Election Results in Divided Government Less Likely to Make Sweeping Changes

By | November 12, 2018

Welcome to FTR’s “Monday Morning Coffee “ blog. The following article is designed to keep busy executives up to date with the latest economic data releases. Released every Monday, this blog promises to keep our clientele updated with the latest weekly economic news and developments, highlighting its impact on the transportation, freight, and equipment markets. Hopefully, this will be an informative addition to the fine body of work associated with FTR.

Overview

Coffee and Economic Review

Global stocks were heading for the biggest drop in two weeks and emerging market currencies slipped on Friday as a confident U.S. central bank and weak Chinese data hit demand for riskier assets. MSCI’s broadest gauge of global stocks fell 0.5% on Friday, the biggest drop since October 26, as the U.S. Federal Reserve held interest rates steady but indicated another rate increase was likely in December. A strong economy stands in contrast to China, where cooling factory gate inflation and falling car sales suggest the economy is struggling to gain traction. Stocks in Hong Kong and China were the two main losers in Asia, where a financial sector sub-index fell more than 2% after China’s banking watchdog told lenders to allocate at least a third of new loans to private companies, raising prospects of a big jump in bad assets. Meantime oil prices fell to multi-month lows as global supply increased and investors worried about the impact of fuel demand from lower economic growth and trade disputes. Benchmark Brent crude oil fell to the lowest level since early April, down more than 18% since reaching a four-year high at the beginning of October.

Wall Street’s three major equity indexes lost ground on Friday, after a week of recovery from the October selloff, as oil prices ell further and more evidence of a slowing Chinese economy was reported. The Dow Jones Industrial Average fell 201.92, the S&P lost 25.82 and the Nasdaq lost 123.98 points on Friday. Oil fell nearly 1.0% on Friday and have now seen the longest stretch of daily declines on a rising global supply and a slowing world economy. The United States imposed sanctions on Iran last week. But granted eight countries temporary waivers to allow them to continue to buy oil from the Islamic Republic. Against the backdrop of trade policy disputes between the U.S. and China. Chinese producer inflation fell for the fourth straight month in October on cooling domestic demand and manufacturing activity and car sales also fell for a fourth straight month. Investors have become wary against the changing picture of rising interest rates, slowing global growth and growing pressure on earnings, hurt by a tight labor market and higher costs associated with tariffs.

Last week, the focus was on the Fed. The November Federal Open Market Committee meeting was uneventful. The members left the fed funds rate at 2% to 2.25% and that was widely expected. There were only a few changes to the statement. The biggest change was in the FMOC’s assessment of business investment, noting it had moderated. If it continues to moderate that could change the Fed’s assessment of long-term growth, currently a touch below 2% per year. Nothing in the data will change the Fed current rate of tightening, which is about one per quarter. The statement did not mention anything about trade tensions. Most likely, the impact of trade would be to subtract a few tenths of GDP growth and remember, the Fed wants the economy to cool. So far, financial market developments have been modest and again, the Fed is looking beyond inflation for signs of excess. So long as the financial markets don’t crash, their view is, a modest correction might be therapeutic. The December meeting will be more interesting. There will be a rate hike and renewed focus on a potential stopping point in 2019, as well as a new summary of economic projections and a post-meeting press release.

Last week was slow in economic data but political events did take over the stage. The midterm elections showed a split in government leadership. The Democrats regained control of the House, while the Republicans maintained control of the Senate. The likely result will be a divided government less likely to make sweeping changes. There is probability enough bipartisanship to pass a budget, but an extension of the procyclical stimulus is unlikely. There could be some form of infrastructure investment, but that remains to be seen. Other data showed some moderation in the ISM non-manufacturing index, which fell from 61.6 in September to 60.3. The index remains elevated and the consumer is in good shape for the holiday season. The PPI for final demand increased a stronger than expected 0.6% in October and much of the strength was in services. With labor inflation gaining ground, the Fed will keep on its tightening schedule.

Latest Data

The U.S. Economy:

The ISM non-manufacturing index cooled slightly in October, falling from 61.6 to 60.3, but does remain at an elevated level. The business activity index fell from 65.2 to 62.5. Employment dropped from 62.4 to 59.7. New orders slipped from 61.6 to 61.5. Supplier deliveries increased from 57 to 57.5. Comments from respondents included “Market demand and supply constraints” and “Supplier backlogs are increasing amid personal shortages, freight issues and a passive component shortage.” The index is consistent with another quarter of above trend GDP growth. Still, there are pockets of weakness in housing and the impacts of tariffs are sowing up in the form of increased cost and reduced margins. The economy still has lots of momentum but that will cool as 2019 passes, as the tax reductions and fiscal stimulus effects fade.

The producer price index for final demand rose 0.6% in October, following a 0.2% rise in September. The increase was the largest this year. Service PPI, which accounted for 60% of the increase in the headline number, rose 0.7% in October. Goods PPI rose 0.6%. Core goods PPI was unchanged in October. On a year-over-year basis, the PPI for final demand was up 2.9% and goods PPI was p 3.5%. The core PPI was up a more modest 2.4%. Inflationary pressures are stirring, with tariffs and supply bottlenecks adding to cost pressures. Also, wages are rising. Additional inflationary pressures will come when the U.S. places additional tariffs on Chinese goods. This will keep the Fed on course for its interest rate schedule.

The inventory build closed the third quarter on a lighter note. Wholesale stockpiles grew a modest 0.4% in September, following a 0.9% surge in August. Performance was mixed across the two main categories. Durable goods inventories increased 0.8% in September, while nondurable goods stockpiles fell 0.4%. Wholesale stockpiles were up 5.2% year-over-year. Wholesale sales also moderated in September, rising 0.2%, after the 0.7% surge in August. Still, the inventory-to-sales ratio held steady at 1.26 months. Durable goods stockpiles had a stellar month, with gains in every category and are up 6.8% y/y. Nondurable goods are faring poorly, with a big 3.8% decline in farm products. Drugs, paper, and miscellaneous products all slipped for the month.

International:

China’s automobile sales fell sharply in October, bringing the world’s largest car market closer to an annual contraction not seen since at least 1990. The Chinese Association of Automobile Manufacturers (CAAM) said overall vehicle sales for January-October totaled 22.8 million, down 0.1% from a year ago. Sales in October were 2.38 million, the fourth straight decline and the steepest drop since erly-2012. The industry body said that the sales drop was because of weakness I consumer demand and the impact of a slowing economy. In previous months CAAM also said the trade war was impacting sales. The downturn in sales underscores how international car makers, from General Motors to Toyota are in for a rough ride, when they are increasingly looking for China as a driver of growth. China’s car industry is also a major employer, economic growth driver and barometer of consumers’ willingness to open purse strings for big ticket items. Chinese car dealers are pushing Beijing to help prop up the sector, including lower purchase taxes. Sales of new energy vehicles, a category comprising electric battery cars and hybrid vehicles remain strong up 51% in October. That took year-to-date sales to 860,000 vehicles, up 75.6% from a year earlier.

Important Data Releases This Week

The October NFIB small business optimism index will be released on Tuesday, November 13 at 6:00 AM EST. The small business index is expected to hold steady at 108.0 in October versus September’s 107.9 reading. September saw a little less optimism in sales and the economy.

The October CPI will be released on Wednesday, November 14 at 8:30 AM EST. Moderate but noticeable pressure is projected for the October CPI, which will rise 0.3%, following September’s 0.1% increase. The core CPI is projected to increase 0.2%. On a yearly basis, this will bring the headline index up 2.5% and the core 2.2%.

October retail sales will be released on Thursday, November 15 at 8:30 AM EDT. A solid 0.5% increase is projected for retail sales, after the weak 0.1% advance in September. Control retail sales, which exclude autos, restaurants, gasoline and building materials have been very solid. Excluding autos, we expect a gain of 0.5%.

Import and Export prices will be released on Thursday, November 15 at 8:30 AM EST. We project import prices to remain unchanged in October and export prices to rise just 0.1% in October. Export prices have been weak, down 0.2% and 0.5% the last two months.

September business inventories will be released on Thursday, November 15 at 10:00 AM EST. A moderate 0.3% gain in inventory build is forecast for September.

October industrial production will be released on Friday, November 16 at 9:15 AM EST. A consistent strength has been mining, but weakness in utility is likely in October. Total IP is projected to increase 0.2% for October. Manufacturing is forecast to rise 0.3%. Capacity utilization is likely to tighten 1 tenth to 78.2%.


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About Steve Graham

Steve is one of the premier analysts in the transportation equipment industry. On a monthly basis Steve tracks and analyzes in detail the trailer and heavy-duty truck industry. Aside from following these two sectors he is also instrumental in helping our customers analyze the economy and its impact on transportation and transportation equipment.