Succinct Summation of Week’s Events (1/16/15):

Succinct Summation of Week’s Events
Positives:

1) The SNB cries mercy and comes to terms with the fact that it can’t win a currency battle with the ECB. The Swiss people have just dramatically improved the purchasing power of their savings. Also, while highly disruptive to economies and markets in the short term, maybe the cult of central banking is seeing its end of days which would ultimately be a huge positive for free markets and price discovery.

2) The UoM consumer confidence index for January jumped to 98.2 from 93.6, well above expectations of 94.1 and the best read since January 2004. Both the current conditions and expectations components were higher m/o/m. One year inflation expectations fell to 2.4% from 2.8%, the lowest since September 2010 and likely driven by lower gas prices.

3) Manufacturing IP rose .3%, one tenth more than expected but was led by mining and an increase in oil and gas extraction which will soon be negatively impacted by a reduction in drilling. A drop in utility output was a drag on the topline and the reduction in capacity utilization to back below 80%.

4) The NY manufacturing index was +10 vs -1.2 in December. That was above the estimate of 5.0 and it gets back to the level of 10.3 seen in November. The 6 month outlook was a bright spot as it rose to 48.4 from 39.3 and that’s the best read since January ’12.

5) With the big caveat that the MBA data around the holidays is extremely noisy, applications to refinance a mortgage exploded higher by 66.4% and purchases spiked by 23.6%. The average 30 yr mortgage rate fell 12 bps to 3.89%, the lowest since May ’13.

6) The level of job openings in November made a new recovery high at 4.97mm, the most since January 2001 and up by 142k m/o/m. The hiring did fall one tenth to 3.4% but the separation rate was down by two tenths. The quit rate was unchanged at 1.9%.

7) The NFIB small business optimism index rose to 100.4 from 98.1 and that is the best since October ’06. There was a 4 pt gain in Plans To Hire to the highest level since August ’07. Encouragingly too, capital spending plans increased to the best level since December ’07. Also, the NFIB said “labor market conditions are suggestive of a tightening, which will put further upward pressure on compensation along with government regulations.”

8) Headline CPI fell .4% m/o/m as expected while the core rate was flat vs the estimate of up .1%. The y/o/y gains for both are .8% and 1.6% respectively. The y/o/y core rate is the slowest since February but since August 2012, core CPI has been between 1.6-2%. The drop in energy prices of course drove the headline but food prices were higher and services inflation due to rent remains sticky at 2.4% y/o/y. Let’s separate the current commodity deflation from services inflation in the overall discussion over prices.

9) Believing in the virtues of positive real interest rates, the Reserve Bank of India has given itself flexibility to respond to changes in inflation and growth and they lowered interest rates by 25 bps and won’t be pushing on a string.

10) Australia, beset by falling oil and iron ore prices, reported a much better than expected job gain in December.

11) China reported a better than expected export figure for December of up 9.7% vs the estimate of 6%. Imports fell less than expected as likely the lower price of oil and iron ore helped.

12) Putting aside my opinion of ECB QE (negative as it’s the wrong medicine), as expected, the European Court of Justice’s interim ruling (final one doesn’t come for another 4-6 months) stayed away from interfering with the ECB’s OMT program which directly eases the pressure on the ECB in conducting sovereign bond buying.

13) Industrial production for the EU in November rose .2% m/o/m, two tenths more than expected and the prior month was revised up. It was still down .4% y/o/y.

14) UK CPI in December rose just .5% y/o/y, the lowest since May ’00 and below the estimate of up .7%, thus helping REAL wage gains. Core inflation however (also takes out alcohol and tobacco) was steady at 1.3% vs 1.2% last month and in line with the estimate. With respect to asset price inflation in the UK, home prices in November rose 10% y/o/y, still robust but the slowest rate of growth since April. London home prices slowed to a still vibrant 15% increase y/o/y vs 17.2% in the month prior.

Negatives:

1) The SNB created an earthquake for its exporters (contribute about half of GDP) and tourism industry who were planning on a 1.20 peg to the euro and now have to scramble. Over time, they should adjust both from a cost structure perspective and an FX hedging one. Until then, a sharp economic slowdown is likely. Negative bond yields in Switzerland now go out 10 years as the SNB makes it poison (and hugely expensive) to hold Swiss francs. I refer to this now as impounding instead of compounding ones capital.

2) US December retail sales were much weaker than expected across the board. Headline sales fell by .9% vs an expected drop of just .1%. Sales ex volatile autos and gasoline fell by .3% vs the expected gain of .5% and the ‘control group’ which also takes out building materials saw sales fall by .4%, well below expectations of up .4%. What was saved at the gas station was apparently not spent elsewhere.

3) After a print of 40.2 in November and 24.3 in December, the January Philly manufacturing survey moderated further to 6.3, the lowest since February when it touched -2.0 in the dead of that miserable winter. The six month outlook held steady at 50.9 vs 50.4 but that was the lowest since May.

4) US Initial jobless claims jumped to 316k vs 297k last week and that was 26k more than expected. The w/o/w rise brings the 4 week average to 298k from 291k. After rising by 123k last week, continuing claims fell by 51k. For the first time since oil prices collapsed, Texas showed up as one of the states that saw the largest increase in claims for the week ended December 27th where 5,422 people filed.

5) For purposes of calculating GDP, business inventories rose .2%, one tenth less than expected and the I/S ratio held at the highest level since October ’09 as sales fell.

6) Japanese machinery orders in November were up 1.3% m/o/m but that was well below expectations of up 4.4%. The y/o/y drop was 14.6%.

7) Aggregate loan growth in China totaled 1.69T yuan in December, well above expectations of 1.2T and it’s the largest monthly gain since March. I put this in the negative camp because credit growth remains excessive and the GDP created per each yuan of debt continues to shrink.

Peter Boockvar
Chief Market Analyst
The Lindsey Group LLC
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