RETAILING

U.S. Retail Buying Strengthens Unexpectedly

The consumer exhibited noticeable buying power last month. Total retail sales and spending at restaurants jumped 0.8% (5.8% y/y) during November following a 0.5% October increase, revised from 0.2%. Sales of motor vehicle & parts eased 0.2% (+6.3% y/y) following two months of strong increase, as unit vehicle sales fell 3.1%. Retail sales excluding autos jumped 1.0% (5.7% y/y) after a 0.4% rise.

The rise in retail spending reflected a 2.8% increase (12.2% y/y) in gasoline service station sales, as pump prices strengthened. Retail sales excluding both motor vehicles and gasoline rose 0.8% (4.9% y/y) following a 0.3% October gain. The three-month annualized rate of increase in these sales surged to 8.5%, double last year’s growth rate and the strongest rate of growth since early-2014.

Strength in sales was broad-based last month. Sales of nonstore retailers surged 2.5% (10.4% y/y), recovering after a 0.4% October dip. Building materials & garden equipment store sales gained 1.2% (10.7% y/y) following a 0.1% slip. Appliances & electronics store purchases strengthened 2.1% (6.4% y/y) after two monthly increases of roughly 1.3%. Furniture & home furnishing store sales grew 1.2% (8.2% y/y) following a 1.8% rise. Sporting goods store sales improved 0.9% (2.9% y/y) after two monthly increases of 1.4% or more. Clothing  accessory store sales grew 0.7% (2.8% y/y) for the second straight month. Lagging behind were general merchandise store sales which remained unchanged (3.6% y/y) following a 0.1% uptick.

Remarkable! Not only the sales numbers, but also how American consumers are, once again, oblivious to debt ratios and very comfortable with taking on more debt, just as the Fed is hiking.

Underlying Inflation Gauge (UIG)

• The UIG estimated on the “full data set” increased from a revised 2.91% in October to 2.95% in November.
• The “prices-only” measure decreased slightly from a revised 2.22% in October to 2.21% in November.
• While the twelve-month change in the November CPI showed an increase from October, only the UIG full data set measure indicated a firming in trend inflation.

The UIG measures currently estimate trend CPI inflation to be in the 2.2% to 2.95% range, with the prices-only measure close to the actual twelve-month change in the CPI.

U.S. service sector slowdown contrasts with stronger manufacturing performance in December

December data pointed to divergent trends across the U.S. private sector economy, with a slowdown in services growth more than offsetting a robust and accelerated upturn in manufacturing output. As a result, the seasonally adjusted IHS Markit Flash U.S. Composite PMI Output Index dropped to 53.0 in December, from 54.5 in November.

The latest reading signalled the weakest expansion of private sector business activity since March. Manufacturing production expanded at the fastest pace since January, while service sector output growth eased to a 15-month low.

A similar easing in new business growth was seen across the private sector economy in December. Resilient client demand and a modest rise in backlogs of work nevertheless encouraged firms to expand their operating capacity, as highlighted by another solid rise in payroll numbers at the end of 2017.

Input price inflation eased to a nine-month low during December, but the overall trend masked a steep and accelerated rise in manufacturers’ cost burdens. The latest increase in input prices across the manufacturing sector was the fastest for exactly five years.

Meanwhile, prices charged inflation eased in December, with both manufacturing companies and service providers recording slower rises in their average charges.

At 52.4 in December, down from 54.5 in November, the seasonally adjusted IHS Markit Flash U.S. Services PMIâ„¢ Business Activity Index signalled the slowest upturn in service sector activity since September 2016. Subdued business activity growth reflected a further loss of momentum for new order intakes. The latest increase in incoming new business was the least marked since April.

Job creation eased to a seven-month low in December, which survey respondents linked to softer new business growth and a moderation in confidence regarding the year ahead outlook. Latest data indicated that business optimism across the service sector eased for the second month running to its weakest since June 2016.

Input price inflation remained relatively subdued in December, with the latest rise in average cost burdens the slowest for nine months. Prices charged inflation also moderated since November.

U.S. manufacturers experienced a robust and accelerated improvement in business conditions during December. At 55.0, up from 53.9 in November, the seasonally adjusted IHS Markit Flash U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) signalled the strongest upturn in operating conditions since January.

December data pointed to sharper increases in production, new orders and employment. Anecdotal evidence suggested that greater domestic demand was a key driver of manufacturing growth at the end of the year. A number of firms also cited efforts to boost operating capacity at their plants, which led to the steepest rise in payroll numbers since September 2014.

Business optimism picked up for the third month running in December. The degree of positive sentiment was also the strongest since January 2016. Survey respondents widely commented on hopes of a sustained upturn in sales volumes over the year ahead, supported by new product launches and investment in additional plant capacity.

Meanwhile, higher prices for raw materials resulted in the strongest rate of input cost inflation since December 2012. There were signs that manufacturers had absorbed part of the rise in average cost burdens, as highlighted by a slower increase in factory gate charges in December.

Chris Williamson, Chief Business Economist at IHS:

“The flash PMI surveys brought a mixed bag of news. While manufacturing is ending 2017 with the wind it its sails, the service sector is struggling in the doldrums by comparison. (…) Similar divergences were seen in relation to future growth, with business expectations picking up in manufacturing to a near-two-year high but waning markedly in services to the lowest for one and a half years.

With services representing a far greater portion of the economy than manufacturing, the overall picture is therefore one of the manufacturing sector’s exuberance being overshadowed by the gloomier service sector.

Measured overall, the surveys point to the economy growing at a modest annualised rate of just over 2% in the fourth quarter.

• The NY Fed’s Nowcast model is projecting growth of almost 4% for the fourth quarter. (The Daily Shot)

• Economists are not quite as optimistic, but they continue to upgrade their estimates. (The Daily Shot)

POLICY MISTAKE?

Eurozone PMI ends 2017 on a high amid record manufacturing growth

(…)Despite the recent bout of strong hiring, capacity constraints continued to be reported, reflected in a further marked rise in backlogs of uncompleted orders. Backlogs rose especially sharply in manufacturing, where the past two months have seen a record increase on average.

Supply chains also continued to be stretched as a result of strong demand, with average delivery times lengthening to an extent not seen since May 2000 as manufacturers reported a record increase in the amount of inputs purchased.

The robust growth of demand and tightening labour market hint at rising core inflationary pressures as we move through 2018. Strong demand was a key factor helping firms hike prices. Average charges for goods and services showed a slightly smaller rise than the prior two months but still recorded one of the largest increases since mid-2011.

Higher prices also reflected the need to pass higher costs on to customers. Average input costs rose sharply again in both sectors, though especially in manufacturing. The overall rate of inflation dipped from November, but remained among the highest seen over the past six-and-a-half years.

The elevated levels of the PMI survey output and price pressure gauges mean that on both counts the data are firmly in territory that has historically been commensurate with a tightening of monetary policy.

However, the ECB left policy unchanged at its December meeting, saying interest rates will remain unchanged until well beyond the asset purchase programme has finished, which is scheduled to run until the end of September 2018 or beyond, if deemed necessary.

Japan Flash Manufacturing PMI signals best quarter since early-2014

(…) While factory output increased markedly in December, it was a strong pick-up in overall order book growth that was the most encouraging development. New business inflows showed the largest monthly increase since January 2014.

Export growth has been a key driver of the recent order book upturn. The PMI survey’s new export orders index (measured in volume terms) – which exhibits a correlation of over 70% with comparable official export data with a two-month lead – rose further in December to its highest since November 2013. This was attributed by producers to strong overseas demand, as well as the weakened yen. An improvement in competitiveness has arisen from the yen’s recent depreciation, with the currency down 5% against the US dollar since early September.

The flip side of a weaker yen, however, was another steep rise in import prices, which pushed overall input costs up at the second-fastest rate in three years, though that should be good news for a central bank seeking to bring up inflation.

However, although some of the higher costs were passed on to customers as firms sought to protect profit margins, selling price inflation remained well below that of input cost increases. Firms’ reluctance to raise selling prices at a level that matches input cost inflation continued to undermine efforts by the Bank of Japan to meet its inflation target. (…)

Japan’s ruling bloc approves big corporate tax cut to encourage wage hikes

Japan’s ruling bloc approved a plan on Thursday to slash the corporate tax rate to around 20 percent from 30 percent – but only for companies that raise wages aggressively and boost domestic capital spending. (…)

“We want to show how serious we are, so we decided to impose penalties such as depriving those who, despite record profits, won’t increase wages or capital spending, of (existing) special tax measures,” Tetsuo Saito, the head of the Komeito Party’s tax commission told reporters. (…)

Abe’s ruling bloc also approved a raft of tax hikes for coming years to pay for a bulging welfare bill, at the risk of putting a damper on private consumption.

The government expects a rise in personal income tax effective in 2020 to bring in some 90 billion yen ($800 million) in additional annual tax revenue.

Taken together, the changes to the tax code will bring an average annual net tax increase of 280 billion yen, said Yoichi Miyazawa, head of the tax commission of Abe’s ruling Liberal Democratic Party. (…)

This Tax Bill Is a Trillion-Dollar Blunder Michael R. Bloomberg

(…) In effect, the tax bill achieves four main things:

• It takes money away from schools and students.
• It restricts our ability to invest in infrastructure.
• It does nothing to boost real wages while making health insurance more expensive.
• It makes it harder to control the costs of Medicare and Social Security without cutting defense and other spending — or further exploding the deficit. (…)

Japanese traders who historically engaged in trading real currencies have turned their sights to cryptocurrencies such as bitcoin, driving prices higher, Deutsche Bank says.

(…) Japan currently accounts for the bulk of bitcoin’s trading volume. Some 40% of bitcoin trading is currently yen-denominated, according to data provider Coinhills, a firm that tracks digital currencies. (…)

Earlier this year, Japan established bitcoin as a legitimate payment method and enacted new rules on the exchanges such as minimum capital requirements, segregating customer accounts, and monitoring potential criminal activity. (…)

DHS Plans to End Work Eligibility for Spouses of H-1B Holders The spouses of highly skilled foreign workers would no longer be able to work legally in the U.S. under a regulatory change proposed by the Trump administration Thursday.