Originally published at The Boock Report
After seeing the tax reform inspired to jump in small business optimism from the NFIB, today the Duke CFO survey optimism index rose the to the best level since June 2004. Also, it was driven by tax reform. This is though coming with building inflation pressures as the survey “also finds the difficulty that companies are having hiring and retaining qualified employees is at a 20 yr high, and that in part will lead to higher wages.” The survey said CFO’s expect “median wage growth of about 3% over the next 12 months.” Hopefully, higher productivity can offset this as opposed to companies passing that on in higher prices. There is also healthcare inflation that is a worry as expectations are for an 8% rise next year. “Nearly half of US companies indicate that the cost of employee health benefits crowds out their ability to spend on long-term corporate investment.” Like I said before, embrace lower corporate taxes but don’t assume all else equal.
There was a slight ebbing of bullish enthusiasm according to Investors Intelligence. Bulls fell to 61.9 from 64.2 while Bears ticked up a hair to 15.2 from 15.1. The spread between the two of 46.7 is a 3 week low but is just 3.3 pts from a 30 yr high. Since bulls got back to 60 on October 11th, the Value Line Equal Weighted Geometric index is up 2.2%. A lot of tax reform generated optimism, along with better global growth will meet faster monetary tightening next year. The former certainly won that battle in 2017 also helped by $2 Trillion of ECB and BoJ largesse. That largesse changes dramatically in 2018 but markets are clearly betting on the soft landing scenario, aka a free lunch.
The MBA said mortgage applications to buy a home fell 1.1% w/o/w but are still up 10.2% y/o/y. Refi apps fell 2.5% w/o/w and are down 9% y/o/y as comparisons have gotten much easier. While this data is seasonally adjusted, don’t pay much attention this time of the year as buying a home and refinancing take a back seat to holiday planning. Likely due to the persistent rise in short-term interest rates, the percentage of loans taken as adjustable rate mortgages shrunk again.
Before the FOMC statement, we will get to see November CPI after yesterday’s PPI upside surprise. The US 10 yr inflation breakeven yesterday did close at the highest level in 7 months at 1.92%. As the FOMC members will hem and haw over their nonsense 2% inflation target, here is an updated chart of the most recent data from the Fed Flow of Funds statement for Q3 out last week. It’s net worth (stocks, bonds, homes, etc…) as a percent of disposable income and a good measure of asset price inflation.
German’s 10 yr breakeven today sits at a 10 month high. Their wholesale price index for November rose 3.3% y/o/y vs 3% in October. This measurement is a slightly different configuration compared to PPI. The 10 yr German bund yield is higher for a 2nd day with the 2 day gain being 4 bps. It still is only at .33% 2 ½ weeks before the QE cut by the ECB. They meet tomorrow. Italian bonds are getting hit hard for a 2nd day on reports that early March will be when their next election will be held with many worried about a Five Star Movement victory. Their 10 yr yield is up 7 bps after a 5 bps rise yesterday. The yield of 1.78% though only takes it back to where it was two weeks ago.
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For the 3 months ended October, the UK lost jobs for a 2nd straight month. A net 56k were shed (most since 2015) vs the estimate of -40k. The unemployment rate though did hold at 4.3%, the lowest since the 1970’s because more left the labor force. Positively, there was a one-tenth uptick in weekly earnings ex-bonus’ to 2.3% which was also one-tenth more than expected but this is still well below the rate of inflation. Also reflecting on the softness in job creation, November jobless claims did rise by 5.9k after an upward revision to October of 5.4k. Data like this completely paralyzes the BoE but lowering the rate of inflation should be their main goal as that lifts real wages which is the precursor to a rebound in growth. Notwithstanding the jobs weakness, the pound is up as are gilt yields. The FTSE 100 is flat.
The very volatile monthly Japanese machinery orders came in better than expected in October. They rose 5% m/o/m vs the estimate of up 2.9% and follows an 8.1% drop in September. It’s an extremely lumpy number and therefore not market moving. The yen is up slightly along with general US dollar weakness, albeit modest. The slightly higher yen led to a .50% drop in the Nikkei. Bond yields were flat.
Industrial production for the Euro area in October did rise .2% m/o/m after falling by .5% in September. The 3.7% y/o/y gain matches the 3rd best since 2011. The European economy has certainly been a surprise story of 2017. We’ll see how interest rates behave next year though as the ECB ends QE and gets closer to ridding itself of negative interest rates. What happens to the European bond market in coming years as this easing gets reversed should be at or near the top of everyone’s risk list.