Morning Report: Manufacturing strong 7/3/18

Vital Statistics:

Last Change
S&P futures 2737 10
Eurostoxx index 380.51 3.77
Oil (WTI) 75 1.06
10 Year Government Bond Yield 2.87%
30 Year fixed rate mortgage 4.52%

Stocks are up this morning as emerging markets rally overnight. Bonds and MBS are flat.\

Today should be quiet as markets close early ahead of the 4th of July holiday.

Manufacturing continued to plow ahead in June, according to the ISM PMI Index. The responses from the survey participants show that the trade war is having some impact. One food and beverage company mentioned that they were shifting some production to Canada in order to escape Chinese retaliatory tariffs on US products. Inflationary pressures are present in higher commodity prices, and we are seeing secondary pressure from transportation (higher oil prices and driver shortages are pushing up prices here). Pretty much every commodity is seeing price increases, and there are material shortages in aluminum, steel, and electronic components. Overall, this is a strong manufacturing reading, which is usually associated with 5.2% GDP growth. Of course, manufacturing isn’t the driver of the economy it used to be, but it is still a strong reading.

The Fed is going to pay close attention to this report, particularly the part about labor shortages. From their standpoint, inflationary pressures from commodity price inflation are generally considered transitory and therefore temporary. An old saw in the commodity markets is that the cure for high prices is high prices. The potential dampening effect from trade battles will also concern them. IMO, until you start seeing wage inflation pick up in a meaningful way the Fed will consider this a push. Note we will get some insight into this on Thursday when the minutes from the June meeting are released.

The Fed funds futures are still handicapping a 76% chance of a 25 bp hike in September and a 45% chance of one in December as well.

Construction spending rose 0.4% in May, and is up 4.5% on an annualized basis. Residential construction was up 0.8% MOM and 6.6% YOY, as an increase in private resi construction was offset by a drop in public housing spending. Manufacturing construction took a step back, which will be something to watch (could just be noise, but could be trade-related). Meanwhile retail (specifically mall-related construction) is in the doldrums as vacancy rates soar.

Home price appreciation accelerated in May, according to the CoreLogic Home Price index. Prices rose 1.1% MOM and are up 7.1% YOY. The housing shortage is well-documented, and the problem is most acute at the entry-level. Higher rates and low inventory is also preventing some people from moving. CoreLogic estimates that 50% of the mortgage market has a rate of 3.75% or lower. According to CoreLogic’s model which compares home price appreciation to income appreciation, we are seeing large pockets of overvaluation, particularly in Florida, the West Coast, the sand states, and parts of the Eastern Seaboard. The Midwest remains cheap.

Trump is reportedly mulling whether to pick a new Chief of Staff. One of the potential candidates is current CFPB Chairman Mick Mulvaney. Mulvaney is currently doing double duty as OMB and CFPB head, so a change for him would be unlikely, but the possibility is still there. Here are the implications of a change and who might replace him.

Labor shortages continue to be an issue in the Midwest. Companies are now less squeamish about hiring ex-cons. In Elkhart, (where the labor market is so tight it sports a 2% unemployment rate and even the KFC is offering sign-on bonuses), companies are hiring convicted felons (except sex offenders) and are waiving drug tests. It is a back-to-the future scenario, where the labor market is suddenly transported back to 1955.

27 Responses

    • Obviously, The Simpsons started in the 1989, before “political correctness”

      Uh, no.

      How to write a Vice article.

      https://archive.org/details/youtube-sw5UzBjgCiI

      Like

    • I saw that.
      way to miss the entire point of the show.
      Homer isn’t a hero, but an indictment of the “everyman”

      Like

      • I suspect the left is laying the groundwork to force TV stations to drop it.

        Like

        • Well, Fox. They are a *loooooong* way from getting it dropped off FX or otherwise out of syndication. Not that some of them might want it, but the value to Fox (new episodes) is basically brand, and as it loses that it has no more value, while the syndication package is a license to print money for everyone involved. They’re going to have to discover Homer was roofying actresses and having sex with them or something to make that happen.

          Like

      • Not coincidentally, a lot of her complaints seem similar to a lot of women’s complaints about the Simpson’s, which boil down to: “It’s so stupid/Homer is so stupid/I don’t understand”.

        Like

        • I’m sure that they are working on a law that says all entertainment must be reviewed and approved by the Vassar Gender Studies Department.

          Liked by 1 person

        • Vassar Gender Studies Department.

          ad hoc committee chosen by Elizabeth Warren.

          Elizabeth Warren.

          The work requires someone who is not only sensitive to gender issues but to native Americans, and who has displayed unfailing good humor in the face of adversity.

          FIFY.

          Like

        • I’m sure that they are working on a law that says all entertainment must be reviewed and approved by the Vassar Gender Studies Department.

          God, I hope so. I watch to much TV and that would fix that problem in a heartbeat.

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        • Lisa: ““There’s no way I’ll get into an Ivy League school now. At this rate, I probably won’t even get into Vassar.”

          Homer: I’ve had just about enough of your Vassar bashing, young lady.”

          Liked by 1 person

  1. Liked by 1 person

  2. jnc et al:

    The other day you were asking about searching the comments. I’ve had a discussion with WordPress and it turns out that the search function has not yet been included in the so-called “improved experience” that we were enticed to change our admin site to. But the old admin format is still available, so if you need or want to search the comments, go here and you will see the old format with the search box.

    https://conservaliberals.wordpress.com/wp-admin/edit-comments.php

    Like

  3. Liked by 1 person

  4. Like

    • The Supreme Court is the crown jewel of our democracy. It’s the one institution …that has moved this society forward.

      Only an absolute moron would call the single least democratic government institution the “crown jewel” of our democracy.

      Liked by 1 person

      • For a lefty it is.

        Like

      • It is if democracy means “I get what I want no matter how the stupid majority votes”.

        Like

      • There’s a case to be made that judicial review as established by Marbury v. Madison was essential in establishing the rule of law as part of the governing ethos of the United States and is part of what makes the US “exceptional” (if you subscribe to that premise at all).

        Linking it to democracy is a mistake as the court itself is an anti-democratic institution, but many people, especially pundits on the left, have a bad habit of using “democracy” and “liberal constitutional order” interchangeably.

        For myself, democracy is a means, not an end.

        The end is the preservation of liberty.

        Liked by 1 person

        • jnc:

          For myself, democracy is a means, not an end.

          I wholeheartedly agree.

          Like

        • i wonder if people think “democracy” and “liberty” are synonymous and/or interchangeable.

          Like

        • i wonder if people think “democracy” and “liberty” are synonymous and/or interchangeable.

          I suspect that most people do think of them as interchangeable. Obviously to us “guaranteed” liberties limit a democracy. And having a democracy does not “guarantee” liberties for all. But no non-representative government has ever attempted to “guarantee” liberties for all, so I excuse the non-political theorists for their confusion.

          This is consistent with my agreement with JNC and Scott that democracy, or more likely, representative government in any group larger than a village, is a means, not an end. It has proved to be a more likely means than the alternatives.

          Liked by 1 person

    • Ironically, the proposals to pack the court are a bigger threat to “democracy” than anyone that Trump nominates:

      https://reason.com/volokh/2018/07/03/the-case-against-court-packing-revisited

      Liked by 1 person

      • It’s moronic. Do they not think there’d be a response?

        Liked by 1 person

        • They believe that “voter suppression” & gerrymandering is the only reason Republicans are still in office at all, and once that’s struck down then it’s a permanent progressive majority, reinforced by the presumed changing demographics.

          I.e. the whole country becomes like California.

          Like

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