One month ago, when the BEA released its first estimate of the hurricane-impacted economy during the third quarter (which came in at a stronger than expected 3.0%) we were surprised to report that according to the Department of Commerce, in the third quarter the biggest driver of marginal spending was car sales (technically Motor Vehicles and Parts), which increased by $15.6 billion to $463.5 billion. Which, as we said at the time and considering recent US and global automakers data, was paradoxical in light of the ongoing decline in overall sales in the second half of 2017, and it was far too early to expect the post-hurricane spending spree. It was also surprising because as Americans splurged on cars, they pulled back on gasoline purchases, which was the single biggest detractor to spending, subtracting a marginal $3.5 billion in PCE, to $283.6 billion.
In any case, we concluded by saying that “we now await for the revisions to this initial estimate over the coming two months, because something tells us that the auto spending spree will be thoroughly revised well lower.”
One month later, when the BEA released its second Q3 GDP estimate, it appears we were right: the contribution from motor vehicles was indeed revised lower, but not nearly as dramatically as we expected, only from a marginal increase of $15.6 million to $13.5 million.
And yet, many other line items did see a downward revision, which means that something had to increase sharply to compensate for the downward revisions among other spending components. Sure enough, something did: the old faithful “plug” which has saved the US economy every quarter for the past 4 years: Healthcare, or as it is better known, Obamacare, because with Trump failing to repeal Obama’s signature health law, it means that Healthcare will merrily “contribute to GDP” for years to come, by being the single biggest marginal spending item for the foreseeable future.
Finally, for a comparison of how dramatically the contribution of “Healthcare” was revised higher, here is a chart showing side by side the change in spending among all key line items. One can almost hear the orders “from above” to make GDP 3% or higher at any cost when looking at this chart.
Following the bounces in new- and existing-home sales in October, all eyes are on Pending Home Sales to complete the trifecta of 'proof' that housing is back baby… and it did rising 3.5% MoM (beating expectations of a 1.0% gain). The driver of the surge was The South (up 7.4% MoM) as September's 3% hurrican tumble is erased.
September's data was revsised slightly lower (from 0.0% to -0.4%) but October's jump is the biggest since Feb..
The surprise surge was driven by a huge rebound in The South:
Northeast up 0.5%; Sept. rose 1.2%
Midwest up 2.8%; Sept. rose 1.4%
South up 7.4%; Sept. fell 3%
West fell 0.7%; Sept. rose 1.5%
(note- the 2010 surge and purge was the pre- and post- moves around the homebuyer tax credits' expiration"
“Home shoppers had better luck finding a home to buy in October, but slim pickings and consistently fast price gains continue to frustrate and prevent too many would-be buyers from reaching the market,” Lawrence Yun, NAR’s chief economist, said in a statement.
“Until new home construction climbs even higher and more investors and homeowners put their home on the market, sales will continue to severely trail underlying demand.”
One of our favorite patterns during a bull market is the ascending triangle pattern, especially a multi-year ascending triangle. On October the 12th the Power of the Pattern shared the chart below, asking what would you do with this opportunity. See original post HERE
CLICK ON CHART TO ENLARGE
Premium and Sector Members bought into this pattern at the time, as the pattern two-thirds of the time, results in a beak out to the upside. Below looks at an update to this bullish ascending triangle pattern update to Hawaiian Electric (HE) .
CLICK ON CHART TO ENLARGE
Since the original opportunity post on 10/12, Hawaiian Electric is up 10%, out pacing the S&P by nearly 8% in 7-weeks.
The chart above adds a measure move calculation to the pattern, reflecting that the bullish ascending triangle suggests in the long term, HE has more room to run to the upside, where it could reach the target at (2).
Members continue to bring stops up on this position as it powers higher.
Why you see chart pattern analysis with brief commentary:
There is a ton of news and opinions about markets and stocks that make the decision-making process more difficult than it needs to be.
I believe the Power of the chart Pattern provides all you need to see what is taking place in an asset and determine the action to take.
This approach has worked well for me and our clients and I encourage you to test it for yourself.
Send an email if you would like to see sample research and take me up on a trial of our Premiumor Weekly Researchwhere I provide actionable alerts on breakouts and reversals in broad market indices, sectors, commodities, the miners and select individual stocks
With only three weeks left until her final meeting as chairwoman of the FOMC, Fed Chairwoman Janet Yellen today will make what's expected to be her final appearance before Congress when she delivers testimony to the Joint Economic Committee. The Fed was already widely expected to raise interest rates next month, but in case there was any doubt, Yellen pushed the dollar higher when she released her prepared remarks. In her remarks, she praised the "increasingly broad-based" economic expansion that she is leaving in the hands of her successor and colleague, Jerome Powell.
Her testimony is set to begin at 10 am ET. Watch live below:
* * *
Chairman Tiberi, Ranking Member Heinrich, and members of the Committee, I appreciate the opportunity to testify before you today. I will discuss the current economic outlook and monetary policy.
The U.S. economy has strengthened further this year. Smoothing through the volatility caused by the recent hurricanes, job gains averaged about 170,000 per month from January through October, a somewhat slower pace than last year but still above the range that we estimate will be consistent with absorbing new entrants to the labor force in coming years. With the job gains this year, 17 million more Americans are employed now than eight years ago. Meanwhile, the unemployment rate, which stood at 4.1 percent in October, has fallen 0.6 percentage point since the turn of the year and is nearly 6 percentage points below its peak in 2010. In addition, the labor force participation rate has changed little, on net, in recent years, which is another indication of improving conditions in the labor market, given the downward pressure on the participation rate associated with an aging population. However, despite these labor market gains, wage growth has remained relatively modest. Unemployment rates for African Americans and Hispanics, which tend to be more sensitive to overall economic conditions than those for whites, have moved down, on net, over the past year and are now near levels last seen before the recession. That said, it remains the case that unemployment rates for these minority groups are noticeably higher than for the nation overall.
Meanwhile, economic growth appears to have stepped up from its subdued pace early in the year. After having risen at an annual rate of just 1-1/4 percent in the first quarter, U.S. inflation-adjusted gross domestic product (GDP) is currently estimated to have increased at a 3 percent pace in both the second and third quarters despite the disruptions to economic activity in the third quarter caused by the recent hurricanes. Moreover, the economic expansion is increasingly broad based across sectors as well as across much of the global economy. I expect that, with gradual adjustments in the stance of monetary policy, the economy will continue to expand and the job market will strengthen somewhat further, supporting faster growth in wages and incomes. Although asset valuations are high by historical standards, overall vulnerabilities in the financial sector appear moderate, as the banking system is well capitalized and broad measures of leverage and credit growth remain contained.
Even with a step-up in growth of economic activity and a stronger labor market, inflation has continued to run below the 2 percent rate that the Federal Open Market Committee (FOMC) judges most consistent with our congressional mandate to foster both maximum employment and price stability. Increases in gasoline prices in the aftermath of the hurricanes temporarily pushed up measures of overall consumer price inflation, but inflation for items other than food and energy has remained surprisingly subdued. The total price index for personal consumption expenditures increased 1.6 percent over the 12 months ending in September, while the core price index, which excludes energy and food prices, rose just 1.3 percent over the same period, about 1/2 percentage point slower than a year earlier. In my view, the recent lower readings on inflation likely reflect transitory factors. As these transitory factors fade, I anticipate that inflation will stabilize around 2 percent over the medium term. However, it is also possible that this year's low inflation could reflect something more persistent. Indeed, inflation has been below the Committee's 2 percent objective for most of the past five years. Against this backdrop, the FOMC has indicated that it intends to carefully monitor actual and expected progress toward our inflation goal.
Although the economy and the jobs market are generally quite strong, real GDP growth has been disappointingly slow during this expansion relative to earlier decades. One key reason for this slowdown has been the retirement of the older members of the baby-boom generation and hence the slower growth of the labor force. Another key reason has been the unusually sluggish pace of productivity growth in recent years. To generate a sustained boost in economic growth without causing inflation that is too high, we will need to address these underlying causes. In this regard, the Congress might consider policies that encourage business investment and capital formation, improve the nation's infrastructure, raise the quality of our educational system, and support innovation and the adoption of new technologies.
Monetary Policy
I will turn now to the implications of recent economic developments and the outlook for monetary policy. With ongoing strengthening in labor market conditions and an outlook for inflation to return to 2 percent over the next couple of years, the FOMC has continued to gradually reduce policy accommodation. The Committee raised the target range for the federal funds rate by 1/4 percentage point at both our March and June meetings, with the range now standing at 1 to 1-1/4 percent. And, in October, the Committee began its balance sheet normalization program, which will gradually and predictably reduce our securities holdings. The Committee set limits on the pace of balance sheet reduction; those limits should guard against outsized moves in interest rates and other potential market strains. Indeed, there has been little, if any, market effect associated with the balance sheet runoff to date. We do not foresee a need to alter the balance sheet program, but, as we said in June, we would be prepared to resume reinvestments if a material deterioration in the economic outlook were to warrant a sizable reduction in the federal funds rate.
Changes to the target range for the federal funds rate will continue to be the Committee's primary means of adjusting the stance of monetary policy. At our meeting earlier this month, we decided to maintain the existing target range for the federal funds rate. We continue to expect that gradual increases in the federal funds rate will be appropriate to sustain a healthy labor market and stabilize inflation around the FOMC's 2 percent objective. That expectation is based on the view that the current level of the federal funds rate remains somewhat below its neutral level–that is, the rate that is neither expansionary nor contractionary and keeps the economy operating on an even keel. The neutral rate currently appears to be quite low by historical standards, implying that the federal funds rate would not have to rise much further to get to a neutral policy stance. If the neutral level rises somewhat over time, as most FOMC participants expect, additional gradual rate hikes would likely be appropriate over the next few years to sustain the economic expansion.
Of course, policy is not on a preset course; the appropriate path for the federal funds rate will depend on the economic outlook as informed by incoming data. The Committee has noted that it will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. More generally, in determining the timing and size of future interest rate adjustments, the Committee will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.
Thank you. I would be pleased to answer your questions.
The yield curve is one of those indicators that most people have heard of but few can explain. In part this is because it’s usually a non-issue, only becoming important enough to argue about during the final year of long expansions.
(MarketWarch) – The yield curve flattened this week after the Fed minutes suggested that the December rate increase was a near-certainty, even as senior central bankers held concerns about lackluster inflation. The yield curve refers to the line drawing out a bond’s yield and its respective maturities, with a flatter slope signifying weaker growth outlook.
The spread between the 2-year yield and the 30-year yield, one gauge of the curve’s steepness, narrowed to 0.60 percentage point, the tightest span in a decade.
(Zero Hedge) – The US Treasury yield curve collapse continued its unending path to inversion overnight with 2s10s plunging to sub-60bps and 5s30s hits a 65bps handle for the first time since Nov 2007.
2s10s has flattened for 3 days straight, 6 of the last 7 days, and 14 of the last 17 days to a 58bps handle…
As a gentle reminder to all those shrugging this off, BofA reminds that in seven out of seven occasions in the last 50 years an inverted yield curve has been the prelude to recession.
In fact, the last four times the US yield curve was at these levels, the US economy was already in recession.
(Zero Hedge) – Currently, the top corp tax rate in the US is 35%. It looks most likely that rate will drop to 20% when tax reform passes. If you are a corp with an underfunded pension fund, you get a tax incentive to fund the pension THIS YEAR vs in the future when the corp tax rate drops to 20%. Why? Because contributions to the pension plan are tax deductible. You get a bigger tax deduction in 2017 then you will get in 2018 and onwards (assuming tax reform happens in something close to its current form…which it looks like it will).
Multiple primary dealers have reported pension buying in the 30yr sector over the past month, and coincidentally, 30yr bonds have rallied while the front end has sold off for the past month. Pension funds have a favorite bond to buy…STRIPS (30yr zero coupon bonds – higher yield than normal coupon bonds, better asset/liability match..more price sensitive to changes in yield…bigger bang for your buck in a bond rally..and is a flattener to the yield curve). Pension funds don’t trade very much….they tend to buy and hold.
So these flows will SIGNIFICANTLY flatten the 30yr curve…and that is exactly what we have been seeing.
US Treasury yield changes (basis points) since Oct 24, 2017
So, step 1, Mystery Solved.
But Wait, There’s More. If corp pensions are buying 30yr bonds, they are also buying stocks, to keep their relative portfolio weights stable (explains the recent stock rally).
However, come Jan 1 2018, that buying will evaporate, and then DOWN GOES FRAIZER (Fraizer is the US stock market).
(Mint Partners’ Bill Blain) – The flatter US curve is NOT sending a deep meaningful warning of looming recession. It’s hiding something much worse….
The short-end of the US curve reflects what the Fed has done in terms of hiking rates. But, the long end of the US Curve (10-30) is being driven by very different forces. It has flattened because of interest rate differentials between the ZIRP rest of world and the rate normalising US, but also on the fact external investors effectively drive US rates because they are the forced buyers!
Ongoing QE distortions in Europe and Japan are still driving close to Zero domestic interest rates – forcing investors offshore. Global demand for duration partially explains why the US 10-30 curve appears to have flattened. The transmission effects of $5 trillion QE in last three years is a massive allocation towards US assets – which explains why the 10-yr is sticking round 2.5% and the term premium is negative. Remove these effects of global distortion and the US curve would look much steeper and cause far less fear, panic and mania than the yield curve doomsters perceive. Relax. The yield curve is not the thing to worry about.
That dark thing is inflation! Over the last 10-years – since the Global Financial Crisis – we’ve seen the main drivers of inflation stagnate across the board. (I’ve argued many times if you want to see inflation then look at financial assets.) While prices and inflation signals have flat-lined, the inflation Central Bank feared they would create through QE has been incubating in massively inflated real assets – stocks and bonds. My Macro Economist colleague Martin Malone reckons an inflation shock is now a 50% plus risk! He points out all the major inflation drivers are coming back on line.
Global inflationary expectations have risen dramatically this year
Inflation data – which was deflationary 5 years ago, then flat, has now accelerated towards more normal levels
Real Asset Prices – particularly housing and real estate rose dramatically over last 3 years
Risk Assets – like bond and stocks remain hugely inflated
Oil and commodities prices are rising
Jobs are being created around the world, and increasing number of countries now looking at supply side fiscal policy means wage inflation looks inevitable! The Philips Curve returns!
Malone has quantified all the inflation drivers and added them up. He reckons in inflation drivers haven’t been this high since 2007! Ask anyone on the street about inflation and they’ll tell you it’s very real. Wages have stagnated for 10-years, but prices are clearly rising.
In other words, this time may or may not be different. Possible explanations for the flattening yield curve include:
A typical late-cycle transition from positive to negative slope (i.e., yield curve inversion), which implies a recession and equities bear market in 2018.
Temporary tax reform distortion, which, when reversed out, will cause an equities bear market in 2018.
Massive global liquidity pouring into long-dated Treasuries, which means spiking inflation followed by, we have to assume, rising interest rates followed in turn by a stock and/or bond crash in 2018.
Seems like we end up in pretty much the same place regardless.
Following yesterday’s missile launch from North Korea, Senator Lindsey Graham joined CNN’s Wolf Blitzer to warn that the U.S. is “headed to war” with the “crazy man” in North Korea “if things don’t change.” Here are some excerpts from the interview via RT:
The US will go to war with North Korea “if things don’t change,” Sen. Lindsay Graham said, acknowledging that “a lot of people would get hurt and killed.” Meanwhile, Russia and China have once again urged for both sides to exercise restraint and dialogue.
“If we have to go to war to stop this, we will,” the Republican senator told CNN’s Wolf Blitzer on Tuesday. “If there’s a war with North Korea, it will be because North Korea brought it on itself, and we’re headed to a war if things don’t change.”
Graham stated that neither he nor US President Donald Trump wants a war, but stressed that “we’re not going to let this crazy man in North Korea have the capability to hit the homeland.”
When asked by Blitzer about civilian casualties that would occur in a war with North Korea, including in the densely populated South Korean capital of Seoul, Graham said: “It’s not lost by me what a war would look like with North Korea. One, we would win it, but a lot of people would get hurt and killed…”
However, he stressed that “the president’s got to pick between homeland security and regional stability.” He noted that when it comes to that decision, “the president is picking America over the region and I hope the region will help us find a diplomatic solution.”
“He is ready, if necessary, to destroy this regime to protect America, and I hope the regime understands that if President Trump has to pick between destroying the North Korean regime and the American homeland, he’s going to destroy the regime. I hope China understands that also,” Graham said.
Of course, as we noted yesterday, according to a preliminary analysis from the Pentagon, the rocket launched by North Korea was an Intercontinental Ballistic Missile, which was reported to have flown for 50 minutes, on a very high trajectory reaching 4,500 km above the earth (more than ten times higher than the orbit of Nasa’s International Space Station) before coming down nearly 1,000 km from the launch site off the west coast of Japan.
This would make it the most powerful of the three ICBM’s North Korea has tested so far. Furthermore, the mobile night launch appeared aimed at testing new capabilities and demonstrating that Pyongyang would be able to strike back to any attempt at a preventative strike against the regime.
This is concerning for one big reason: according to General Mattis, the North Korean ICBM “went higher, frankly, than any previous” and “North Korea can basically threaten everywhere in the world.” This was confirmed by North Korea missile analyst, Shea Cotton, who cited Allthingsnuclear author David Wright, and who told the BBC that the initial estimates of the ICBM test mean that North Korea can now reach New York and Washington DC.
BREAKING: North Korea missile analyst @Shea_Cotton says initial estimates of ICBM test means NK now can reach New York & Washington DC @BBCNewshour
Finally, here is opinion of David Wright, physicist and co-director of the UCS Global Security Program, whose insight on North Korean launches has emerged as one of the most informative over the past year.
North Korea’s Longest Missile Test Yet
After more than two months without a missile launch, North Korea did a middle-of-the-night test (3:17 am local time) today that appears to be its longest yet.
Reports are saying that the missile test was highly lofted and landed in the Sea of Japan some 960 km (600 miles) from the launch site. They are also saying the missile reached a maximum altitude of 4,500 km. This would mean that it flew for about 54 minutes, which is consistent with reports from Japan.
If these numbers are correct, then if flown on a standard trajectory rather than this lofted trajectory, this missile would have a range of more than 13,000 km (8,100 miles). This is significantly longer than North Korea’s previous long range tests, which flew on lofted trajectories for 37 minutes (July 4) and 47 minutes (July 28). Such a missile would have more than enough range to reach Washington, DC, and in fact any part of the continental United States.
We do not know how heavy a payload this missile carried, but given the increase in range it seems likely that it carried a very light mock warhead. If true, that means it would not be capable of carrying a nuclear warhead to this long distance, since such a warhead would be much heavier.
The question now is what Trump meant when late on Tuesday, in response to a question how the US would respond to the latest ICBM launch, he said “we will handle it.”
A Bosnian Croat wartime commander died on Wednesday shortly after he drank poison, seconds after U.N. appeals judges upheld his 20-year sentence for war crimes against Bosnian Muslims.
Slobodan Praljak, 72, a former wartime leader, tilted back his head and took a swing from a flask or glass as the judge read out the verdict. The man’s defense lawyer then told the court that the accused had “taken poison.” The presiding judge stopped the proceedings and ordered a doctor to be called, Reuters reports.
“I just drank poison,” he said. “I am not a war criminal. I oppose this conviction.”
Praljak sat back down and slumped in his chair, a lawyer who was in the courtroom at the time said. The presiding judge suspended the hearing and called for a doctor. An ambulance was at the building and paramedics went to the courtroom.
Praljak was convicted of involvement in a campaign to drive Muslims out of Bosnia and create an ethnically pure Croat state during the Bosnian war in the 1990s sparked by the breakup of Yugoslavia. The conflict mainly saw Bosnian Muslims fighting Bosnian Serbs, but there was also deadly clashes involving Bosnian Muslims and Croats after an alliance fell apart. A total of 100,000 people died and 2.2 million were displaced in the three-year war.
Quoted by Reuters, Croatian General Marinko Kresic told Croatian state TV he had spoken to the wife of another defendant, General Miroslav Praljak, who was in The Hague. “She confirmed that he drank the poison and that he is in a very grave health condition,” he said.
Praljak died shortly after.
A UN judge who later called the site a “crime scene” said that Dutch police are investigating the incident.
As Reuters adds, the court said it would resume reading the verdict, which is also handling cases against five other defendants, including Milivoje Petkovic.
Prior to drinking the substance, Praljak had heard that his 20-year sentence for alleged war crimes in the Bosnian city of Mostar was being upheld. Praljak, who was one of six former Bosnian Croats having their appeal heard at the UN tribunal, is reported to have told the judge that he is not “a war criminal.”
The dramatic events came in the final minutes of the court’s last verdict before closing down. The International Criminal Tribunal for the former Yugoslavia (ICTY), established by the United Nations in 1993, shuts its doors next month when its mandate expires. The court’s lead suspect, former Yugoslav President Slobodan Milosevic, died of a heart attack in March 2006 months before a ruling in his genocide case.
Two defendants awaiting trial committed suicide by hanging themselves in their U.N. cells, according to court documents. Slavko Dogmanovic died in 1998 and Milan Babi? was found dead in his locked cell in 2006. Last week, the same tribunal handed former Bosnian Serb general Ratko Mladic a life sentence for his role in the genocide of the Balkan Wars in the 1990s. Mladic was found guilty on 10 out of 11 charges, including the massacre of Bosnian Muslim men and boys in Srebrenica in 1995. He had pleaded not guilty on all counts.
Questions have been raised over the fairness of the international prosecution of crimes committed during the Balkan Wars. Of the 161 individuals indicted by the ICTY, the body created specifically to prosecute wartime crimes, 94 are ethnic Serbs, compared to 29 Croats, nine Albanians and nine Bosniaks. Two years ago, Russia used its UN veto right to block a resolution on the 20th anniversary of the Srebrenica tragedy, saying that the draft document depicted the Serbian people as the sole guilty party in the complex armed conflict in Yugoslavia.
Big dip overnight was bought and as US equity markets prepare to open, Bitcoin just topped $11,000…
Bundesbank’s Buch Says Difficult to Tell If Bitcoin Is a Bubble
“The question we have to ask ourselves is to what extent there is an overvaluation in a certain market segment, and I tend to shy away from calling something a bubble formation because that’s difficult to assess,” Bundesbank Vice President Claudia Buch says at press conference in Frankfurt.
“The question that occupies us is whether these trends are strongly financed through credit and money is used to speculate, and as it’s not a very large market segment there is little information at the moment”
Doesn’t currently see bitcoin as a financial stability risk for Germany
While some see broader acceptance of the cryptocurrency…
BITCOIN to pay freight? A shipowner wrote to me today to say that they accept Bitcoin/ Ethereum saying that using Crypto currencies is actually very easy & safe & quick as each payment takes a few minutes, as opposed to hours or days with the usual bank transfer. Brave new world.
WTI Crude algos ran stos this morning to pre-API levels on the heels of Russian and Saudi comments, but those gains are fading fast as the machines run out of ammo.