Mtg purchase apps, Durable goods orders, Pending home sales, Rental vacancy, International trade, Trump threat

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Highlights

Disruption tied to a fire at an auto supplier not only pulled down the previously released manufacturing component of the industrial production report but it also helped pull down durable goods orders in May which fell an as-expected 0.6 percent. Vehicle orders fell 4.2 percent in the month with vehicle shipments down 4.4 percent. Civilian aircraft orders, which had been very strong earlier in the year, fell for a second month, down 7.0 percent following April’s 30.3 percent downswing. Excluding vehicles and civilian aircraft as well as all other transportation equipment, orders were still lower, down 0.3 percent to barely make Econoday’s consensus range.

Also barely making the consensus range are core capital goods (nondefense ex-aircraft) which fell 0.2 percent though here an upward revision to April, to a 2.3 percent surge and more than double the initial reading, is a major offset. Shipments for this reading, which are inputs into business investment for second-quarter GDP, are mixed, down 0.1 percent in May but with April revised 1 tenth higher to an even stronger 1.0 percent gain.

Turning to tariff-exposed readings, orders for primary metals slipped 0.4 percent following, however, April’s upward revised 2.4 percent gain and March’s 4.7 percent spike, with fabrications, which are indirectly affected by tariffs, down 1.2 percent following gains of 3.3 and 1.3 percent in the prior two months. The May declines for these two components, which make up more than 20 percent of total durable orders, hint at a cool down following a buying surge immediately following the tariffs

Yet another housing indicator slumping:

Highlights

The resale market has been flat and may be about, despite the strength for new home sales, to turn lower. The pending home sales index for May fell 0.5 percent to just make the low end of Econoday’s consensus range. Weakness in the report is concentrated in the South which is by far the biggest housing region and where contract signings for resales have fallen 3.5 and 1.0 percent the last two reports. These results underscore recent home-price updates including yesterday’s Case-Shiller report that point to ebbing price appreciation for existing homes.

Pending Home Sales Inch Back 0.5 Percent in May

Pending home sales decreased modestly in May and have now fallen on an annualized basis for the fifth straight month, according to the National Association of Realtors®.

Read more at http://www.calculatedriskblog.com/#IAob0xYYZsAR5XfE.99

Smaller deficit than expected, but, again, signs of volatility due to timing and expectations of tariffs, and the drop in consumer imports is most often due to a general drop in US consumer spending, and not an increase in purchases of domestically produced goods and services. And most recently oil prices have moved higher:

Highlights

Forget about tariffs and trade wars. Exports in May surged a convincing 2.1 percent to pull down the nation’s goods deficit to a much lower-than-expected $64.8 billion in May. The results will add further to second-quarter GDP forecasts where high-end estimates were already approaching 5 percent.

The export gain is led by a 12.8 percent monthly jump in foods & feeds and includes a 3.7 percent gain for capital goods which are the nation’s strongest exports. And consumer goods also rose, up 3.2 percent. The overall gain comes despite a 3.1 percent decline in industrial supplies, a component where swings in oil prices dominate.

Imports were nearly neutral in May, up only 0.2 percent following a 0.4 percent decline in April. Auto imports fell 1.2 percent in the month with consumer imports, which is the Achilles heel of U.S. trade, down 1.0 percent. Imports of industrial supplies, again reflecting oil prices, fell 0.7 percent. A category that shows a gain, and here perhaps a welcome one pointing to rising business investment, is imports of capital goods which jumped 3.4 percent.

This is a very healthy report and it may offer a signpost of the nation’s trade performance going into a summer of cross-border discontent.

Trump threatens Harley-Davidson: If it moves operations overseas, ‘they will be taxed like never before!’

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New home sales, OPEC, Tariffs, bank lending

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Up more than expected, but last month revised quite a bit lower as well, as housing overall remains depressed:


This is not population adjusted:

OPEC ministers strike deal on oil production levels

  • A source confirmed to CNBC that a deal has been struck and a statement critical of the U.S. that Iran wanted to include would not be in the final communique.
  • A report from Reuters put the agreed upon level at a boost in oil output by around 1 million barrels per day (bpd).
  • The market is awaiting a press conference with oil ministers for more details on the agreement.

    • First, the Saudis remain as price setter, setting price through their discount policies and then selling all the crude their refiners want to buy at those prices.

    So for any given level of demand, opec members will now be able to sell up to 1 million barrels per day more, if they can produce it. Most have probably already been reasonable close to producing at full production, so their total increases are likely to be maybe 500,000 bpd.

    Therefore, if non Saudi production does increase, for any given level of demand the Saudis will see that much less demand for their output, which would then fall by that amount.

    That means the Saudi’s price setting policy remains unchanged.

    Tariffs that hit companies are (ultimately) passed through to consumers:

    Trump administration’s new tariffs hit US consumers less, companies more

  • Consumer goods account for 1 percent of items on the June 15 lists from the the U.S. trade representative, down from 12 percent on the April 3 list, according to a report from the Peterson Institute for International Economics.
  • The revisions follow public pushback and come as Republicans try to hold their majority in Congress during November’s midterm elections.
  • For its part, Beijing’s new tariff lists “stayed far away from supply chains. They wanted to signal to the rest of the world that they are still a good place to provide value,” said Mary Lovely, economics professor at Syracuse University and nonresident senior fellow at the Peterson Institute.

    • Carver Yachts reports that it has already had two orders from Europe canceled as a result of the EU’s retaliatory 25% tariff on American-made boats.

    Still way down, and it happened pretty much all at once with the election:

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    Mtg apps, Current account, Existing home sales, Wage growth, Equity valuations

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    Purchase applications remain negative this year vs last:

    Highlights

    The June 15 week was an active one for mortgage bankers as the purchase index rose a solid 4.0 percent and the refinance index 6.0 percent. Despite the jump in the purchase index, its year-on-year rate remains in the negative column for a second straight week, at minus 1.0 percent. Turning back to refinancing, the outsized gain increased the share of mortgage activity to 36.8 percent of total applications vs 35.6 percent in the previous week. The average rate for 30-year fixed mortgages with conforming balances ($453,100 or less) was unchanged at 4.83 percent.

    Higher than expected but last couple of months revised to lower numbers. In any case it’s relatively large, and the US continues to be dependent on imported oil, all of which is not $US friendly should the current trade policy result in reduced non resident desires to accumulate $US:

    Highlights

    A sharp rise in the nation’s deficit in goods trade made for a nearly $8 billion deepening in the first-quarter current deficit to $124.1 billion. Yet the result is much better than expected in what reflects a comparison with the fourth quarter which, when forecasters made their estimates, stood at $128.2 billion but is now revised sharply lower to $116.2 billion. Note that today’s report includes annual revisions.

    The goods deficit swelled by $8.1 billion in the first quarter to $220.5 billion and was unable to be offset by other factors which were all flat including the surplus on service trade which did rise but only slightly to $0.3 billion. The main factors for the fourth-quarter revision are the surplus on primary income which was revised $5.2 billion higher, the surplus on services revised $4.2 billion higher, with the deficit on goods revised $1.9 billion lower.

    As a percent of GDP, the first-quarter deficit rose to a still moderate 2.5 percent vs 2.4 percent in the prior quarter which was revised from 2.1 percent. This report, amid early skirmishes of trade war, will be taking on closer and closer scrutiny.


    Confirming weakness in housing:

    Highlights

    The new home market is on the rise in sharp contrast to the resale market which is flat at best. Existing home sales slipped 0.4 percent in May to a lower-than-expected 5.430 million rate and a year-on-year decline of 3.0 percent. Part of the lack of sales traction may be due to prices which, in contrast to the decline in sales, rose 2.7 percent in the month to a record $264,800 for a year-on-year gain of 4.9 percent. Supply improved in the month but remains thin, up 2.8 percent to 1.850 million units on the market with supply relative to sales at 4.1 months vs 4.0 months in April.

    The resale market remains a dead weight and is limiting the housing sector’s contribution to overall economic growth. In regional data, the Northeast popped higher in the month but remains the weakest resale region at an 11.7 percent yearly decline with the West at minus 4.1 percent and the Midwest at minus 2.3 percent. Sales in the South, which is by far the largest resale market, are unchanged on the year.


    Wage growth continues to be depressed:

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    Housing starts, Redbook retail sales, Euro current account

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    No houses get built without a permit:

    Highlights

    The good news in May’s housing starts report is centered in the present, less so in the outlook. Starts jumped 5.0 percent in the month to a 1.350 million annualized rate that hits the top end of Econoday’s consensus range and that should give a boost to residential investment in the second-quarter GDP report. Good news also comes from completions which rose 1.9 percent to a 1.291 million rate which will help feed a housing market starving for immediate supply.

    The question of future supply is still very positive but, however, has not improved in the May report as building permits fell for a second straight month and very steeply in May, down 4.6 percent to a 1.301 million rate. Weakness includes single-family homes, down 2.2 percent to a 844,000 rate, and once again multi-family units which are down 8.8 percent to a 457,000 rate.

    Back to the good news as the breakdown for starts shows a 3.9 percent rise in single-family homes to 936,000 and a 7.5 percent gain for multi-units to 414,000. The gain for completions is entirely centered in the key single-family category, up 11.0 percent to 890,000 to offset a 13.8 percent decline for multi-units.

    Building in the housing sector, given reports of shortages of construction workers and also construction equipment, may be progressing at the fastest rate possible based on year-on-year rates of growth: at 20.3 percent for starts, 10.4 percent for completions with permits at 8.0 percent.

    The new home market, where sales are up in the low double digits, is a leading sector of the economy but appears to be bumping up against capacity constraints. Showing much less strength than new home sales have been resales which have been surprisingly flat and which will be updated with tomorrow’s existing home sales report.

    The multi family component has flattened which has caused total housing starts to decelerate:


    The longer term chart shows that housing continues to be depressed, with higher levels recorded in the 1960’s when the population was half of what it is today:


    Permits look to have flattened most recently, and also remain depressed historically:


    Same store retail sales appear to be doing ok, so seems store closings may have run their course?


    This is very euro friendly though currently world events are keeping porfolio managers underweight euro, as they focus on ECB rate policy which fundamentally doesn’t work the way they think it does.

    Euro Area Current Account

    The Eurozone’s current account surplus increased to EUR 26.2 billion in April 2018 from EUR 19.6 billion in the corresponding month of the previous year. The services surplus went up to EUR 7.9 billion from EUR 5.7 billion; the primary income surplus widened to EUR 5.6 billion from EUR 5.2 billion and the secondary income deficit decreased to EUR 9.9 billion from EUR 16.2 billion. On the other hand, the goods surplus narrowed to EUR 22.6 billion from EUR 24.9 billion. Considering the January to April period of 2018, the current account surplus rose to EUR 104.6 billion from EUR 82.2 billion in the same period of 2017

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    Housing index, Saudi oil pricing charts

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    A lot less than expected as the housing slump continues:

    Highlights

    Acceleration is not the indication from the home builders’ housing market index which, though at a high level, edged back 2 points in June to 68 which is at the bottom end of Econoday’s consensus range. Current sales at 75, future sales at 76, and traffic at 50 all slipped 1 point in the month. The reading for traffic is the lowest since November and is not a good sign for the homestretch of the Spring housing season.

    The West is a focused region for home builders and leads the regional breakdown followed by the South and Midwest and then the Northeast which though last has been showing improvement.

    The new home market has been moving higher, both sales and permits, though indications including prices have been pointing to slowing growth. Watch for housing starts tomorrow where positive results are expected.

    Can’t say what they are up to currently. Could be fine tuning to keep things steady, but hard to say what their actual price target is vs the $US, as they may be targeting a euro price,
    for example:


    Sales at their posted prices seem to be reasonable stable:

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    Industrial production, China retail sales, Miles driven, Federal interest payments, Budget charts

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    A weaker than expected print due to auto sales which have been volatile, but charts show it’s still chugging along at a modest pace:

    Highlights

    A big drop in autos skewed industrial production lower in May, slipping 0.1 percent and missing what was an already soft consensus by 2 tenths. Manufacturing volumes fell a very steep 0.7 percent, pulled down by a 6.5 percent monthly drop in motor vehicles that itself reflected the effects of a fire early in the month at a supplier in Michigan.

    Yet readings outside autos are also soft with hi-tech production up only 0.2 percent and production of business equipment down 1.1 percent. Excluding autos, manufacturing production fell 0.2 percent in the month. The manufacturing component of this report never really has shown the kind of strength being posted by factory shipments or factory orders.

    Manufacturing makes up the great bulk of industrial production and once again is overshadowing another standout month for mining which surged 1.8 percent. Year-on-year mining production is up 12.6 percent vs only a 1.7 percent rate for manufacturing. Utility production has been mixed, up 1.1 percent in May for 4.0 percent yearly growth.

    Capacity utilization is over 90 percent for mining at 92.4 percent vs 79.4 percent for utilities and 75.3 percent for manufacturing. Utilization overall, down 2 tenths to 77.9 percent, is not extreme and points to available slack in the industrial sector.

    Putting mining and utilities aside, industrial production is once again an anomaly, not pointing as other reports to building strength and a rising tempo for the nation’s factory sector.

    Note that traditional non-NAICS numbers for industrial production may differ marginally from NAICS basis figures.


    Growth slowing:

    Will the tax cuts and spending increases save us?

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    Jobless claims, Retail sales, Bank lending, Fed comments

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    Just a reminder (from 2015) as to why claims are this low:


    This is not population adjusted:


    We haven’t yet to recover from the last recession, in my opinion due to an ongoing lack of demand:

    Highlights

    The FOMC said yesterday that household spending has picked up and indeed it has. Retail sales jumped 0.8 percent in May which easily tops Econoday’s high estimate. And the results include an upward revision to April which now stands at a 0.4 percent gain.

    The report shows balanced gains including a 1.3 percent jump at restaurants and a 0.5 percent increase for motor vehicles, both pointing to rising discretionary demand. Building materials, which have been soft, surged 2.4 percent in what will be a plus for residential investment. Department stores have been very weak but have now put together back-to-back gains of 1.5 percent in May and 0.7 percent in April. Clothing stores, at 1.3 and 1.2 percent, have likewise bounced back with sizable gains the last two months. Gasoline sales have risen 2.0 and 1.0 percent in May and April on higher prices. Disappointments include a decline for furniture in May and only a 0.1 percent rise for nonstore retailers (e-commerce).

    It was only a few weeks ago that the Fed’s Beige Book had downgraded consumer spending to “soft” which highlights the importance of today’s report, one that, as far as the Fed at least, marks a pivot upward. Consumer spending so far this year has been mixed but given the strength of the jobs market, improvement should be no surprise.


    Muddling through at rates of growth that exceed personal income growth, so seems unsustainable:


    Bank lending:

    Like the hair dresser said, ‘no matter how much I cut off, it’s still too short.’ Raising rates supports the economy via the interest income channels, and the higher the debt to gdp ratio the larger the effect. (Paying interest is like basic income for people who already have $…) That is, the Fed has it backwards. They think they are stepping on the brakes when they are stepping on the accelerator with regards to the economy and inflation:

    Fed Raises Interest Rates, Sets Stage for Two More Increases in 2018

    (WSJ) Eight of 15 officials now expect at least four rate increases will be needed this year, up from seven in March and four in December. Most officials expect the Fed would need to raise rates at least three more times next year and at least once more in 2020, leaving rates in a range between 3.25% and 3.5% by the end of 2020, the same end point officials projected in March. The statement dropped language added four years ago that said officials expected to hold their benchmark rate “for some time” below a neutral setting. Nine of 14 officials putting neutral at either 2.75% or 3%.

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    Trade, Consumer credit

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    The trade deficit narrowed but due to a drop in consumer spending on imported cell phones, which doesn’t bode well for retail sales, which are under pressure from the reduced growth of real disposable personal income. And the widening trade gap with the euro area is fundamentally euro friendly even as fears of Italian politics are frightening portfolio managers:

    Highlights

    Helped by a dip in cellphone imports, the nation’s trade gap narrowed sharply in April to a much lower-than-expected $46.2 billion. Cellphone imports fell $2.2 billion to pull down the consumer-goods deficit which narrowed by $2.8 billion in the month.

    Despite the improvement for consumer goods, the bilateral gap with China rose a noticeable $2.1 billion to an unadjusted $28.0 billion in results that probably won’t ease ongoing trade friction. Note that country data, unlike other data in this report, are traditionally tracked in unadjusted terms due to small monthly totals yet adjusted data for China are available and tell a different story with the gap at a higher level of $30.8 billion but down in month-to-month terms from an adjusted $34.2 billion in March.

    Turning back to unadjusted country data, the gap with Europe also deepened, by $2.5 billion in April to $14.6 billion with the Japanese gap little changed at $6.3 billion. Turning to North America, the gap with Mexico narrowed by $2.4 billion to a deficit of $5.7 billion while a small March surplus with Canada turned into a $785 million deficit in April.

    Imports of iron and steel mill products rose $228 million to $2.1 billion with imports of bauxite and aluminum up slightly to $1.5 billion. It will be interesting to watch whether these totals, due to U.S. tariffs on steel and aluminum, begin to slide in the month’s ahead.

    Overall, exports rose 0.3 percent in the month to $221.2 billion with goods, led by a gain for industrial supplies and also food, up 0.2 percent at $141.3 billion and despite a 0.1 percent slip in service exports which totaled $70 billion. Imports fell 0.2 percent with goods, again reflecting the weakness in cellphones, down 0.3 percent to $209.5 billion and services up 0.6 percent to $47.9 billion.

    April’s deficit is more than $1 billion narrower than March and far under the $53.1 billion monthly average of the first quarter. This points to a big net-export lift for second-quarter GDP.

    The petroleum deficit appears to have leveled off, while trade overall still looks to be trending further into deficit, recognizing the volatility around year end:


    Deceleration continues:

    Highlights

    Consumer credit rose a lower-than-expected $9.3 billion in April though consumers did run up their credit-card debt slightly as revolving credit, which was in the negative column the last two reports, rose $2.3 billion in the month. Nonrevolving credit, which includes student loans and also vehicle financing and which often posts double-digit gains, rose only $7.0 billion in the month.

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    Employment, Construction spending

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    Above expectations and indicative of continuous modest growth. However, I have trouble making it all ‘add up’. More comments below:

    Highlights

    Employment growth is strong and it is not entirely without wage pressure. Nonfarm payrolls rose 223,000 in May to just top Econoday’s high estimate while the unemployment rate moves down a tick to a new expansion low of 3.8 percent. The monthly gain for average hourly earnings came in at the high end of expectations, up 0.3 percent for a year-on-year rate that is up a tenth to 2.7 percent.

    Payroll gains are led by trade & transportation, up 53,000 in the month for a sector where delivery delays have been climbing, and include solid 31,000 gains for both retail and also professional & business services with the gain for the latter suggesting that employers are scrambling to fill positions. Manufacturing payrolls rose 18,000 which hits Econoday’s consensus with construction payrolls up 25,000.

    The participation rate moves down a tenth to an even thinner 62.7 percent as the number of people actively looking for work is down 281,000 to 6.065 million. The workweek for all employees is unchanged at 34.5 hours though factory hours and factory overtime are down which point to give back for May’s industrial production report.

    But today’s report is about strength and the risk that available slack in the labor force is disappearing and in turn raising the potential of wage inflation. The results clearly support expectations for a rate hike at this month’s FOMC.

    The federal government continues to reduce headcount:

    Seems the deceleration in payroll growth reversed around year end, perhaps in reaction to the change in tax laws:

    This dropped dramatically with the 2008 recession, recovered only modestly, and most recently seems to have leveled off at historically low levels:

    The participation rate began falling with the recession, leveled off for the last two years, and has yet to recover:


    Wage growth shows a lack of demand as well:


    Unemployment as defined has hit a multi cycle low even with weaker wage growth and weaker GDP growth.

    Might have something to do with healthcare? Increasingly health insurance is available only through employment? Maybe there’s been a reduction of illegal workers which would also explain in part the reduction in productivity?

    And this chart shows that 4.3 million people took jobs last month who previously were not classified as unemployed and were not even considered as part of the labor force:

    Highlights

    A rebound in multi-family units helped drive construction spending 1.8 percent higher in April to fully reverse the prior month’s 1.7 percent decline. Spending on multi-family units rose 3.6 percent in the month following March’s 4.3 percent decline in a gain, however, that can’t overshadow no change for spending on single-family homes. But home improvements were a big positive rising 0.7 percent in the month.

    Non-housing data are mixed with private nonresidential, led by transportation and power, up a strong 0.8 percent but with highways & streets down 1.0 percent.

    This report is often very volatile making year-on-year readings useful to gauge trends. And there is clear strength here, with total spending up 7.6 percent including a very strong 9.6 percent gain for single-family homes that puts April’s no change in perspective. Housing is in short supply which has been holding down home sales and the question for the sector is whether builders can pick up their pace to meet demand.

    This chart is not adjusted for inflation. On an inflation adjusted basis it’s still short of the prior cycle highs:

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