings from past years are suddenly accounted for as domestic earnings at a lower tax rate. DB is implying that companies have been deferring capital spending due to current tax law, even with adequate liquidity and access to funding.

  • Tighter funding, wider cross-currency basis Even if foreign profits are held in dollars, the impact on the cost of offshore dollar funding can be material if a repatriation shifts liquidity away from European and other foreign banks to the US. The implication is that cross-currency dollar basis would be pushed wider. Our bottom-up analysis in section 4 suggests that about 250bn dollars currently sit in cash or near-cash dollar liquidity that has the potential to be moved back to the US. Compared to the approximately 200bn withdrawal of dollar liquidity from Eurozone and Japanese prime money market issuers following recent US reforms the amounts are material. Most importantly, this is likely a lower bound on the potential liquidity impact. While corporate may be able to shift the custodial location of Treasury holdings onshore without pulling liquidity from offshore banking systems, it is not clear this can be achieved for asset manager mandates or holdings of non-US resident issuers such as Eurodollar corporate bonds. In the event that the corporate tax reform is permanent, it is likely the absence of future dollar liquidity from US corporate profits will have the most material medium-term impact: approximately 300bn of US earnings are re-invested each year, and the shift of parts of this flow of reliable dollar liquidity to the US would be a negative supply shock for offshore dollar funding.
  • Allow an example: assume a client has $100 billion in DB NYC, and $100 billion in DB London. Repatriation simply means he shifts the $100 billion in his DB London account to DB NYC account. And DB now has the entire $200 billion in its account at the Fed. DB’s overall liquidity has not changed. And if a DB client in the Euro zone wants to borrow $ from DB, DB is just as able to make that loan as before the repatriation.

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    [The author would like to acknowledge Suhaib Chowdhary for his invaluable assistance]

    George Saravelos
    FX Research

    Deutsche Bank AG, Filiale London
    Global Markets
    1 Great Winchester Street, EC2N 2DB, London, United Kingdom
    Tel. +44 20 754-79118

    My conclusion remains. Repatriation as a source of funds is being grossly over estimated

    Trump has been big (huge) on threatening the likes of China with currency manipulation, aka yuan depreciation vs the $. Same with yen, euro, etc. all threatening the Trump rust belt revival constituency, etc.

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    So now, a week after his election, the gauntlet has been throw, as the $US reaches new highs, and I suspect we’ll soon see how the big guy responds:

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    Mortgage purchase apps, ADP employment, International trade, PMI services, ISM services, Factory orders

    The year over year change not looking so good:

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    Highlights

    Purchase applications for home mortgages were down just 0.1 percent from the prior week in the September 30 week, but the comparison with the year ago week plunged sharply into deeply negative territory at minus 14 percent. Refinancing applications were up 5.0 percent from the prior week, however, as more mortgage holders seized the opportunity to refinance with lower interest rates. The refinancing share of mortgage activity increased to 63.8 percent, up 1.1 percentage points from a week ago. Mortgage rates fell to the lowest level since July, with the average interest rate on 30-year fixed-rate conforming loans ($417,000 or less) falling 4 basis points to 3.62 percent.

    Employment growth continues to decelerate:

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    Highlights

    ADP is looking for significant slowing in employment growth for September, to 154,000 for its private payroll estimate vs a slightly revised 175,000 in August. The Econoday consensus for private payrolls in Friday’s report is 170,000 but today’s ADP result will definitely raise talk of a lower print.

    In the old days a drop in oil prices would cause the US trade deficit to decrease. But as previously discussed, this time it didn’t happen. And now with lower US oil production and more oil and product imports, higher prices will increase the trade deficit:

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    Highlights

    The nation’s trade deficit widened by $1.2 billion in August to $40.7 but details are positive. Exports of capital goods, excluding aircraft, actually rose slightly to $37.6 billion while imports of capital goods were up $1.2 billion to $50.2 billion. These results hint at badly needed strength for cross-border business investment. When including aircraft, however, capital goods exports fell $0.7 billion in what is the lowest result in nearly 5 years.

    Total exports in August rose 0.8 percent, which is another positive, while imports rose 1.2 percent. The gain for imports is a subtraction in the national accounts but it does point to solid domestic demand, specifically once again for capital goods. The trade gap for goods is unchanged from July at $60.3 billion while the trade surplus for the nation’s services, in what is a superficial negative in the report, fell $1.2 billion to $19.6 billion for the lowest showing since December 2013. But the dip in services reflects $1.2 billion in broadcast payments for the Olympics.

    By countries, the gap with China widened by $3.6 billion to $33.9 billion while the gap with the European Union widened by $1.6 billion to $13.9 billion. The gap with Japan edged lower to $6.0 billion.

    Today’s results may lower third-quarter GDP estimates but the export reading excluding aircraft is a subtle positive for the economic outlook.

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    Up a bit but some troubling details:

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    Highlights

    Service sector growth is improving, at least that’s what Markit’s U.S. sample is reporting. The composite index for September is 52.3, up slightly from 51.9 in the month’s flash reading and up solidly from a 5-month low of 51.0 in August. But the composite hides what is disappointing slowing in new orders which are at their weakest growth rate since May. And in a negative indication for Friday’s employment report, hiring slowed to a 3-1/2 low in the month. Reports from Markit, unlike other reports, continue to cite uncertainty over the presidential election as a negative factor. A positive in the report is a third straight build in backlog orders which posted their second best gain since April last year. But another negative is a near recovery low in 12-month optimism. Input costs and selling prices are both very subdued. Watch for the ISM non-manufacturing report later this morning at 10:00 a.m. ET.

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    Hard to say what’s going on here! I suppose it can be said that monetary policy is finally kicking in and the good times are back!!!
    ;)

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    Highlights

    August was a weak month for the ISM non-manufacturing report but not September! The composite index shot up to 57.1 from August’s recovery low of 51.4 which now looks like a very odd outlier for this report which otherwise has been consistently strong this year. And new orders are especially strong, up nearly 9 points to 60.0 which points to brisk activity for other readings in the months ahead. Employment is also a very solid plus in the report, up 6.5 points to 57.2 which is the strongest rate of growth since September last year. This particular reading will help offset some of the disappointment over this morning’s weak estimate from ADP. Service exports are a specific strength of the U.S. economy and this report points to September gains, at 56.5 for the best reading in a year. Business activity is at 60.3, again very strong, with total backlog orders back in the plus column at 52.0. The great bulk of the nation’s economy accelerated sharply at the end of the third quarter, at least based on this report.

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    Returning to earth, not looking so good here. August up a bit more than expected but July revised down more than that, and year over year orders remain in contraction:

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    Highlights

    Throw out the headline and look at capital goods. Factory orders in August edged only 0.2 percent higher but core capital good orders (nondefense ex-aircraft) jumped 0.9 percent following very impressive gains of 0.8 percent and 0.5 percent in the prior two months. These results point to a rebound for business investment which otherwise has been depressed this year.

    But the new orders for capital goods will take time to fill and in the meantime business is slow as shipments of core capital goods slipped 0.1 percent following a July dip of 0.7 percent. These two readings will hold down nonresidential investment in the third-quarter GDP report, but that’s pretty much ancient history.

    Other readings include no change for total shipments, a fractional dip of 0.1 percent in unfilled orders, and a constructive 0.2 percent build in inventories. In sum, this report is a positive for the economic outlook.

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