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.
European shares fell on Friday as weak data from China rekindled anxiety over slowing global growth as divestors fretted ahead of Saturday’s crucial talks between U.S. Donald Trump and China’s Xi Jinping over trade. The pan-European STO 600 opened marginally on Friday but fell into the negative, due to exposure to companies in Germany, whom are sensitive of exports to China. The STOXX 600 was set for its second straight month of losses. China reported its weakest factory growth in more than two years on Friday. MSCI’s broadest index of shares outside of Japan ended Friday down 0.2%. The financial markets ended the week with low expectations of a ceasefire in the trade war.
China and the United States agreed to keep their trade war from escalating after a highly anticipated dinner between President Donald Trump and Chinese President Xi Jinping on Saturday. The leaders agreed to pause the introduction of new tariffs and intensify their trade talks. The White House will leave existing tariffs n $200 billion of Chinese goods at 10% and refrain from raising that rate on Jan.1 to 25%. China agreed to boost its purchases of agricultural and industrial goods to reduce its trade imbalance with the U.S. The two sides agreed to mutually open their markets, and as China advances a new series of reforms and gradually ease the balance in the two-way trade. After 90 days, if there is no progress on structural reform, the U.S. will raise tariffs to 25%.
The move by both the U.S. and China is positive, but by no means a ceasefire. Both sides have a lot of negotiations to complete before a complete trade deal is completed. The announcement will be positive for equities for a short term and may boost trade between the two nations. The move may help boost confidence and repair trade volumes and could help support the global economy. The global economy has been clearly slowing and a boost to global equities and the removal of some uncertainties could help turn the global economy upwards. This remains to be seen, as conditions remain fragile and renewed trade tensions could still break out. However, a step back from the cliff is good. The outlook for 2019 did get brighter but there are still a lot of dark clouds. The U.S. economy is still expected to slow in 2019, but a brighter global economy may be the needed boost to keep the expansion alive.
Wall Street rose on Friday as investors hoped progress on trade in a critical U.S.-China meeting over the weekend and the S&P and the Nasdaq posted their biggest weekly gain in nearly seen years. The Dow saw its largest weekly advance in two years. Investor were encouraged this week by comments by Federal Reserve Chair Jerome Powell and the subsequent minutes from the central bank’s latest meeting that the Fed will be data-driven rather than aa ideological approach to future rate hikes. All three major indexes recorded modest monthly increases for November. The three key issues that investors refocusing on are how dovish is the Fed going to be going forward and how are trade relations with China going to play out and what’s going on in the energy markets.
The minutes from the November Federal Open Market Committee were familiar. The Fed is going ahead with its December rate hike and the committee will continue to modify its forward guidance, moving away from explicit guidance while stressing the value of incoming economic data. The Fed is changings its emphasis from its long-term projections for the economy and inflation to short-term data in its statement. This give the Fed more flexibility in pushing back the view that the Fed is set on a preset course and be more data dependent. Oil prices will reduce inflationary pressures for a short-term at least and raise the probability that the Fed might pause in 2019. Although the Fed didn’t mention it, the prospects of slower global growth and increasing trade tensions that could involve the larger economy and the downturn in the equity markets are giving the Fed ammunition to consider pausing its rate increases, especially if the economy starts to stumble next year. The Fed will raise rates in December, but how many more increases will be needed in 2019 is now open for discussion.
The spotlight was on the Fed and the meeting with Trump and Xi, but there were some other data released last week that shed some light on the economy. Real GD for the third quarter was unchanged in the second estimate at an annualized pace of 3.5%. Personal consumption was revised lower, but declines were matched by modest upward revisions to investment spending. The volatile trade environment caused a larger than initially reported build in inventories. Corporate profits were solid, with before-tax profits rising 10.3% on a year ago basis. The strength came from the domestic economy. Slow global growth and the high dollar saw profits from foreign profits to fall by $7.7 billion in Q3.
The outlook for the consumer remains bright, supported by advances in income. Personal income rose 0.5% in October and every category contributed to the increase. Personal spending rose a strong 0.6%, but that follow a weak September. New-home sales fell 8.9% in October. Higher mortgage rates are hurting housing. Starts were slightly positive in October, but the trend is flat and not expected to improve for a couple of years. Next week will be busy for economic data. We get to see both the ISM manufacturing and non-manufacturing indexes, construction spending, vehicle sales, international trade, factory orders and employment. The economy’s prospects look good for 2019. A lot depends on trade relations between the U.S. and China to become more positive but there are concerns about Fed policy in 2019. How far will the Fed go will be a major theme for 2019. Will the global economy continue slowing, or rebound slightly will be another challenge for the new year? The economy is expected to slow in 2019, but how much and when will be the central theme for 2019.
The U.S. Economy:
The inventory build started the fourth quarter on a strong note. The October advance wholesale inventories report showed stock expanded by 0.7%, following a 0.6% advance in September. Auto inventories rose 1.2% and retailers excluding autos expanded 0.7%. Retail stocks advanced 0.9% in October. The report suggests inventory bud will be a contributor to growth in the fourth quarter. Trade remains a wild card to future inventory accumulation. Wholesalers and retailers buy a lot of imported products such that higher prices of Chinese goods will slice into margins.
The nominal goods deficit swelled to $77.2 billion in October, up from $76.3 billion in September. Nominal goods exports fell 0.6% in October, following a 2% gain in September. Food, feeds and beverage exports declined 6.8%, while automotive exports lost 2.8% and capital goods exports dropped 1.1%. Nominal goods imports rose 0.1% in October, following a 1.7% gain in September. Capital goods imports fell 5.1%, while industrial supplies lost 0.9% for the month. The slowing global economy, the impact of the high dollar and the effects of the trade war are hurting trade. The real broad weighted dollar has appreciated dollar is up about 5% since January and the global economy is past its peak. Tariffs are hurting trade. Total exports are up 7.8% from a year ago, but agricultural exports are down 2.8% from October 2017. The meeting at the end of November between President Trump and President Xi will important to future trade.
New home sales took a tumble in October, coming in 8.9% below September’ level. Sales in October equaled an annual rate of 544,000 units. Sales fell in all four Census regions’ Inventory continued to increase in October, which loosened the market ad kept downward pressure on rice. The inventory-to-sales ratio equaled 7.4 months in October, up 0.9 months from September and up 1.8 moths from a year earlier. The price distribution of sales shifted down in October. Sales of homes prices u der $300,000 accounted for 50% of sales in October, up from 44% in September and up from 45% in October 2017. Higher mortgage rates and still high prices are hurting new home sales. Sales won’t fall off a cliff but are unlikely to move much before rates start to come down and that won’t happen until 2021 at the earliest.
Personal income rose a stronger than expected 0.5% in October, following a 0.2% advance in September. It was the strongest advance in income since January. Meantime, personal spending advanced 0.4% in October, following the 0.1% increase in September. Consumers continue to spend at a decent pace, supported by rising incomes and the tax reductions. Consumer spent aggressively in the third quarter but have seemed to moderate a little in the fourth. Support from the tax reductions is fading, but lower energy prices are a support. Inflation is controlled. The PE deflator rose .2% in October, following a 0.1% rise in September. The ore PCE rose just 0.1% for the month. The headline PCE was up 2.0 from a year earlier and the core was up 1.8%. Inflation is tracking ear the Fed target and lower energy prices will keep downward pressure on the index for a few months. The Fed will keep on schedule for a rate hike in December and will continue its trend in 2019. How many increases n 2019 is subject to debate. The Fed could pause but a lot depends on how inflation behaves.
The euro-zone business growth was much weaker than expected this month as export fell sharply by the slowing global economy and the ongoing U.S. trade war. The composite PMI Index fell to 52.4 in November, the weakest reading since late-2014. The service PMI fell to a 25-month low of 53.1 in November from October’s 53.7. The manufacturing PMI fell to 51.5 from 52.0, a level not seen since mid-2016. The index for output, fell to 50.4, a level very near contraction, from 51.3. Backlogs fell to 48.4 from 49.0.
The Chinese official manufacturing PMI fell to 50 in November from 50.2 in October, the weakest reading in 28 months. Manufacturing is now close to contraction territory and add further fuel to fears of a global slowdown. The report was released before the meeting between President Trump and President Xi in Buenos Aires. The new orders index declined to 50.4 from 50.8, with export orders shrinking for a sixth straight month. Production was modest but slightly weaker than I October. The official non-manufacturing PMI dipped to 53.4 from 53.9, with overall business confidence slipping to 54.2 from 56.4 in October. China’s policymakers are expected to launch more policy support and stimulus measures if domestic and external conditions continue to deteriorate. While China may still it its growth target of around 6.5% this year, some economists project growth could slip to as low as 6% next year, the weakest expansion in nearly 30 years.
Important Data Releases This Week
The November ISM manufacturing index will be released on Monday, Dec. 3 at 10:00 AM EDT. Slightly strength at a high level is forecast for the ISM manufacturing index. The index is projected to decline to 57.2 in November from October’s 57.7 reading in a month where the industrial sector backtracked from being red-hot to just hot.
Construction spending in October will be released on Monday, Dec.3 at 10:00 AM EDT. Construction spending is expected to have increased 0.4% in October after being unchanged in September, a month where both residential and nonresidential construction spending was weak but offset by a increase in public spending.
U.S. vehicle sales for November will be released on Tuesday, Dec. 4 at 4:00 PM EDT. Vehicle sales were almost flat in October but surprised with a second month of strength. Sales are projected to backtrack to 17.2 million for November from the 17.5 million pace in October.
The November ISM non- manufacturing index will be released on Wednesday, Dec. 5 at 10:00 AM EDT. A slightly less robust rate of growth is projected for the ISM non-manufacturing index to cool to 59 from October’s 60.3 reading. New orders and new export orders were strong in October.
October international trade will be released on Thursday, Dec. 6 at 8:30 AM EDT. After the release of the advance goods report, we project the deficit to widen from $54.0 billion to $54.9 billion.
October factory orders will be released on Thursday, Dec. 6 at 10:00 AM EDT. Already released durable goods orders saw a steep 4.4% drop, reflecting a decline in defense aircraft and a step backwards for primary metals. We expect to see a 2.0% for the month after non-durable goods are included
November employment will be released on Friday, Dec. 7 at 8:30 AM EDT. A solid 190,000 gain in payrolls is projected for November, following the decent October 250,000 increase. October bounced back after a hurricane caused September to be weak. The unemployment rate is projected to be unchanged at 3.7%. Average hourly earnings are forecast to improve to 3.2% y/y.