OPTIMISM SETS ALL-TIME RECORD IN 2017 NFIB SMALL BUSINESS OPTIMISM INDEX FOR DECEMBER CAPS A HISTORY-MAKING YEAR

The Index of Small Business Optimism lost 2.6 points in December, falling to 104.9, still one of the strongest readings in the 45-year history of the NFIB surveys. (…) Following the election announcement, the Index rose from 95.0 (a below average reading) for October and pre-election November, to 102.0 in the November weeks after the election, and then to 105.0 in January. This surge in optimism has led to 2017 achieving the highest yearly average Index reading in the survey’s history. The average monthly Index for 2017 was 104.8. The previous record was 104.6, set in 2004.

U.S. Consumer Credit Usage Surges

Consumer credit outstanding strengthened $27.96 billion (5.3% y/y) during November after a little-revised $20.53 billion October rise. It was the strongest increase since November 2001. During the past ten years, there has been a 51% correlation between the y/y growth in consumer credit and y/y growth in personal consumption expenditures.

Nonrevolving credit usage jumped $16.75 billion (5.2% y/y), the largest increase since August of 2016. (…) Revolving consumer credit balances jumped $11.19 billion (5.7% y/y), the strongest rise in twelve months. (…)

U.S. JOLTS: Job Openings and Hiring Rates Erode

The Bureau of Labor Statistics reported that the total job openings rate in November fell to 3.8%, its lowest level in six months. The hiring rate also fell slightly to 3.7% from the expansion high of 3.8%.

The private sector job openings rate fell to 4.1% from 4.2%. The decline was pronounced in the factory sector and professional & business services. The rate improved in leisure & hospitality as well as trade, transportation & utilities and construction. In health care & government, the rate held steady.

The total number of job openings eased 0.8% (+4.4% y/y) reflecting a 0.9% drop (+6.0% y/y) in the private sector total. The job openings decline included the manufacturing, professional & business services and health care & social assistance sectors. The number of job openings rose in construction, trade transportation & utilities and leisure & hospitality.

The private sector hiring rate slipped from the cycle high to 4.1% led by the construction, professional & business services and leisure & hospitality sectors. Elsewhere, the hiring rate rose moderately or held steady.

The overall number of hires fell 1.9% (+4.3% y/y), with sharp declines in leisure and hospitality, construction and professional & business services. Hiring improved in manufacturing, education & social services and government.

The overall job separations rate eased to 3.5%, the lowest level since April. The decline was led by the financial activities, construction, information, professional & business services and education sectors. The leisure & hospitality, manufacturing and trade transportation & utilities areas showed improvement.

The layoff & discharge rate declined to 1.1%, the lowest level in six months. The decline was evident in the professional & business services, financial services and education sectors. Layoffs & discharges increased amongst manufacturing, information as well as leisure & hospitality firms. The actual number of discharges eased 0.4% (+1.6% y/y) to the lowest level in six months. Professional & business service sector layoffs declined, but firing rose in manufacturing, trade, transportation & utilities and the leisure & hospitality sector.

• Is the high job quits rate telling us that wage growth is about to accelerate (better give your workers a raise or they will quit)? (The Daily Shot)

Source: Capital Economics

The Global Economy’s Output Gap Has Closed For the first time in a decade, the global economy appears to be operating at its potential, according to World Bank economists

(…) Although the overall global output gap has closed, some countries are still operating below potential, especially commodity exporters. Others, especially the world’s advanced economies, appear to be somewhat “above potential,” meaning that the economy has more demand than is sustainable in the long-run. Excess demand is likely to lead to inflationary pressures, an increase in asset prices and pressure on central banks to raise interest rates.

Closing the output gap could trigger a broad change in economic conditions around the world.

(…) Now, international inflationary pressures could be on the return.

“Slack in the rest of the world forces firms to keep costs at a certain level,” said Ayhan Kose, the director of the World Bank’s Development Economic Prospects Group. “In 2018, that is disappearing.”

With the gap only narrowly closed, and uncertainty around that estimate, Mr. Kose cautions that the inflationary pressures could remain modest in 2018. (…)

Overall, the world’s economy grew 3% in 2017, the World Bank said, up from the June estimate of 2.7%, and a considerable strengthening from the 2.4% growth that was logged in 2016. The World Bank forecasts that growth will pick up a bit more in 2018, rising to 3.1%.

Despite a growth surge and closing output gap, however, the report’s authors caution that risks to the economy remain significant, with potential growth slowing in many economies due to aging demographics, slowing productivity growth and less investment than in the past.  Adding to those risks are global central banks shifting to tighter monetary policies, and many governments around the world with unsustainable fiscal outlooks.

FIBER: Industrial Commodity Prices Continue to Improve

The Industrial Materials Price Index from the Foundation for International Business and Economic Research (FIBER) rose 2.4% during the last four weeks following a 6.7% during all of last year. Recent price improvement came as U.S. factory output increased 2.3% y/y through November following little change in 2016.

Prices in the metals sector increased 6.5% during the last month, and rose 21.2% y/y. Strength was led by a 12.3% one-month rise in steel scrap prices which improved 16.8% y/y. Aluminum prices increased 10.2% over four weeks and one third y/y. The cost of copper scrap gained 7.7% over the last four weeks and 29.2% during the last year. Amongst other metals, lead prices improved 1.3% during the last month and 26.2% y/y, while zinc prices rose 5.6% during the last four weeks and 30.8% y/y.

Prices in the crude oil & benzene group strengthened 1.5% last month, and gained 8.0% y/y. This rise was led by a 6.8% m/m increase (14.5% y/y) in crude oil prices to an average $61.15 per barrel, the highest level since December 2014. Benzene prices fell 5.1% in the last four weeks, but rose 14.3% y/y.

In the textile group, prices increased 1.2% last month, and rose 2.5% y/y. Cotton prices strengthened 6.9% m/m and by roughly the same amount y/y. Burlap prices improved 1.0% over the last four weeks and 14.6% y/y. Prices in the miscellaneous group nudged 0.3% higher last month, but slipped 0.8% y/y. Framing lumber prices eased 0.7% in recent weeks, but remained up nearly one-quarter y/y. Prices for structural panels were little-changed last month, yet rose 17.6% y/y. Natural rubber costs rose 1.5% last month, but still were off nearly one-third y/y.

  

Investors Finally Seeing Signs of Inflation Market-based inflation expectations top key threshold as investors respond to improving economy, higher energy prices, tax cuts

(…) The 10-year inflation break-even rate, which reflects the yield premium on the 10-year U.S. Treasury note over the comparable Treasury inflation-protected security, topped 2% on Tuesday for the first time in more than nine months, according to Thomson Reuters. It settled Friday at 2.027%, its highest level since March 16. (…)

China May Halt Purchases of U.S. Treasuries

Canadian home prices grew 10.8 per cent in fourth quarter: Royal LePage

SENTIMENT WATCH

• Wall Street’s Rising Euphoria May Spell Trouble for Stock Market

• Morgan Stanley: “People Have A Hard Time Even Imagining How The Market Could Decline”

(…) “Our team has observed a dramatic shift in sentiment since we initiated coverage in April. In April, it felt as if people were looking for a reason for the market to fail.

Now, we have seen a total reversal with people having a hard time even imagining how the market could decline.” (…)

In the past, when the RSI has peaked above 80 an average correction of -3.5% has followed one month later. The corrections have ranged from -0.8% to -7.7%.

Morgan Stanley concludes, a pull back feels close and it is now just a matter of time…

• As Stocks Reach New Highs, Investors Abandon Hedges

(…) “I haven’t seen hedging activity this light since the end of the financial crisis,” said Peter Cecchini, a New York-based chief market strategist at Cantor Fitzgerald. “It started in late 2016 and accelerated in the second half of the year.” (…)

A University of Michigan survey in October showed that consumers saw a nearly 65% chance on average that the stock market would rise in the next 12 months, the highest share on record. That measure remained near record levels in the following months.

New data indicate that either demand for protection is low or investors are favoring bullish options on the S&P 500 instead. (…)

Bets by hedge funds against volatility—similar to a bullish wager on stocks—outnumber bets on rising volatility, recent Commodity Futures Trading Commission data show. (…)

• Gundlach Says S&P 500 Will Have Negative Return for 2018

EARNINGS WATCH

• What the Tax Law Will Do to Bank Earnings  It is going to be a noisy quarter for bank earnings. Because of the tax-overhaul law, big banks are going to record a host of special charges that cut into fourth-quarter profit.

(…) Five of the biggest U.S. banks are likely to report a total of about $31 billion in tax-related hits for the fourth quarter, according to the banks’ recent disclosures and public comments. (…) Because of the reduction in the tax rate, banks and other companies will have an incentive to “kitchen-sink things,” said Christopher Marinac, director of research at FIG Partners in Atlanta. That is, to accelerate deductible expenses to record them in 2017 instead of 2018. (…)

Write-downs of deferred tax assets will lead to reductions in some banks’ regulatory capital, and will cut into their book value, a figure closely watched by investors.

But even as banks take their fourth-quarter charges, the tax-rate reduction to 21% is starting to work for them. Large national and regional banks should see an average 15% boost in their earnings per share by 2019 from the lower tax rate, Bernstein analyst John McDonald said in a research note last week. (…)

• Tax Reform to Fuel Increased Corporate Pension Contributions – GSAM

(…) U.S. companies have until mid-September to benefit from the higher 35% corporate tax rate when deducting their defined-benefit pension plan contributions from their tax bill. A $1 million pension plan contribution made during this time can still count toward the 2017 tax bill and will result in a $350,000 tax deduction. The value of the deduction falls to $210,000 for contributions of the same size made under the new tax rules for 2018. (…)

S&P 500 companies were expected to contribute around $50 billion to their U.S. pension plans in 2017, according to GSAM. The defined benefit pension plans of S&P 500 companies were about 85% funded at the start of 2017, resulting in a funding gap of roughly $260 billion, according to GSAM.

Companies with underfunded pension plans face higher insurance premiums from the Pension Benefit Guaranty Corporation, the agency that insures private-sector defined-benefit pension plans. The PBGC collects a fixed fee for each person enrolled in a private-sector pension and a separate, variable penalty payment for each dollar the plans are in arrears.

Plan sponsors were paying 3.4% on any deficit in 2018, which is expected to climb to 3.8% this year and above 4% by 2020, according to GSAM.

Companies that reduce or close their pension plan funding gap can eliminate those costs, Mr. Moran said.

‘The blockchain is real,’ says JPMorgan’s chairman

(…) In the interview, Mr. Dimon added that “you can have crypto-dollars and yen and stuff like that,” a reference to the idea that central banks and governments would create their own bitcoin-like currencies that borrowed some of its technological advantages. Addressing initial coin offerings, or ICOs, which many virtual-currency related startups have used to raise millions of dollars with minimal disclosure, Mr. Dimon said: “You look at every one individually.” (…)