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.
World shares hit their highest levels in six months as investors gravitated to the view that the latest exchange of tariffs between the United States and China may be less damaging than initially feared. A rally in Chinese stocks helped the MCI’s broadest index of Asia-Pacific shares outside of Japan up 1.27% on Friday, helped by the expectations that Beijing will pump more stimulus into the economy to weather the trade war. The index has rebounded 4.6% from a 14-month low on Sept. 12. The MSI All-Country Index, which tracks shares of 47 countries, hit the highest level since March 13. The advance in stocks came despite anecdotal reports from companies on both sides of the Pacific that the trade war is starting to impact their operations. The outlook for corporate profits has remained solid in many markets on the strength of global growth, keeping valuations relatively attractive.
Industrials led the Dow to a new closing high on Friday ahead of Monday’s major sector reshuffle, capping a week that largely shrugged off trade worries. Trading volume spiked to the highest level since Feb. 9 in anticipation of the major S&P sector change, when telecoms will be folded into a new sector called communications services, along with heavy-hitters, such as Facebook and Walt Disney. While the Dow edged higher, the S&P and Nasdaq ended Friday in negative territory. “Quadruple witching,” when stock options and futures expire, and the rebalancing of the S&P 500 and the Russell 2000 indexes contributed to heavy volumes.
U.S. President Donald Trump escalated his trade war with China this week by imposing 10% tariffs on about $200 billion of Chinese imports and warned of further tariffs if China took retaliatory actions. China responded by adding $60 billion of U.S. products to its import tariff list. Starting Monday, a 10% duty applies to 200 billion of Chinese imports and Americans have until the end of the year to stockpile Chinese product before the tariff leaps to 25%. Trump has threatened to place another $267 billion of made-in China goods, which would hit nearly all consumer products, including mobile phones, kids toys and shoes. That escalation will move companies to stock up ahead of the tariffs. The tight freight market will get tighter until January 1. Spot rates from Shanghai to Los Angeles, the biggest U.S. port, reached $2,362 per 40-foot container in the week ending Sept 13, the highest level since December 2014.
Thanks to Mr. Trump, American consumers and businesses can look forward to a big price spike. Not all products will see an equal price spike because some products come from other nations and supply chains are resilient. However, Mr. Trump’s tariffs on washing machines were an example on what we can expect to see. The tariff on that product, which applied to all import’s not just China, resulted in a price spike of 15% y/y. The latest tariff will hit $42 billion of consumer goods, according too Bank of America/Merrill Lynch estimates. How does that feed into inflation? A 10% increase in the tariff could mean a 10% price increase, which would hit about 5% of the CPI. That doesn’t sound large, but the 25% tariff will be bigger and the one after that even larger. That will matter both to U.S. shoppers and the Federal Reserve. One offsetting factor is the Chinese yuan’s steep slide, down more than 8% against the dollar since April and that will dampen some of the effects of Mr. Trump’s 10% import tax. As the price of goods increase, the consumer will make a choice and the choice commonly will be to reduce spending. Fast-forwarding freight has a flip side, after pulling freight forward, it will also will fall off after January 1 and some of this retreat will reflect lower final demand.
Last week was focused on housing. Although starts rebounded 9.2% in August, building permits fell 5.7%. Homebuilding remains subdued. Permits are running below starts, suggesting that building activityg is running out of steam. Existing home sales came in unchanged at a 5.34 million annual pace, that followed four months of declining sales. Homebuilders remain reluctant to sell their home due to concerns they may not find another suitable and affordable home to buy. House prices are high, and interest rates are rising, making the future of housing subpar.
Despite housing being stuck in the slow lane, broader economic activity appears to be solid. The Leading Economic Index (LEI) climber 0.4% higher in August. The largest contributor was the 0.2 gain from the IMS manufacturing new orders index. Most of the other components in the index, made positive contributions to the index, further evidence the economic growth remains sold. The economy is being super charged by the fiscal stimulus and lower taxes and the effects from that boost will persist through 2019. Trade will slow, but not break growth. However, the stimulus will fade in 2020-21 and the economy will slow to trend. The impact of higher interest rates amid a slower economy, plus trade may be more than the economy will take. The sailing is smooth now, but darker clouds are on the horizon.
Next week, all eyes will be on the Fed, whom are expected to raise rates and a look at the Chicago Fed’s National Activity Index, new home sales durable goods orders, the third estimate for Q2 GDP, advance goods deficit, pending home sales, wholesale inventories and personal incomes, spending and the PCE index.
The U.S. Economy:
The NAHB homebuilder sentiment index was unchanged in September at 67. The index remains 17 points above the to-point threshold. One of the three subcomponents, the current sales and sales expectations index increased for the month. Confidence remains high among builders despite rising mortgage rates and a generally flat market. Income growth and a strong job market should drive gains near full capacity over the next few quarters.
Housing starts bounced back in August, with starts increasing 9.2% to an annualized rate of 1.282 million units. Single-family start rose 1.9% to an annual pace of 876,000 units, while the multi-family component increased 29.3% to 406,000 units. The increase in housing activity is unlikely to be sustained as total permits fell 5.7% to 1.229 million units. Total starts were up 9.4% from August 2017 and total permits were down 5.5% y/y. Completions in August totaled 1.213 million, up 2.5% from July and 11.2% from August 2017. Permit backlogs came in at166,000, down 2.4% from July but still up 11.4% year-over-year. The bounce back in starts was welcome, but the fall in permits is a concern about near-term activity. The effects of Hurricane Florence will depress activity in September but will boost activity in October and November. Despite the stronger August report, it is hard to escape the conclusion that residential construction may have temporary peaked. The industry is operating near capacity and interest rates are rising. Fundamental drivers such as income gains and family formation suggest activity won’t see a large correction, but rising rates may mean the peak is near for this cycle.
Existing home sales were flat in August, coming in at a annualized 5.34 million. Sales remained down by 1.5% from August 2017. Single-family sales totaled 4.75 million, unchanged from July but down 1% y/y. Single-family home inventories totaled 1.7 million, unchanged from August but up 3% from a year earlier. The I/S ratio was 4.3 months of sales unchanged m/m, but up 0.2 from a year ago. The report suggests that housing has leveled out, at least temporarily. The combination of low supply, rising mortgage rates and reduced tax deductibility has hurt the market.
Prospects for the economy are strengthening. The Conference Board’s Leading Economic Indicators index rose 0.4% in August, following increases of 0.7% in July and 0.5% in June. All three of the index’s major components were in positive territory last month. The ISM new orders index and the Leading Credit Index made the biggest contribution to the August increase. Average weekly claims for unemployment insurance improved in August and other labor market indicators point to sustained growth. Factory orders fell a bit because of the volatile aircraft segment, but core capital goods orders have been solid. The latest data, except for housing has been basically positive for the last few months. This suggest the economy’s strong momentum will continue.
Confidence among Asian firms slumped to the lowest level in almost three years as businesses feared blowback from the worsening trade war, a Thompson Reuters/INSEAD survey showed. Representing a six-month outlook of 104 forms, the survey sentiment index fell to 58 for the July-September quarter, the lowest reading since the fourth quarter of 2015 from 74 three months earlier. It was the second straight quarter-on-quarter decline for the index and the steepest recorded since the survey started in 2009. “The fall in the index could be a strong signal of an economic slowdown,” said Atonio Fatas, a Singapore based economist with the global business school INSEAD. He added that changes in the index correspond well with changes in economic growth in the Asia Pacific region. He added further that “we have witnessed a cyclical upturn in the global economy that had to come to an end. We see the end of the cycle in advanced economies as well as emerging markets. The survey confirms that these fears are real.” A global trade war was cited as the chief business risk, with the second most identified risk was a Chinese slowdown and currency fluctuations. The sub-index for China nosedived to 25 from 63, the lowest reading ever and Japanese companies turned pessimistic.
Important Data Releases This Week
August housing starts will be released on Wednesday, September 19 at 10:00 AM EDT. Housing starts and permits are expected to have bounced back in August. Starts are projected to come in at an annual rate of 1.240 million, compared to 1.168 million in July. Permits are forecast to come in at 1.320 million, compared to July’s 1.303 million.
The August Chicago Fed National Activity Index is scheduled to be released on Monday, September 24 at 8:30 AM EDT. Strength in employment will be an offset to softness in manufacturing production for the national activity index in August. The index will rise to 0.20 versus 0.13 in July.
August new home sales will be released on Wednesday, September 26 at 10:00 AM EDT. New home sales are expected to rise slightly to 630,000 versus the 627,000 rate in July. A positive in July was a supply jump but prices may prove a negative in July.
August durable goods orders will be released on Thursday, September 27 at 8:30 AM EDT. A 2.0%-plus advance for August after the 17% decline in July. Aircraft orders were weak in July. Core capital goods orders are projected to advance 0.4% in August following the 1.4% rise in July.
Q2 GDP (third estimate) is scheduled to be released on Thursday, September 27 at 8:30 AM EDT. The third estimate is projected to come in at 4.3% annualized rate versus the 4.2% rate n the second estimate. Consumer spending will be unchanged at 3.8%.
August international trade in goods will be released on Thursday, September at 8:30 AM EDT. The goods deficit is expected to narrow to $70.8 billion in August from $72.1 billion in July. The result will update progress in net exports, which were very favorable in the second quarter. AM EDT. Pending home ales are expected to increase 0.2% in August after falling 0.7% in July.
The August pending home sales index will be released on Thursday, September 27 at 10:00 M EDT. Wholesale inventories are expected to rise 0.2% in August after a 0.6% increase in July. Despite the spike in inventories in July, sales at the wholesale level have been lean.
August personal income and outlays is scheduled to be released on Friday, September 28 at 8:30 AM EDT. Personal income is seen rising at a solid 0.4% rate in August, up slightly from July’s 0.3% increase. Spending will rise 0.3% in August, down slightly from the 0.4% advance in July. The PCE index is projected to rise 0.2% and the core 0.1%. This bring the year-over-year advance to 2.3% for the total index and 2.0% for the core.