THE TRAVELLING EDGE ( 24 October 2017)

Note: I am writing from the Philippines until Nov. 5, 12 hours ahead of N.A.

Stocks May Benefit as Hurricanes’ Impact Proves Short-Lived

This from the WSJ’s Money Beat Monday:

The economy is bouncing back from Hurricanes Harvey and Irma faster than many analysts expected, a sign that the “Goldilocks” environment that has propelled U.S. stock indexes to dozens of record highs this year is still intact.

“Incoming data suggest Hurricanes Harvey and Irma had slightly less of a negative impact on economic activity in the third quarter than we had previously assumed,” said analysts at Macroeconomic Advisers last week. The firm raised its estimate for third-quarter growth to 2.7% from 2.6%.

Barclays also raised its forecast for GDP last week to 2.5% from 1.5%, saying that U.S. economic activity had returned to normal faster than the bank had anticipated. (…)

But David Rosenberg on Monday revealed that state employment data show that Florida lost 127k jobs last month and Texas 7k. This means that ex the hurricanes-impacted areas, employment rose 101k, down from 169k in August which was the weakest month since last March.

And this from the NY Fed:

• The New York Fed Staff Nowcast stands at 1.5% for 2017:Q3 and 2.6% for 2017:Q4.
• News from this week’s data releases decreased the nowcast for Q3 by 0.2 percentage point and decreased the nowcast for Q4 by 0.3 percentage point.
• Negative surprises from the new residential construction and industrial production releases accounted for most of the decline.

Markit’s flash PMI for October is encouraging:

U.S. private sector growth accelerates to nine-month high in October, partly driven by a rebound in manufacturing

• Flash U.S. Composite Output Index at 55.7 (54.8 in September). 9-month high.
• Flash U.S. Services Business Activity Index at 55.9 (55.3 in September). 2-month high.
• Flash U.S. Manufacturing PMI at 54.5 (53.1 in September). 9-month high.
• Flash U.S. Manufacturing Output Index at 54.5 (52.4 in September). 8-month high.

October data indicated a robust and accelerated expansion of U.S. private sector business activity. The upturn was supported by the fastest rise in manufacturing production for eight months, alongside another robust increase in service sector output.

However, growth of overall new business volumes moderated further from the two-year peak seen in August. This reflected a slowdown in the service sector, as manufacturing firms reported the strongest rise in new work since March. Manufacturers recorded the most marked increase in new work from abroad for 14 months.

The latest survey revealed a solid increase in private sector employment, supported by the steepest rise in payroll numbers at manufacturing companies since June 2015.

Meanwhile, input price inflation moderated from September’s three-year peak. This contributed to a slowdown in prices charged inflation to its weakest for six months. That said, manufacturers continued to report relatively strong cost inflation, driven by rising commodity prices (particularly metals).

October data also pointed to the greatest pressure on manufacturing supply chains since early-2014. Survey respondents widely cited disruption and stretched workloads among suppliers following hurricanes Harvey and Irma.

The rate of job creation at service providers eased slightly in October. Some companies cited softer new business growth, alongside subdued pressure on operating capacity.
Service sector firms remain upbeat about their growth prospects for the year ahead, and the degree of optimism improved from September’s seven-month low.

Input cost inflation moderated to its least marked since March. This contributed to softer prices charged inflation across the service economy, with the latest increase in average charges the slowest for six months.

More People Think Renting Is a Better Deal Than Buying Some 76% of millennials said renting is an affordable option, up more than 10 percentage points from a year ago

(…) roughly 76% of renters in August said they believe renting is more affordable than owning, up from 65% in September 2016, according to survey results from Freddie Mac expected to be released Wednesday.

“We talk virtually every day about how renting is becoming less and less affordable. I think the answer is just that housing is becoming less and less affordable and renting is the more affordable of the two,” said David Brickman, executive vice president and head of Freddie Mac Multifamily. (…)

Roughly 82% of baby boomers said they view renting as a more affordable option, up 11 percentage points from a year ago. And the share of Generation Xers who see renting as more affordable jumped to 75% from 56%. (…)

The top reason renters across all age groups said they prefer to rent was convenience and flexibility, with 23% of respondents citing that as the reason, while 18% said they don’t have enough saved for a down payment. The third most common reason cited was that they had recently moved and are exploring neighborhoods.

That suggests the trend toward renting is being driven less by necessity and more by preference and lifestyle, which means it might not reverse anytime soon.

The Freddie Mac survey found a marked decline in those who said they are actively working toward homeownership, to 14% in August 2017 from 21% in January 2016.

Canada Forecasts Bottom-Line Boost on Growth Surge

Canada’s Liberal government said Tuesday that public finances have improved substantially due to strong economic growth, giving lawmakers leeway to sharply reduce deficits while delivering additional tax breaks to households with children and low-income workers.

Finance Minister Bill Morneau unveiled the revised forecast in the country’s parliament. The positive budget news could help distract from the scathing criticism Mr. Morneau has received over the past few months over his efforts to change tax rules affecting small firms and the self-employed.

The Finance Department’s fall fiscal update indicated the government’s bottom line will improve by nearly 30 billion Canadian dollars ($23.72 billion) over the next three fiscal years, ending March 30, 2020, on stronger-than-anticipated growth. Of that windfall, Mr. Morneau said the government intends to spend roughly a quarter, or more than C$7 billion, in that period on enhanced child benefits and a beefed-up tax break for low-income workers. (…)

In the 2017 budget plan presented in March, Canada anticipated 1.9% growth. Growth has been upgraded to 3.1% this year, and 2.1% in 2018 from an original 2% estimate. (…)

Eurozone adds jobs at strongest pace in over a decade

• Flash Eurozone PMI Composite Output Index at 55.9 (56.7 in September). 2-month low.
• Flash Eurozone Services PMI Activity Index at 54.9 (55.8 in September). 2-month low.
• Flash Eurozone Manufacturing PMI Output Index(4) at 58.7 (59.2 in September). 2-month low.
• Flash Eurozone Manufacturing PMI(3) at 58.6 (58.1 in September). 80-month high.

The recent strong growth of the euro area economy was maintained at the start of the final quarter of the year, driven by another marked improvement in new orders. Rising workloads encouraged firms to take on extra staff at the sharpest pace in over a decade. (…)

Manufacturers also recorded a faster rise in new orders than their service sector counterparts, with the rate of expansion at a four-month high. The strong performance of manufacturing partly reflected higher new export orders, with export growth picking up from that seen in September.

(…) the rate of job creation was the strongest in over a decade. Service providers took on extra staff to the greatest extent in seven months, while manufacturing jobs growth
was the strongest since data collection began in June 1997.

Job creation reflected further evidence of pressure on capacity, with backlogs of work increasing solidly again during October. Meanwhile, the manufacturing sector saw suppliers’ delivery times lengthen to the greatest extent in 80 months amid pressure on supply chains. (…)

Inflationary pressures continued to build at the start of the fourth quarter. Companies posted the fastest rise in input costs in six months, with both the manufacturing and service sectors seeing sharper rates of inflation in October.

Further improvements in demand meant that firms were often able to pass rising cost burdens on to their clients. As a result, output price inflation accelerated for the third month running and was the sharpest since June 2011. As was the case with input prices, charges increased at sharper rates across both monitored sectors.

Japanese manufacturing sector growth remains solid

• Flash Japan Manufacturing PMI® signals solid growth, but edges lower to 52.5 in October (52.9 in September)
• Flash Manufacturing Output Index at 52.6 (53.2 in September)

Central Bankers Cling to Stimulus Amid Weak Inflation Leaders of the world’s largest central banks indicated that weak inflation in advanced economies could prolong the postcrisis era of easy-money policies.

(…) Fed Chairwoman Janet Yellen said she expected the U.S. central bank to continue slowly raising short-term rates, but she expressed caution about how weak inflation might affect that path.

Gradual increases in the Fed’s benchmark federal-funds rate “are likely to be appropriate over the next few years to sustain the economic expansion,” she said, without specifying when the next rate increase would come.

Fed officials are watching price pressures closely, Ms. Yellen said, as the “biggest surprise in the U.S. economy this year has been inflation.” (…)

The fund expects inflation in advanced economies to grow at 1.7% over the next two years, below the 2% for which many advanced-economy central banks aim.

Sluggish inflation growth, which has confounded officials and economists, is “something that we did not observe to that extent in the past,” former ECB President Jean-Claude Trichet said. “It complicates considerably the life of central banks in the advanced economies.” (…)

Eurozone inflation was 1.5% on the year in September but ECB officials say it could slip below 1% at the start of next year because of moderating food and oil prices. (…)

Likewise, Bank of Japan Gov. Haruhiko Kuroda said weak inflation would prolong the central bank’s expansionary policy despite a growing economy.

“The Bank of Japan will consistently pursue aggressive monetary easing with a view to achieving the price-stability target at the earliest possible time,” he said. “Achieving the 2% target is still a long way off,” Mr. Kuroda said. 

Japanese consumer prices excluding fresh food rose 0.7% in August from a year earlier, up from 0.5% in July. (…)

While asset valuations today are “high in historical terms,” that may reflect investors’ expectations of a “new normal” of lower interest rates for the foreseeable future than in the earlier decades, she said, adding that financial stability risks remain “at a moderate level.”

EARNINGS WATCH

One quarter of the way, 120 companies have reported, 73% beat rate, +4.0% surprise factor. Blended EPS expected at +4.1% on +4.5% revenue growth.

Trailing EPS now $127.03. Rising earnings, stable inflation = rising Rule of 20 Fair Value (yellow line) = positive backwind.

TECHNICALS

Monday, Lowry’s Research’s Buying Power index fell to 150 while its Selling Pressure index rose to 152, reassuming the dominant position. Lowry’s says the “the cross is simply the consequence of a market pullback in response to what had become a very extended rally and overbought condition.”

Tuesday, Lowry’s saw few signs of strength behind the DJIA 167 point (0.72%) gain. “Up Volume was barely positive with 57% of total Up/Down Volume, while Advancing Issues were 54% of total Adv/Dec Issues. In fact, the DJIA continues to run far ahead of the other major price indexes and bolsters the signs of selective strength provided by the lagging readings in both the % of OCO issues above their 10 and 30-DMAs. Weak Demand and selective strength suggest risk of a pullback remains elevated.”