“We’ve seen some data that in my case will add some confidence to my view that inflation is moving up to target,” said, the newley appointed Federal Reserve Chairman Jerome Powell. Today, Chair Powell addressed Congress with his guidence on economic growth and what to expect from monetary policies during his reign over the Fed.
The U.S. benmark 10 year treasury rallied +5bps to 2.915% during Chair Powells’ testimony. Leading equities to sell off for the first time since Wednesday of last week.
Chair powell signled to markets that more than three rate hikes this year is likely, in order to cool a persumed overheated economy. However, the distinction between a overheating economy and a stock market, where multiples have be overvalued for months, discussed durning today’s proceedings.
Just prior to Chair Powell’s testimoney a myriad of economic data was released, including Durable Goods Orders. Where a weaker than expected print in orders was traced to the unprecidatable tarnsporation sector.
United States Durable Goods Orders MoM was reported at -3.7% in Jan from 2.9% in the previous period. It was expected at -2%.
After two months of strong gains , nondefense aircraft orders fell 28% in January. Meanwhile, motor vehicles and parts posted a scant increase of 0.1%, whucg was just enough to offset December’s decline. Orders for new Vehicles are still rising at an impressive 11.9% pace on a three-month average annualized babsis, althiygh this is a bit softer from the comporable pace set in December.
Orders for defense aircraft also fell sharply (down 46%). This led to a 26.3% decline in toal defense orders, but excluding this category, private orders still looked weak, having declined 2.7%. Most disappointiong in today’s report was the 0.2% drop in orders when excluding aircraft and defense orders, or “core” orders. That followed a 0.6% decline in Decemebr and the trend in core capital goods orders has weakened noticably from an impressive run in the fall of 2017; core capital goods orders are up at a 3.7% three-month average annualized pace, compared to over 18% as recently as Novemeber.
With survey data still confirming soaring confidence in the business sector and the boost to after-tax corporate earnings just beginning to benefit from the tax cuts, there are plenty of silver linings for business spending. That said, the softening in core orders is beinning to look more at odds with soft survey data like the ISM manufacturing index, and cosecutive declines in core capital goods orders cannot be ignored.
Expect in the near term, the hard data for oders to converge with soft survey data. In times of such pronounced survey strength, however, the gap between hard and soft data is usually narrowerd by business surveys getting reined in, rather than the hard orders data which feed into GDP experiencing a marked acceleration.
Hence, expect to see some softening in the ISM index when the February report is released on Thrusday. Prior to this morning’s release, there was an implied lag in the effects of the tax cuts and thus, a slower pace of equioment soending in the first quarter. Remarkably, against this backdrop of euphoria and favorable fiscal policy, the hard data suggest downside risk to our alredy-termpered forecast for capital goods spending in the first quarter.
– Mr. Tim Quinlan and Ms. Sarah House
New orders for manufactured durable goods in January decreased $9.2 billion or 3.7% to $239.7 billion. This decrease, down following two concecutive monthly increases, followed a 2.6% December increase. Excluding transportation, new orders decreased 0.3%. Excluding defense, new orders decreased 2.7%. Transporation equpment, also down following two consecutive monthly increases, led the decrease, $8.6 billion or 10.0% to $77.7 billion.
Shipments of manufactured durable goods in January, up eight of the last nine months, increased $0.6 billion or 0.2% to $247.0 billion. This followed a 0.5 % December increase. Transportation equipment, up two of the last three months, led the increase, $0.4 billion or 0.5% to $81.3 billion.
Unfilled orders for manufactured durable goods in January, down following four consecutive monthly increases, decreased $3.1 billion or 0.3 % to $1,140.9 billion. This follwed a 0.6 % December increase. Transporation equipment, down three of the last four months, drove the decrease, $3.6 billion or 0.5 % to $771.8 billion
Inventories of manufactured durable goods in January, up eighteen of the last nineteen months, increased $1.3 billion or 0.3 % to $408.5 billion. This follwed a 0.5% December increase, Transportation equipment, up two consecutive months, led the increase, $0.7 billion or 0.5 % to $131.9 billion.
Nondefense new orders for capital goods in January decreased $1.2 billion or 1.5 percent to $73.6 billion. Shipments increased less than $0.1 billion or virtually unchanged to $74.4 billion. Unfilled orders decreased $0.7 billion or 0.1 percent to $706.1 billion. Inventories increased $1.0 billion or 0.5 percent to $181.9 billion. Defense new orders for capital goods in January decreased $3.3 billion or 26.3 percent to $9.2 billion. Shipments increased $0.4 billion or 3.2 percent to $11.5 billion. Unfilled orders decreased $2.4 billion or 1.6 percent to $141.0 billion. Inventories decreased $0.2 billion or 0.7 percent to $23.2 billion.
- United States Wholesale Inventories MoM Adv was reported at 0.7% in Jan from 0.4% in the previous period. It was expected at 0.3%.
- United States Redbook MoM was reported at -0.6% in 24/Feb from -0.7% in the previous period.
- United States S&P/Case-Shiller Home Price MoM was reported at 0.2% in Dec It was expected at 0.1%.
Home prices ended 2017 on a high note with the S7P Corelogic Case-Shiller National Home Price Index (HPI) rising to 0.7% in december, slightly besting Novermeber’s print. The strongest gains were concentrated in the West, all 20 cites saw MoM gains.
Western Markets Lead Broad National Gains
- Home prices rose 0.7% in December, with prices rising 6.3% YoY, up from 6.1% last month. Both the 10- and 20-city indexes saw appreciation moderate in December, but the headline index accelerating only slighttly.
- Home price growth continues to be strongest in the West. The six-fastest-appreciating markets are located in Westeren states, with Seattle, Las Vegas and San Fransico leading the way.
Prices Booming.. How Much More Room to Grow?
- Home prices are in the midst of a boom. Since the bottoming in 2012 and adjusted for inflation, the HPI has risen 38% for a real annual gain of 5.3% per year. Since 1976, the HPI‘s annual gain averaged just 1.3%.
- The persisten rise in home prices is reducing affordabilty. With interest rates rising, home sales look a little more vulnerable, as eveidenced by yesterday’s drop in new home sales.
- For more on homes becoming less afforadable check out Mr. Anthony Sander’s page here: Confounded Interest ‘Simply Unaffordable! Housing Prices in 20 U.S. Cities Advance at a Healthy Pace (6.30% Price Growth Versus 2.43% Earnings Growth)’
–Mr. Mark Vitner and Mr. Hank Carmichael
The chart below depicts the annual returns of the U.S. National, the 10-City Composite, and the 20-City Composite Home Price Indices. The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, which covers all nine U.S. census divisions, recorded a 6.3% annual gain in December 2017. The 10-City and 20-City Composites reported year-over-year increases of 6.0% and 6.3%, respectively.
The following chart shows the index levels for the U.S. National, 10-City and 20-City Composite Indices. As of December 2017, average home prices for the MSAs within the 10-City and 20-City Composites are back to their winter 2007 levels.
Table 1 below shows the housing boom/bust peaks and troughs for the three composites along with the current levels and percentage changes from the peaks and troughs.
- United States House Price Index MoM was reported at 0.3% in Dec from 0.4% in the previous period. It was expected at 0.4%.
- Consumer Confidence surged to new highs in February, rising 6.5 points to 130.8 durning the month. The strong job market has pushed consumers’ assement of the present situation even higher. Expectations also rose.
Consumers are Very Upbeat About the Economy
Consumers have not been this upbeat about the economy since late 2000. The Consumer Confidence Index rose further than expected in February, as both the present situation and the expectation series rose solidly. The headline came in at 130.8 in February, besting the previous high of 128.6 posted in November. After cooling slightly in January, consumers’ assessment of the current economy became even more favorable in February. February’s reading of 162.4 was 7.7 points higher than in January and 5.9 points above its previous cycle high hit in December. Consumers’ expectations also improved markedly, notching an index of 109.7, which rivals its recent highs.
The job market was the main driver of the surge in confidence about the present economy. The share reporting that jobs are plentiful jumped to a new cycle high of 39.4 percent while reports that jobs are hard to get declined to
a new cycle low of 14.7 percent. The fact that the labor differential, or the gap between those views, is now at its widest point of the cycle is further evidence
of a tightening labor market that should result in further upward pressure
on wages. Respondents are increasingly realizing that workers are in very 50% tight supply, which should incentivize more job switching. The report today suggests more wage gains may be evident in the jobs report on Friday.
The evidence of wage growth in the January jobs report, and its potential impact on inflation and the path of interest rates, sent the markets in a 30% tailspin in early February. Consumers, however, remain unconcerned about inflation, with this report’s measure of inflation expectations essentially 20% unchanged. The sell-off did cause the share of respondents expecting higher stock prices a year from now to fall about 10 points from its all-time high of 51 in January. The share expecting higher interest rates rose to about 70 percent. Plans to buy a home or an automobile in the next six months were little changed despite expectations of higher interest rates.
Consumers’ rising expectations in February stemmed from better views on business conditions, employment and income. Respondents’ expectations 30% about business conditions six months from now had retreated in December
and January as tax policy and its impact on business was still being flushed 25% out. The share expecting better conditions rose 4.3 points to 25.8 percent. Expectations for employment opportunities in six months increased as well. 20% Very few respondents expect fewer jobs in six months, only 11.9 percent, 15% which is near the cycle low in October.
Income expectations, which were little changed immediately following the 10% tax cut in January, reacted positively in February. The share expecting higher income rose 3.2 points to 23.8 percent, which is the highest of the cycle. The share expecting income to decrease also rose slightly, from 7.9% to 8.6%. New withholding tables took effect in February, so these responses are likely early assessments. As the survey cut-off date was February 15th, March data will likely provide a fuller picture.
–Mr. Mark Vitner and Ms. Jamie Feik
- United States 4-Week Bill Auction was reported at 1.495% from 1.38% in the previous period.
- United States 52-Week Bill Auction was reported at 2.020% from 1.83% in the previous period
Market Breadth Indicators