Overnight Data Drop

January 30th, 2017 1:58 pm

Via Robert Sinche at Amherst Pierpont Securities:

JAPAN: In advance of the BOJ meeting data will be released on December IP, Household Spending and the labor market. The Bberg consensus expects another 0.3% MOM rise in IP after a 1.5% surge in November, although YOY growth would slow to 3.0%. The UR is expected to hold at 3.1% while Real Household Spending is expected at -0.9% YOY after a -1.5% YOY drop in November, which would be the 1th straight YOY decline in real spending.

AUSTRALIA: The NAB Business Confidence Index has ranged between 0 and 10 for the last 3 years, with the 5 reading for November in the center of that range. However, the NAB Business Conditions Index, also at 5, has exhibited a steady downtrend since the 9-year high of 13 reached in march, a more ominous outcome.

NEW ZEALAND: Net Migration flows have been hovering around record highs, and the December outcome will follow Net Migration of 6220 in November. New residents appears to be helping maintain demand for housing and overall growth in the economy despite the weakness in commodity prices.

EURO ZONE: The Bberg consensus expects that the UR will have held at 9.8% in December while the Advance Real GDP report for 4Q2016 will show a 0.5% QOQ rise that will keep YOY growth at 1.7%. On inflation, the consensus expects the Headline CPI will be reported up to 1.5% YOY from 1.1% in December, although the consensus expects the Core CPI to have held at 0.9% YOY.

GERMANY: The Bberg consensus expects the Unemployment will have fallen another -5K in January, which would be the 18th straight monthly decline, keeping the UR at the record low 6.0%. The consensus expects that Real Retail Sales will have rebounded 0.5% MOM after a -1.7% MOM setback in November, taking the YOY gain to 0.5% in December from 3.2% YOY the prior month.

FRANCE: the Bberg consensus expects Real GDP to be reported up 0.4% QOQ for 4Q2016, taking YOY growth to 1.1%, up from the 1.0% 2-year low in 3Q. Consumer Spending for December is expected to have posted a 0.2% MOM rise after a 0.4% rise in November, bringing the YOY rise down to 2.1% from a very solid 3.2% YOY in November. Finally, the consensus expects the Headline EU Harmonized CPI will have fallen -0.5% MOM but that would result in a YOY rise of 1.2%, up from 0.8% YOY in December.

ITALY: Despite an economy lagging its EZ peers, the Bberg consensus expects the UR slipped to 11.8% in December from 11.9% in November.

SPAIN: The Bbgerg consensus expects the EU Harmonized CPI will have jumped to 2.2% YOY for January from 1.4% in December, although the Core CPI is expected to be reported unchanged at 1.0% YOY for January.

UK: The Bberg consensus expects the recovery in UK Mortgage Approvals will have continued in December, rising to a 9-month high of 69.2K.

IRELAND: The January UR will follow a 7.2% print for December, a level that was just under half the Jan 2012 high of 15.2%.

BRAZIL: The Bberg consensus expects the (not SA) Unemployment Rate will have held at 11.9% in December, up from 9.0% in December 2015.

 

Microsoft Refunding

January 30th, 2017 1:33 pm

This articles provides details on the mega multitranche ($17 billion) Microsoft offering. I think that circa 1980 the US Treasury  quarterly refunding was about $6 billion per quarter.

Via Bloomberg:

LAUNCH: Microsoft Corp $17b Debt Offering Across 7 Tranches
2017-01-30 18:09:33.469 GMT

By Lisa Loray
(Bloomberg) — Total deal size $17b across seven tranches.

* Tranches (Guidance, IPT):
* $1.5b 3Y (2/06/2020) at +40
* +45 (+/-5), +60a
* Optional redemption; MWC
* $1.75b 5Y (2/06/2022) at +50
* +55 (+/-5), +70a
* Optional redemption: MWC; Par call 1mo prior to
maturity
* $2.25b 7Y (2/06/2024) at +70
* +75 (+/-5), +90a
* Optional redemption: MWC; Par call 2mo prior to
maturity
* $4b 10Y (2/06/2027) at +85
* +90 (+/-5), +100a
* Optional redemption: MWC; Par call 3mo prior to
maturity
* $2.5b 20Y (2/06/2037) at +100
* +105 (+/-5), +115a
* Optional redemption: MWC; Par call 6mo prior to
maturity
* $3b 30Y (2/06/2047) at +115
* +120 (+/-5), +130a
* Optional redemption: MWC; Par call 6mo prior to
maturity
* $2b 40Y (2/06/2057) at +140
* +145 (+/-5), +155a
* Optional redemption: MWC; Par call 6mo prior to
maturity
* Issuer: Microsoft Corp (MSFT)
* Ratings: Aaa/AAA/AA+
* Format: SEC Registered sr unsecured notes
* UOP: GCP
* Active Bookrunners: Barclays, HSBC
* Settlement: 2/06/2017 (T+5)
* Denoms: $2k x $1k
* NOTE: MSFT reported earnings last Thurs. with EPS and rev.
beating estimates
* NOTE: MSFT issued $19.75b 7-part deal in Aug. 2016 in
connection with LinkedIn Corp. acquisition
* Information from person familiar with the matter, who is not
authorized to speak publicly an

MSFT Deal

January 30th, 2017 8:59 am

Microsoft selling as many maturities as possible it seems.

 

Via Bloomberg:

NEW DEAL: Microsoft $Benchmark 3Y, 5Y, 7Y, 10Y, 20Y, 30Y, 40Y
2017-01-30 12:58:55.906 GMT

By Brian Smith
(Bloomberg) — Expected to price today.

* IPT:
* 3Y (2/06/2020): +60a
* 5Y (2/06/2022): +70a
* 7Y (2/06/2024): +90a
* 10Y (2/06/2027): +100a
* 20Y (2/06/2037): +115a
* 30Y (2/06/2047): +130a
* 40Y (2/06/2057): +155a
* Issuer: Microsoft Corp (MSFT)
* Ratings: Aaa/AAA/AA+
* Format: SEC Registered sr unsecured notes
* UOP: GCP
* Active Bookrunners: Barclays, HSBC
* Settlement: 2/06/2017 (T+5)
* Denoms: $2k x $1k
* Information from person familiar with the matter, who is not
authorized to speak publicly and asked not to be identified

Greek Tragedy

January 30th, 2017 8:56 am

I received this article from a fully paid up subscriber who noted that 10 Year Greece bonds were wider by 34 basis points today. He did not note if that was against Bunds or Treasuries.

Via Bloomberg:

Greek Bonds’ ECB Fantasy Faces Cold Reality of IMF Report: Gadfly
2017-01-30 13:21:20.573 GMT

By Marcus Ashworth
(Bloomberg Gadfly) — It was never going to last. Greek
government bonds have given back about a sixth of their
surprising gains late last year, having reacted badly to a
leaked International Monetary Fund draft report describing the
country’s debt and financing needs as approaching “explosive”
territory. Creditor woes look depressingly familiar, and there’s
probably a lot more bond pain to come.

Greece’s recent fixed-income popularity reflected signs
that government budget proposals would meet with approval from
the European Commission, European Central Bank and IMF, and at
long last Greek officials and the troika would have the
appearance of getting along. Some improving economic data also
helped. These ignited hopes of Greece being accepted finally
into the European Central Bank’s Public Sector Purchasing
Program, and sparked a run of gains that made the government’s
securities the best performer in Europe last year.
Greece was never eligible for the ECB’s QE as its bonds are
deeply non-investment-grade, and it’s mired in its third
bailout. The idea that it would soon shake off either of these
conditions, let alone both, never made sense. Inflation at a
four year high is just the latest scare, as it threatens to make
farcical the whole pretense that its debt is remotely
sustainable — it has at least 7 billion euros ($7.4 billion) of
bonds due to mature before August.
While the country seeks a fresh round of funding, the IMF
board will meet on Feb. 6 to discuss its debt-servicing
capacity. A return to the bad old days of bickering between the
Greek government and its main creditors beckons. Germany is
diametrically opposed to any debt forgiveness, and the IMF draft
report says this is unavoidable.
Those contradictions aside, the one thing they can agree on
is that Greece honors its commitment to get to a 3.5 percent
budget surplus to GDP by 2018. The IMF says Greece is some full
2 percentage points shy of hitting that target, so it must cut
state pensions and the tax-free allowance on personal incomes to
5,000 euros. Both Prime Minister Alexis Tsipras and Finance
Minister Euclid Tsakalotos have in the past week made comments
this would be “unacceptable” and not a “single euro” more of
austerity measures will be approved.
A European Commission spokeswoman said Monday there’s no
reason for  an “alarmist assessment” of Greece — adopting an
amazingly passive stance. The IMF view offers no such pretense.
And bond investors, who cannot afford such a chilled view, will
vote with their feet accordingly. Hopes for entry into the inner
ECB club will have to be put on the backburner, and consequently
Greek debt should return from whence it came.
This column does not necessarily reflect the opinion of
Bloomberg LP and its owners.

JPM on Treasury Supply

January 30th, 2017 8:53 am

Via Bloomberg:

Treasury Coupon Auction Sizes to Grow This Year, JPM Says
2017-01-30 13:31:13.753 GMT

By Elizabeth Stanton
(Bloomberg) — Two factors will cause U.S. financing needs
“to rise significantly” — bigger federal budget deficits,
assuming $250b of fiscal stimulus through end of 2018, and Fed
tapering reinvestments beginning in mid-2018, JPMorgan
strategists led by Jay Barry say in Jan. 27 note.

* “As a result, we expect that Treasury will likely increase
coupon auction sizes later this year,” beginning by
reversing last year’s cuts at the November refunding; 5Y-30Y
sizes would increase by $1b, TIPS by $2b
* Earliest timing for announcement on longer-maturity debt is
probably August
* JPMorgan remains tactically bullish on Treasuries; while
improving economic data and risk appetite “are certainly
bearish,” there is “downside risk around fiscal and trade
policies, and positions remain stretched to the short side”

FX

January 30th, 2017 6:23 am

Via Marc Chandler at Brown Brothers Harriman:

Drivers for the Week Ahead

  • Three major central banks meet in the week ahead
  • There are several important reports that will give investors more insight into how the economies have begun the New Year
  • Although the Lunar New Year holiday runs through the week, China will report the manufacturing and the non-manufacturing PMI, and Caixin will report its manufacturing PMI
  • EM FX was mixed last week and that continues into this week, though some markets remain closed today

The dollar is mixed against the majors.  The yen and the Scandies are outperforming, while the euro and sterling are underperforming.  EM currencies are mixed too.  TRY, SGD, and MXN are outperforming, while ZAR, BRL, and RUB are underperforming.  MSCI Asia Pacific was down 0.3%, with the Nikkei falling 0.5%.  MSCI EM is down 0.4%, with China markets closed until February 6 for the Lunar New Year holiday.  Euro Stoxx 600 is down 0.8% near midday, while S&P futures are pointing to a lower open.  The 10-year UST yield is flat at 2.48%.  Commodity prices are mixed, with WTI oil up 0.3%, copper down 0.1%, and gold flat.

Three major central banks meet in the week ahead, and there are several important reports due out that will give investors more insight into how the economies have begun the New Year.  However, the uncertainty surrounding these events and data pale in comparison to known and unknown impulses from the new US Administration.  

On one hand, there is little thus far that should be surprising.  The executive orders, like freezing new regulations, are what other presidents have done, including Obama.  Further, Trump is simply doing the things that he supported during the campaign, like withdrawing from TPP, supporting pipelines, the wall on the Mexican border, not funding international activity the support abortions, and limiting immigration by Muslims.  

On the other hand, it is not so straight forward.  There are no indications that the rhetoric about prosecuting Clinton over her emails is going forward, and in fact, press reports suggest that officials in the new Administration may also be continuing to use private networks and unsecured communication.   China has not been cited as a currency manipulator, as Trump had pledged as a Day 1 priority.  

That the immigration freeze included people with green cards and those in transit struck many as particularly severe, and a judge sought to limit the impact on some new arrivals.  Many airports were scenes of large spontaneous protests over the weekend.  A study by the libertarian Cato Institute found that between 1975 and 2015, immigrants from the seven countries from where immigrants are frozen have not committed any fatal terrorist attacks on US soil.  Also, Muslim Americans with family backgrounds in those seven countries have killed no Americans in the past 15 years.  

When Trump signed the order to officially end the TPP negotiations, he noted that Clinton also opposed the deal, though during the campaign he accused her of being duplicitous and really supporting the final agreement.  Trump also expressed interest going forward in bilateral agreements rather than multilateral arrangements.  Couldn’t TPP form the basis of a bilateral US-Japan free-trade agreement?  

Investors are also continuing to wrestle with the conflicting views represented by different Administration officials.  The President seemed to endorse actions that are defined as torture, but then said he would defer to Defense Secretary General Mattis, who is opposed.  What does it mean to say that NATO is obsolete but important?  Some members of the cabinet are more pro-trade than others, and it is not clear who will be the “deciders.”  

The rubber meets the road in the middle of March.  The debt ceiling is expected to be reached.  This is the authorization to pay for what has already largely been spent.  It is the bill that comes after the meal.  The debt ceiling has been lifted nearly 75 times since the early 1960s.  It is part of the US political ritual where Congress uses the debt ceiling as leverage to try to get concessions from the President.  

The point man for the White House is the Office of Management and Budget (OMB) Director Mulaney, who is a deficit hawk.  He has gone beyond what Trump said in the campaign and suggested that cutting Social Security and Medicare may be necessary.  Other campaign promises and other cabinet members are committed to various fiscal actions, including tax cuts and infrastructure, that will likely boost the US deficit (and therefore debt), even if reasonable people differ on the magnitude and duration of the impact.

The Mexican peso was the strongest currency in the world last week, despite the escalation of tensions.  The Mexican peso bottomed on January 11 and retested the low on January 19.   It rose 3.3% last week, closed firm, and is posting further gains today.  Since it trended higher consistently last week, it is difficult to know the true impact of reports that the two Presidents talked after a scheduled meeting was canceled when Mexico refused to pay for the wall that Trump insists upon the building.  

Some suggest that the peso’s recovery was the realization that things could not get worse, though after the peso bottomed, things have in our view have indeed gotten worse.  This took the form of a suggestion that among the things that the US could do to get Mexico to pay for the wall was a 20% tariff on Mexico’s exports to the US.  While this seems far-fetched, as we have noted, the US President can impose a 15% temporary tariff under conditions of a balance payments emergency.

Given the complicated continental trade where a part could cross the border several times, the law of unintended consequences risks significant economic dislocations in the US.  Others suggest it is the Negotiator-in-Chief posturing.  Consider this:  before last week’s peso gains and since the beginning of 2016, the peso had depreciated by more than a fifth, partly driven seemingly by Trump’s comments, which if sustained would seem to offset some of the sting of a tariff.  

This is Trump’s first tangle and one that he prioritized.  It is important that he wins it from a political point of view.  The wall is of great symbolic value.  It is a campaign promise that many of his supporters appear to have taken literally.  

The Federal Reserve, the Bank of England, and the Bank of Japan hold policy meetings in the week ahead.  None of the central banks are likely to take fresh action.  Each may be somewhat more upbeat than previous statements.

The US economy moderated more than expected in Q4 16 after a 3.5% annualized clip in Q3 16.  However, the best measure for underlying economic signal excludes inventories and net exports.  This measure of final domestic sales accelerated to 2.5% from 2.1%.  The Fed’s statement will also likely recognize that increased inflation expectations.  The five-year breakeven is above 2% for the first time in a couple of years, and the three-year breakeven looks set to cross that threshold in the days ahead.  The uncertainty surrounding the fiscal initiatives of the new US Administration has not been lifted.  It seems unreasonable to expect anything about the balance sheet to be including in the statement.  This may be addressed at the mid-March meeting (around the time of the debt ceiling), if not directly than at the press conference.  

After rallying into the last FOMC meeting, the dollar has pulled back in recent weeks.  The euro’s five-week, roughly 4.4% gain was snapped last week with a 0.05% loss.  Since the last FOMC meeting, the only one of the major trading partners that the dollar has appreciated against is the peso (2.65%).  It has fallen against the euro (2.8%), Canadian dollar (1.4%), and Chinese yuan (1.0%).  The Federal Reserve is unlikely to feel compelled to discuss the dollar.  

The Bank of Japan meets.  The rise in global interest rates is pulling up Japanese rates, requiring the central bank to defend its +/- 10 bp target range.  The BOJ may upgrade its economic assessment after stronger than expected exports and industrial output.  It may be too early to expect the BOJ to upgrade its inflation outlook, but even many private sector economists suspect the worst of deflation is passed.  

The Bank of England meets.  Although some talk about the central bank’s neutral stance, it is still engaged in buying Gilts and corporate bonds.  It has been fairly successful in purchasing corporate bonds and may achieve its objective earlier than had been anticipated.  There could be some update of operational issues.

It is true that the risk of a BOE rate cut has slackened considerably since last summer, and that the next move is likely to be an increase.  The decision to keep rates on hold will likely have unanimous support.  The risk is that the BOE turns more upbeat at exactly the wrong time.  The official forecasts for this year and next are above the median forecast (1.4% vs. 1.2% and 1.5% vs. 1.3%, official vs. median for 2017 and 2018, respectively).  

While the potential to impact the market is strong, the January US jobs report has little policy implication.  What the Fed decides to do in March will have practically nothing to do with the number of jobs or wage growth seen in January.  It will not change the general perception that while job growth is slowing as full employment is reached, it is sufficiently strong to continue to absorb some slack.  The US economy created an average of 180k jobs a month last year after 229k a month in 2015. In Q4 16 average job growth slowed to 165k.  The median forecast is for around 175k increase.  

Average hourly wages will be watched especially closely following the increase in minimum wage in many states and cities at the start of the year.  A 0.3% increase after 0.4% in December would be solid.  The three, six, and 12-month average is 0.2%.  However, because of the base effect (0.5% increase last January), the year-over-year rate will likely ease from 2.9%.  The year-over-year comparison is more likely to improve this month.  Last February earnings were flat.

Separately, note that US auto sales are expected to slow from a cyclical high 18.39 mln annual pace in December.  A 17.5 mln unit pace in January would still be solid and a little above last year’s monthly average even if sequentially it is softer.  

Headline eurozone inflation is rising.  It rose 1.1% year-over-year in December after a 0.6% pace in November.  The first estimate for January is expected to be 1.4%-15%.  The ECB target is near but below 2%, but Draghi has been emphasizing the core rate, which is expected to remain unchanged at a subdued 0.9% pace.  It bottomed at 0.6%.  He is opposed to reconsidering the decision made last month to extend the asset purchases through the end of this year but at a 60 bln euro a month pace rather than the current 80 bln that runs through March, based on the recovery in oil prices.

German state CPI reports have been trickling out today.  Most are showing acceleration from December, which points to upside risks to the national reading.  That will be reported today at  8 AM ET, with consensus at 2.0% y/y vs. 1.7% in December.  

We have made the point before, and it is worth making again:  In lieu of offsetting stimulus policies by Germany, or the structural reforms that Draghi repeatedly demands, German inflation running a bit above the periphery is helpful in boosting the competitiveness of the periphery.  That said, ideas that an Italian election could be held in June, now that the Court ruling leaves both chambers with a proportional representation system, suggests Italian bonds will continue to underperform.  

We suspect that the economies and prices will evolve to allow the ECB to consider tapering further in late Q3 or early Q4.  The eurozone also reports its first estimate of Q4 GDP.  The data suggests growth of 0.4%-0.5%, which would keep the four quarter pace steady in the 1.8%-1.9% range that has been sustained since the middle of 2015.  Growth is not spectacular, but it is solid and above what economists estimate to be the trend pace.  The PMIs suggest the momentum has been sustained into early 2017. Unemployment is stubbornly easing in Greece, Italy, and Spain, but in the aggregate the unemployment area in EMU is expected to have remained at 9.8% in December for the third consecutive month.  

Although the Lunar New Year holiday runs through the week, China will report the manufacturing and the non-manufacturing PMI, and Caixin will report its manufacturing PMI.  The manufacturing surveys are expected to soften slightly (0.1-0.2 points) with little significance.  Both are expanding, with readings between 51-52.  The non-manufacturing PMI rose 54.5 in December, which was the second best reading (after November 54.7) in a couple of years.  Officials in Beijing are likely watching the new US Administration closely, perhaps through the prism of the Chinese saying about killing a chicken to scare the monkeys.  

The onshore yuan has appreciated by almost 1.0% this month, and the onshore yuan has risen by 1.5%.  Since the squeeze that appears to have been engineered by the PBOC at the start of January, the offshore yuan is trading at a premium to the onshore yuan, suggesting speculative pull has been neutralized, at least for the time being. The evolution of the relationship in a stronger US dollar environment may be an important test.

EM FX was mixed last week and that continues into this week, though some markets remain closed today for the Lunar New Year holiday.  MXN, BRL, and ZAR were the best performers last week, while TRY, HUF, and RON were the worst.  MXN continues to gain despite signs that Trump will maintain a bellicose stance towards Mexico, but we think the peso remains vulnerable to further selling.  

Several EM countries were either downgraded or had their outlooks cut last week, including Turkey, Nigeria, and Chile.  S&P affirmed China’s AA- rating but maintained a negative outlook due to rising financial risks.  Our quarterly EM and Frontier Sovereign ratings models warn of a continued bias towards downgrades this year.  

Weekend Data Preview

January 27th, 2017 1:23 pm

Via Robert Sinche at Amherst Pierpont Securities:

JAPAN: After surging by 3.0% over the 3 months ended November, the Bberg consensus expects that Retail Sales dropped 0.5% MOM in December, a small giveback given recent gains.

EURO ZONE: The set of monthly EC economic and confidence surveys are expected to hold recent gains. The Bberg consensus expects the overall Economic Confidence Index for January held at a 6-year high of 107.8 while the GDP-leading Business Climate Indicator (BCI) is expected to inch up to 0.80 from 0.79, the highest since mid-2011.

GERMANY: The Bberg consensus expects that while the EU Harmonized CPI fell back -0.6% MOM in preliminary data for January, the YOY increase would increase to 2.0%, which would be the highest reading since December 2012. But the January/February YOY readings should mark the peak as the contribution from energy price comparisons lessens.

SPAIN: The Bberg consensus expects that preliminary data for Real GDP for 4Q2016 will show another 0.7% QOQ rise, bringing YOY growth down to 3.0%, the slowest in 7 quarters but still solidly above the EZ average of just over 1.5%.

SWITZERLAND: The Bberg consensus expects the December KoF Leading Indicator to have bounced back up to 102.9 after falling back to 102.2 in November.

GREECE: After declining by more than 35% from 2008, a depression-sized decline, it appears that nominal Retail Sales may finally be stabilizing with the Nov

Durable Goods

January 27th, 2017 1:18 pm

Via Stephen Stanley at Amherst Pierpont Securities:

The headline December durable goods orders figure was disappointing, as both defense and aircraft bookings were softer than expected.  Defense orders more than reversed the 30% jump recorded in November, falling to the lowest level since June.  Aircraft bookings were projected to improve substantially, based on Boeing data, but in fact the tally only posted a tepid rebound.  As a result, overall durable goods orders slipped by 0.4%.  However, the various “core” measures were all better than I had expected.  Excluding the two noisy categories detailed above, orders advanced by 0.9% on top of November’s 1.1% gain (previously reported +0.7%).  In fact, December marks the seventh straight monthly increase for the ex-defense and aircraft measure, the longest such string since the early days of the expansion.  Similarly, the ex-transportation figure rose by 0.5% in December, a sixth straight increase.

The business investment outlook is beginning to perk up.  Core capital goods orders were up by 0.8% on top of November’s 1.5% advance (revised from 0.9%).  This gauge had fallen in 5 out of 7 months through May but has now moved higher in 6 of the most recent 7 months.  Core capital goods shipments seem to have turned the corner as well, surging by 1.0% in December on the back of November’s 0.6% rise.  The modest advance in the business equipment spending component of GDP in Q4 after four straight quarterly declines confirms the upturn.  As noted in the GDP discussion, I expect a friendlier policy environment to spur an acceleration in investment outlays in 2017, though the full unleashing of pent-up activity may not come until corporate tax reform makes its way through Congress.

Consumer Sentiment Dissected

January 27th, 2017 10:54 am

Via Stephen Stanley at Amherst Pierpont Securities:

Given the extreme optimism illustrated by the University of Michigan sentiment figures (as well as other measures of consumer confidence), I thought it might be a good time to look under the hood at what may be driving consumer attitudes.  Clearly, the election was the catalyst for the abrupt jump in optimism, but what exactly are consumers thinking?

The January University of Michigan consumer sentiment gauge was revised slightly higher to 98.5, the highest reading since January 2004.  The bulk of the 11-point gain in the headline figure has come from more upbeat expectations.  The current conditions index is up, but at 111.3 in January, was only half a point higher than in June, while the expectations index has increased 11 points since October to within a point of the 13-year high.  This makes sense, as households are responding to the prospects of what they view as better economic policies (of course, with high hopes come the possibility of disappointment if things do not pan out).

A variety of expectations metrics confirm this.  44% expected an improving economy over the next year, the highest proportion since 2004.  51% have a favorable long-term economic outlook, matching the highest reading since 2004.  33% look for the unemployment rate to decline, the most optimistic reading since 1984.  The optimism extends to personal finances, as 41% of consumers anticipated improving personal finances, the best since 2005.  Specifically, the average expected income gain for the year ahead was the strongest since 2008, and over half of respondents expect home prices to rise for the first time since 2007.

There are two other notable developments in the January report.  First, inflation expectations ticked higher.  Both the 1-year and the long-term expectations medians moved to 2.6%.  For the long-term outlook, 2.6% makes the top of the range seen since early last year, though it is still toward the bottom of the range seen over a longer period (the 2.3% reading in December had been the all-time low).  Second, while the financial markets remain somewhat skeptical that the Fed has the guts to follow through on the dots, consumers are bracing for higher interest rates.  74% of respondents expect increases this year, the highest proportion since 2006 (which happens to be the last year that the Fed raised rates more than once).  As a result, 20% of households cited the prospect of higher mortgage rates as a reason that now is a good time to buy a home, the highest reading since 1995.

IP Dissected

January 18th, 2017 9:46 am

Via Stephen Stanley at Amherst Pierpont Securities:

Industrial production surged in December by 0.8%, mainly driven by a weather-induced 6.6% rebound in utility usage.  In fact, the utility category has been driving the headline figures for several months.  In contrast, manufacturing output has been on a steadier but glacial uptrend.  Factory production rose by 0.2% in December and is up on average by 0.1% per month over the past four months (and by a cumulative 0.2% over the last 12 months).  While this is far from robust, it is a little better than what we saw in 2015 and early 2016, when factory output was being dampened by the steep dollar appreciation that occurred in late 2014/early 2015.  Despite President-elect Trump’s best efforts to keep production on shore, another run-up in the dollar since the election is not going to be helpful for manufacturers.  Once tax and regulatory reform begin to kick in (presumably in the second half of this year), manufacturers may have a lot to cheer about, but, for now, the near-term outlook remains tepid at best.