Tuesday 30 May 2017

What's holding US Core PCE back?

The Fed's target for core PCE is 2% and the YoY number has dropped back to 1.5% from 1.8% a few months ago.

Looking at the components the main weakness is durable goods, without which we would likely be over 2% already.

Within this autos, household goods, food and recreational goods were the only weak areas YoY for Q1-17/Q1-16. Services expenditure, which is about 2/3rds of overall spending, is over 2% in all sections except Healthcare.

You could conclude that the dip in Core PCE has been at least in part explained by 'going out of business' sales in retail, price weakness in autos and a drop in food prices.

On the manufacturing side of the economy, which is ultimately producing these goods, looking at the Durable Goods orders/ shipments numbers from the Census Bureau, out of the bigger categories we have had weakness in Autos, Capital Goods and Machinery.

This is consistent with some weakness in Autos and Auto price pressures, and generally slow capex, with the oil sector and its supply chain not having fully recovered from the oil downturn and export related industries being affected by the strong USD/ weak EM demand.

That said, at least in April's seasonally adjusted numbers you saw growth in Autos and some continuing sideways/ moderately weak machinery and capital goods numbers.

On the manufacturing side, on say a 12-18 month view, a new credit cycle in EM boosting imports, Trump's policies pushing the US Dollar down and supporting investment and manufacturing would likely support an increase in manufacturing durable goods prices.

Some pick up in wage growth would also help support the overall Core PCE number, particularly in the services components, along with the ending of liquidation sales in traditional retail and an apparent inventory adjustment in Autos.

On a shorter term basis however, we could see a further dip in a range of data points and potentially even a growth scare going into the summer, with many US macro numbers surprising on the downside recently and the US Treasury bond market showing no signs of fearing inflation and Fed hikes. In fact forward inflation expectations have only really been lower in this cycle during the aftermath of QE ending.


Monday 22 May 2017

EZ/ German CA surplus and labour arb

EZ CA surplus rose to 3.4% of GDP in the 12 months to March, EUR364bn cumulatively. Its working out pretty well for Germany which was also at more or less a record high, while having a more or less record weak 'Deutsche mark'. Via a weak Euro Germany has achieved the equivalent of expropriating over 6 million direct jobs from deficit countries and then vendor financing the subsequent deficits while creating secondary jobs in her supply chain. 

The UK politicians who are telling us they should lead the country for the next five years are unable to link trade deficits, to jobs, to productivity/ growth, to investment, to tax collections. Is it any wonder that career politicians/ corporate politician parties are blowing up in one country after another.

Friday 19 May 2017

UK new home price falls in London

ONS new home selling prices in Q117 for London: £448k, down from £499k in Q416. A 10% drop, but a bump in existing home prices masks this for London overall. No doubt some of this is mix, with sales of affordable homes probably doing OK in Q1, while the prime markets seized up. Evidence from Q2 however is an acceleration of price reductions in prime and the beginnings of weakness outside of that. 

Housebuilding has become a hot topic in the election. The class of feckless politicos that rule the country have worked out that house building might win votes and after two decades of inaction are now competing to build 1m new affordable homes. 

Meanwhile Carney and May are planning to give Trump some competition in the weakest developed market currency race.

Puerto Rico restructurings

Puerto Rico, one of many municipal bankruptcies likely to happen in the US and Europe over the next few years is coming to a head. The current price of 59c for the GO bonds might prove somewhat optimistic vs where they trade after a yet to be agreed deal is finalised.

The PR development bank this week agreed a 55c recovery, with its bonds trading in the low 20s before hand. That equated to a 17% yield on the post-restructuring notes, plus pull to par. 

US oil demand is weak and getting weaker

US oil demand is down 1MMbpd week on week (a 5% drop, driven by industrial type products) and 1.3MMbpd YoY; it has gone negative YoY over the last few months.

I had put it down to less trips to the mall/ more Amazon orders, but this contraction is accelerating now if the weekly data isnt just a 1 week blip. 5% is an inventory liquidation. Question is whether its a sign of further liquidations or just noise.

Monday 8 May 2017

UK debt dynamics

Its pretty easy to look through the US Fed flow of funds tables, but UK data is harder to add up.
With signs of falling house prices, just how dependent is the UK on credit growth?

There are a myriad of stats from the government but I have just tried to add up central government borrowing and individual lending, as they are both a form of consumption supporting credit creation. While corporate borrowing finances balance sheets and financial debt is driven by disintermediation.
Since the end of 2009 the UK economy in nominal terms has grown 14.5%, or £240bn in output to the end of 2016. Unfortunately debt has grown by £820bn, or +44% of 2016 GDP. Over the last 5 years the sum of government and individual borrowing had been roughly 3.5x nominal GDP growth.

In the last 5 years growth in credit to government and individuals has averaged 6.4% of GDP, while nominal GDP has only grown 2.1%.

Over the last 5 years the UK government has borrowed an average of £83bn a year and individuals £30.5bn.

With final demand being so dependent on credit being created for consumption and credit growing 3.5x faster than GDP, its hardly surprising Carney is reluctant to raise interest rates and Osborne resorted to pumping up a housing bubble to try and offset austerity.

Only problem is what happens if housing starts to fall and takes individual credit demand with it, or in a state of full employment wage pressures force the BoE to start raising interest rates, as is happening in the US.

I suspect it will take a strong dose of a very weak currency and Perfidious Albion, with respect to Brexit arrangements, to get out of this one.

For what its worth, the US has been growing combined Federal, state and individual debt around 3x GDP during this cycle as well.

Source: UK data is from ONS and BoE datasets