Thanks for reading my Diary today and all week - and enjoy the weekend.
To end the week, here is a summary of the important macroeconomic developments this week:Positives
1) Initial jobless claims totaled 204k, 6k less than expected and little changed from 205k last week. These are the lowest levels since the late 1960's. The 4 week average is now down to 208k.

2)The NFIB small business optimism index for August rose almost 1 pt m/o/m to 108.8 and that is the highest level in the history of this survey dating back to 1973. The NFIB CEO bottom lined the report by saying "As the tax and regulatory landscape changed, so did small business expectations and plans. We're now seeing the tangible results of those plans as small businesses report historically high, some record breaking, levels of increased sales, investment, earnings and hiring."

3)The preliminary September UoM consumer confidence index jumped 4.6 pts to 100.8 and that was well more than the 96.6 that was expected and the best since March. Both Current Conditions and Expectations were higher and UoM said "the gains were widespread across all major socioeconomic subgroups." One year inflation expectations did moderate by 2 tenths to 2.8% after touching the highest since 2014 last month. The likely reason was the drop in expectations for gasoline prices which fell to a 5 month low. Higher income expectations was a key reason for the consumer optimism as this component rose 3 pts to match the best level since March. The employment component also rose to the highest since February. Expectations for business also improved m/o/m. Helping confidence, "gains in household wealth were cited by near record numbers, primarily due to increases in stock holdings and rising home values." Spending intentions rose to multi month highs.

4)Industrial production in August rose .4% m/o/m, one tenth more than expected and July was revised up by 3 tenths. Manufacturing production though was light as it rose .2% m/o/m, one tenth less than expected and July was left unrevised. A sharp 1.2% rise in utility output explains the headline beat. With manufacturing, auto production rebounded but was saw no growth ex auto's. Capacity utilization at 78.1% is still running below its long term average of around 80% with manufacturing capacity at 75.8% vs its long term average of about 78%.

5)August CPI rose .2% headline and .1% core m/o/m, both one tenth less than expected. The y/o/y gain of 2.7% (down from 2.9%) was the headline print and 2.2% at the core (down from 2.4%). A sharp decline in apparel costs and a fall in medical prices weighed on price gains. Rent growth remained strong. Services prices ex energy rose 3%, offset by a .3% m/o/m decline in core goods prices and .2% drop y/o/y.

6)August PPI came in less than expectations both headline and core. Taking out food, energy and trade though has it about in line with the estimate. Finally some relief on the 'truck transportation of freight' category was a key reason as prices here fell .2% m/o/m although remain up 7.2% y/o/y and 'rail transportation of freight and mail' was higher by 6.4% y/o/y.

7)Likely helped by the stronger dollar, import prices fell .6% headline and .2% ex petro. The headline drop was well more than the estimate of down .2% but the ex petro figure was as expected. Versus last year, import prices are still up 3.7% and just 1% ex petro. Of note is the rise in export prices as emerging market currencies have of course dropped sharply. Headline export prices were up 3.6%, 2.3% ex food and energy and up by 4.1% ex ag.

8)The MBA said purchase applications were up a slight .9% and the y/o/y gain was 4.3% which was an improvement from the up 2% seen last week.

9)In what will be a lift to Q3 GDP, business inventories rose .6% m/o/m in July after a .1% rise in June.

10)Job openings in July reached a record high of 6.9mm. Hirings though were only a modest 2k after a decline in June. The quit rate rose to 2.4%, the highest since January 2001.

11)Eurostat said Eurozone Q2 labor costs rose 2.2% y/o/y up from 2.1% in Q1 and that matches the most since Q2 2012. European bond yields rise notably on the week.

12)In the UK, for the 3 months ended July, there was a 2.9% y/o/y wage gain ex bonuses' matching the best since July 2015.

13)In the new UK data point reflecting the state of their economy on a rolling 3 month basis saw GDP in the 3 months to July rise .6% vs the estimate of up .5% driven by consumer spending and services. Construction was also a boost

14)The September German ZEW investor confidence index on the German economy rose 3 pts to -10.6 and that is better than the slight increase expected to -13. It is still negative though for the 6th straight month. Current conditions rose too. The ZEW said "During the survey period, the currency crises in Turkey and Argentina intensified, while German industrial production and incoming orders were surprisingly low in July. Despite these unfavourable circumstances, economic expectations for Germany improved slightly. The considerable fears displayed by the survey participants regarding the economic development have diminished somewhat, which may in part be attributable to the new trade agreement between the USA and Mexico."

15)Italy seems intent on keeping its budget deficit closer to 2% of GDP. The Italian Finance Minister over the weekend said "It makes no sense to seek two or three billion euros of extra deficit if we then have to pay three or four billion more due to higher yields."

16)The Turkish central bank finally stepped up and surprised the market with a greater than expected interest rate. The lira rallied 4% on the week in response. This was followed by the Russian central bank which unexpectedly raised rates and a ruble rally followed.

17)Chinese retail sales did improve to a 9% y/o/y rate from 8.8% in July and that was 2 tenths more than expected. The 8.5% pace seen back in May was the slowest since 2003. The 6.1% IP y/o/y increase was as expected and up from the near 3 yr low of 6% in July. The jobless rate in urban areas was 5% vs 5.1% in July.

18)China announced that aggregate loan financing in August totaled 1.52 Trillion, about 200b yuan more than expected. It's up from July but down from August 2017. The main reason for the upside was a further pick up in corporate bond issuance. The shadow finance side saw a continued decline in loans and bank loans were below what was forecasted. There was a slowdown in money supply growth (M2) that moderated to 8.2% y/o/y growth, 4 tenths less than expected.

19)The Trump Administration invites the Chinese back for more trade discussions and combined with the Turkish central bank news helps to lift EM off the mat.

20)Chinese exports rose 7.9% y/o/y vs the forecast of up 5.7% in yuan. Imports jumped by 18.8%, well more than the estimate of up 12.1%. In dollars, exports were up by about 10% with imports up 20%, close to expectations. In dollar terms, exports to the US jumped by 13.2% and to Canada by 13.7%. Front loading I'm sure.

21)Japanese machinery orders rose 11% m/o/m in July, above the estimate and follows a decline of 8.8% in June.

22)Australia, a key China proxy, reported a better than expected August jobs number.

Negatives

1)The negative commentary in the UoM consumer confidence data was this: "The largest problem cited on the economic horizon involved the anticipated negative impact from tariffs. Concerns about the negative impact of tariffs on the domestic economy were spontaneously mentioned by nearly 1/3 of all consumers in the past 3 months, up from one in five in the prior four months. Prospective tariffs were also associated with the expectation of higher rates of anticipated inflation during the year ahead."

2)Core retail sales (ex auto's, food and building materials) in August rose just .1%, 3 tenths less than expected but that was offset by a 3 tenths upward revision to July so we'll call it a push relative to the forecasts. The core rate is running at a good rate of 5.2% y/o/y and marks the 3rd month in the past 4 with a 5 handle. This compares with the 5 year average of 3.7% core growth.

3)The MBA said refi applications fell 6% w/o/w and are down 39% y/o/y. The level stands at an 18 year low.

4)Consumer credit outstanding in July rose to another record high of $3.9 Trillion, 47% above the 2008 peak thanks to the parabolic rise in non revolving credit, mostly student and auto loans.

5)In the UK, for the 3 months ended July, 3k jobs were added after the solid 42k in the prior period. The estimate was up 10k. The unemployment rate did hold at 4%, the lowest since the 1970's. The more up to date number on jobs saw August jobless claims rise by 8.7k, the 3rd straight month of gains.

6)UK industrial production in July was below expectations with the manufacturing component down by .2% instead of rising by .2% as expected.

7)Eurozone industrial production fell .8%, 3 tenths more than expected in July and June was revised down by one tenth.

8)In China, fixed asset investment ytd y/o/y slowed to 5.3% growth from 5.5%. The estimate was 5.6% and that is the lowest rate seen since at least 1999 that I have data on.

9)The China Association of Auto Manufacturers said vehicle sales in China fell 4.6% y/o/y in August.

10)China CPI rose by 2.3% in August, the most since February as a break out of swine flu boosted food prices by 1.7% y/o/y. The estimate was up 2.1%. Inflation ex food and energy was still up 2% y/o/y, matching the most since February. At the producer level, prices were up by 4.1% y/o/y, one tenth more than expected but basically in line with the trend seen this year but down from higher trends in 2017.

11)There was a lot of welcome reflection on the crisis of 10 years ago and the steps taken to deal with it. I wish there was also discussion on the excesses that built up and got us there and why The Federal Reserve and others didn't see the threats!

Here is a list of the positions I own (long and short) that have been mentioned in my Diary:

Longs: (SPY) puts, (GLD) large, (BAC) small, (BOX) , (C) small, (CMCSA) , (DWDP) large, (HIG) , (JPM) small, (DDS) , (KHC) , (M) small, (PZZA) large, (TWTR) calls, TWTR large, (WFC) small

Shorts: SPY calls, SPY Large, (QQQ) , (DIS) small, (FAST) tagends, (TLT) small, (SBUX) small, (IYR) small

The yield on the ten year U.S. note is approaching 3.00% and the two year note yield is close to 2.80%.

Cash is the Alternative (C.I.T.A.).

Dillard's (DDS) , the gift that keeps on giving, is +$4.00 today.
Trading at $79.11, I recently (last Friday) reestablished my long under $73.

Knowledge@Wharton "Remembering the Lehman Weekend- What Are The Risks Now?"

I added further to my large Twitter (TWTR) long.

What's curious is that the 3-day P/C is making a 3- month low, even as the market is at a lower-high - but whatever !!

A casual gaze on my phone suggests little price movement.

No trades.

Peter Boockvar comments:The CPI induced treasury rally yesterday lasted only a few hours because rates are right back at fresh highs for the week. The 2 yr is actually back to its fresh high for 10 years at 2.77%. It got as low as 2.74% after 8:30am yesterday and started the week at 2.70%. The 10 yr yield is now up 5 bps on the week to 2.99%. This is following weakness in European bonds as the German 10 yr bund yield is 5 bps on the week at .44%, the highest since August 2nd. The UK 10 yr Gilt yield is up by 7 bps since last Friday at 1.53%, that's a 4 month high. 

I think we're at an important moment in global yields for the 3 reasons I stated on Wednesday. Today marks the last day of trade that corporate pension funds can top up their plans with Treasuries at the tax deduction rate of 35%. After that, they can only deduct at a 21% rate. I've seen estimates that north of $50b has been front loaded into longer term US Treasuries in anticipation of the tax change this year.

Secondly, as stated here many times, we are two weeks away from a 50% cut in ECB QE to just 15b euros per month in Q4. It was as high as 80b euros at its peak. At that 80b run rate, it equated to 7 times net issuance of European governments vs about 25% at the peak of Fed QE. Outside of reinvestments and NIRP on the very short end, that boot on the foot of longer term rates is about to end in Europe. 

Lastly, what could easily determine if the 10 yr US yield goes convincingly above 3% or not could very well be the results of the discussions with China in a very binary way. A deal pushes it well above 3%. No deal keeps it below. On a deal and looking at this chart dating back to 2010, I don't think 3.25-3.5% is out of the question.

10 YR YIELD

Mario Draghi cited rising labor costs yesterday as reason giving him more confidence that core inflation was going to head towards 2%. "We see pickup in nominal wage growth everywhere" he said. Today Eurostat said Q2 labor costs rose 2.2% y/o/y up from 2.1% in Q1 and that matches the most since Q2 2012. This is a factor in the rise in European bond yields today.

With China now trying to grease the stimulus wheels again, the August economic data seen overnight was mixed. Retail sales did improve to a 9% y/o/y rate from 8.8% in July and that was 2 tenths more than expected. The 8.5% pace seen back in May was the slowest since 2003. The 6.1% IP y/o/y increase was as expected and up from the near 3 yr low of 6% in July. Fixed asset investment ytd y/o/y slowed to 5.3% growth from 5.5%. The estimate was 5.6% and that is the lowest rate seen since at least 1999 that I have data on. Finally, the jobless rate in urban areas was 5% vs 5.1% in July. The yuan is slightly weaker and Chinese markets were mixed with A shares down in Shanghai but H shares up in Hong Kong. 

This morning the futures (S&P and Nasdaq) are, as is the custom, higher.
The markets continue to ignore a number of cautionary signposts/macroeconomic events/concerns and are benefiting from the float shrink of 5-7 years of corporate share buybacks, the dirty water of liquidity (contributed by the world's central bankers), the heightened role of price momentum based on other (risk parity) quant strategies and the rising popularity of passive, index funds.
Adding significantly to the demand for stocks are central banks (most notably BOJ and the Swiss National Bank) who, through their active equity investing, make them the sovereign equivalent of Fidelity Management as they have become one of the dominant investors of our time.
Moreover, in a backdrop of reduced retail activity (in individual stocks, save whatever is the speculative play du jour), materially reduced mutual fund turnover and the lower role of active hedge funds (they too have mostly become quants) the demand v. supply equation for equities continues to favor buying over selling.
Bouts of selling are quick - and when stocks trade lower the buy on the dip crowd makes its rescue and arrests the drop.
Finally, probably 4-8 very large (long biased) macro funds are likely dominating what little activity/volume there is, buoying stocks as the water sloshes around in the bathtub of equities.
The sort of cautionary technical signs - like a lagging Russell Index (yesterday) - no longer provide the historical predictive role that has been the case in the past. Iomega-like speculation in stocks like (NIO) and (TLRY) are viewed as normal. And the breakdown in selected, market leading technology stocks and the lackluster performance of financials are dismissed as "one offs" by the bullish cabal.
Reactionary technicians find the markets to be titillating (scoffing at the anticipation of untoward fundamentals) and unconcerned about reward v. risk or, arguably rising economic ambiguities (low interest rates and a narrowing yield curve), the unprecedented lack of cooperation between world powers (in a flat and interconnected world), large public and private debt loads, the unstable political setting, the failure of fiscal policy to trickle down, the divergence between the S&P Index and other world (emerging) markets, orange and black swans and the global pivot of monetary policy.
In particular, the fact that the rising wave of debt and central bankers' liquidity injections have failed to produce steady wage growth and productive investments in the real economy go unnoticed by those that worship at the altar of stock price momentum.
And I will remind everyone that what caused the 10% correction in late January/early February was the rise in interest rates. Well, today, we are right back a fresh ten year high in the yield on the two year note and the ten year Treasury yield is back to 2.99%.
How long this investment bliss and consistent buying continues is anyone's guess but the degree of complacency (and the absence of fear and doubt) are off the charts.

I'm going to be tied up for a few hours later this Friday morning and will be making infrequent posts.

Important one:

Countries most exposed to a trade war: