Succinct Summation of Week’s Events 7.29.16

Succinct summations of the week’s events:

Positives:

1) Employment Cost Index for Q2 saw private sector wages and salaries rise 2.6% year over year, the most since Q1 2015 and a pick up from the 2% gain in Q1. Benefits also rose by the most since Q1 2015 and by 1.7% y/o/y vs 1.2% in Q1.

2) Chicago PMI for July fell 1 pt to 55.8 but that was a bit higher than the estimate of 54. Smoothing out this very volatile number puts the 3 month average at 54 and the 6 month average to 52.2. Pointing to a possible economic rebound in Q3 from the punk 1st half of the year, “companies increased their inventories at the fastest pace since October 2015, building on June’s double digit gain.”

3) Conference Board’s US consumer confidence index fell a hair to 97.3 in July from a revised 97.4 in June (revised from 98) but that was slightly better than the estimate of 96. The Present Situation component rose to the best level since September but Expectations moderated a touch. The data is “suggesting the economy will continue to expand at a moderate pace” while “consumers remain cautiously optimistic about growth in the near term” according to the Conference Board.

4) New home sales in June totaled 592k annualized, 32k more than expected and up from 572k in May which was revised up by 21k. Sales now are at the most since February ’08 and continue to creep closer to the 25 yr average of 715k. Months’ supply fell to 4.9 from 5.1. The median price was up by 6.1% y/o/y to back above $300k.

5) Case Shiller home price index saw prices fall for a 2nd straight month but only by the slightest amount. On a y/o/y basis, prices were higher by 5.2% but that was the slowest pace of gain since September. In order to bring back more forcefully the 1st time buyer, price gains need to slow to closer to the rate of inflation.

6) BoJ only modestly increased their QE program via more stock purchases while staying on hold with NIRP and JGB QE. Have they reached a logistical end of the road and if so, what does that mean broadly for global sovereign bonds?

Negatives:

1) Downward revision to Q1 to .8% and the Q2 growth rate of just 1.2% (well below the estimate of 2.5%) we now have a 1% average rate of growth so far this year and 1.2% over the past 4 quarters. Nominal GDP was just 3.4% in Q2. Consumer spending rebounded and real final sales are averaging 1.8% over the past 2 quarters.

2) Federal Reserve seems unable to identify an exit from ZIRP.

3) Initial jobless claims totaled 266k, 4k more than expected and up from a revised 252k last week (initially was 253k) . Because a 270k print 5 weeks ago drops out of the 4 week average, the new one fell to 257k from 258k last week and is just a hair above the lowest level since 1973. Continuing claims, delayed by a week, rose by 7k after the prior week’s drop of 21k.

4) Pending home sales in June grew by .2% m/o/m which was below the estimate of up 1.2%. NAR said “unfortunately for prospective buyers trying to take advantage of exceptionally low mortgage rates, housing inventory at the end of last month was down almost 6% from a yr ago, and home prices are showing little evidence of slowing to a healthier pace.”

5) Mortgage applications to buy a home fell 3.3% w/o/w after falling 2% in the week prior. This brings the index to the lowest level since early March while still up 12% y/o/y. Refi applications fell 15% w/o/w likely in response to the 4 week high in mortgage rates even though they still remain ridiculously low. They are up 72% y/o/y.

6) Core durable goods order rose .2% m/o/m in June with May revised down by one tenth to a decline of .5%. It was in line with the estimate for up .2% but was still down 4.2% y/o/y. Durable goods ex transports were much weaker than expected as they fell .5% vs the estimate of up .3%. There was a .4% m/o/m drop in the shipments of core goods, well worse than the estimate of up .4%. Shipments of core goods were down 5.8% y/o/y.

Thanks, Peter !