BOOM?
JUNE PMIs
The major themes are clearly trade uncertainties and tariffs pushing prices up. Capacity constraints and lead times are also impacting supplies and prices. Lastly, who’s exporting these days?
June data signalled a slightly softer rate of growth across the U.S. manufacturing sector. The PMI dipped to its lowest in four months as output and new orders both expanded at the slowest rates since November 2017. Meanwhile, the effects of tariffs were widely cited as contributing to another sharp rise in input prices, while suppliers’ delivery times lengthened to the greatest extent since the series began. Average charges also increased sharply, rising at the second-fastest rate since June 2011.
The seasonally adjusted IHS Markit final U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) registered 55.4 in June, down from 56.4 in May. The latest PMI reading was up from the ‘flash’ figure of 54.6 and ended the strongest quarterly performance since the third quarter of 2014.
Output growth remained strong in June, despite the rate of expansion easing to a seven-month low.
Similarly, the upturn in new orders was the softest since November 2017. Although the expansion lost some momentum, it was solid nonetheless. Panellists stated that growth was due to robust client demand and favourable market conditions. However, new business from abroad contracted for the first time since July 2017 (albeit only slightly), amid reports of weaker foreign client demand following recent tariff announcements.
The rate of input cost inflation was the slowest for four months, but remained sharp nonetheless. The rise in cost burdens was driven by greater global demand for inputs and the effects of recent tariffs. Supplier shortages were a key factor behind longer delivery times. Lead times for inputs lengthened to the greatest extent in the series history.
Factory gate prices also increased sharply, with the rate of inflation accelerating to the second-fastest since June 2011. Panellists widely commented that higher input costs were partly passed onto clients.
Reflective mainly of difficulties in sourcing raw materials, buying activity and stocks of purchases grew at weaker rates in June.
Capacity pressures persisted, despite employment growth quickening since May, as backlogs increased solidly. The rate of job creation was the fastest since February and outstanding business rose at the second-strongest rate since September 2015.
Business confidence was strong in June. Optimism was commonly linked to expected sustained upturns in output and new orders. That said, sentiment fell to the lowest level for five months.
(…) The survey has a good track record of accurately anticipating changes in the official manufacturing output data, and suggests the goods-producing sector is growing at an annualised rate of around 2.5%.
On the downside, new orders inflows were the weakest for seven months, with rising domestic demand countered by a drop in export sales for the first time since July of last year. Business optimism about the year ahead also fell to the lowest since January, with survey respondents worried in particular about the potential impact of trade wars and tariffs.
Tariffs were widely blamed on a further marked rise in input costs, and also linked to worsening supply chain delays – which hit the highest on record, exacerbating existing tight supply conditions.
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The ISM
Of the 18 manufacturing industries, 17 reported growth in June.
Some comments:
- “Business is strong in all regions. Materials are tight. Trucking continues to be a major challenge.” (Chemical Products)
- “Strong economic growth continues to put pressure/strain on capacity, lead time, availability and pricing across a broadening array of commodities and components.” (Computer & Electronic Products)
- “U.S. tariff policy and lack of predictability, along with [the] threat of trade wars, [is a] causing general business instability and [is] drag on growth for investments.” (Electrical Equipment, Appliances & Components)
- “Electronic component supply issues continue to disrupt production.” (Transportation Equipment)
- “We export to more than 100 countries. We are preparing to shift some customer responsibilities among manufacturing plants and business units due to trade issues (for example, we’ll shift production for China market from the U.S. to our Canadian plant to avoid higher tariffs). Within our company, there is a sense of uncertainty due to potential trade wars.” (Food, Beverage & Tobacco Products)
- “The Section 232 steel tariffs are now impacting domestic steel prices and capacity. Base steel prices have already increased 20 percent since March.” (Fabricated Metal Products)
- “Transportation costs are going through the roof right now, which definitely impacts the decisions we’re making with regard to quantities we’re bringing in versus truckload and LTL.” (Furniture & Related Products)
- “The economy and product demand still continue to be strong. Having trouble finding people [to fill] blue collar positions. Lead times for parts and materials are moving out, and we are seeing commodity cost pressures increases with the threat of tariffs. Additionally, suppliers are asking for more price increases.” (Machinery)
- “The uncertainty of U.S. tariffs and the Canada/Mexico/E.U. retaliatory tariffs continues to cloud strategic planning efforts. Contingency planning (for tariffs) is consuming large amounts of manpower that could be used for more productive projects. The tariffs are improving margins in our raw material businesses; however, our businesses which are further up the supply chain are seeing significant inflation.” (Miscellaneous Manufacturing)
- “The steel tariffs continue to drive uncertainty. Projects and services using steel have limited days that prices are good for. Trucking is tight, requiring advanced planning and increasing costs.” (Paper Products)
Commodities Up in Price
Aluminum (20); Aluminum Based Products (2); Butadiene; Capacitors; Caustic Soda (12); Copper (8); Corrugate (21); Corrugated Boxes; Diesel; Freight (5); Hydraulic Hoses/Fittings; Hydraulic Valves; Isopropyl Alcohol; Natural Gas; Nylon; Packaging Materials; Paper (2); Phosphoric Acid; Plastic Components; Plastic Resins; Polypropylene; Resistors (2); Rubber; Solvents; Steel — Cold Rolled; Steel — Galvanized; Steel — Hot Rolled (19); Steel — Stainless (3); Steel Based Products (2); Steel Tubing; and Wood Pallets.
Commodities Down in Price
None.
Commodities in Short Supply
Aluminum (2); Capacitors (12); Electrical Components (3); Electronic Components (2); Freight (2); Resistors (8); Steel Based Products (2); and Steel — Hot Rolled (3).
Note: The number of consecutive months the commodity is listed is indicated after each item.
The euro area manufacturing upturn slowed further at the end of the second quarter. The final IHS Markit Eurozone Manufacturing PMI® posted an 18-month low of 54.9 in June, down from 55.5 in May and the earlier flash estimate of 55.0. The PMI has signalled a weakening in the pace of expansion in each month since the turn of the year, as manufacturers have experienced a synchronised easing in growth of both production and new order volumes.
PMI readings moved lower in five of the nations covered by the survey, including the two best performers (Netherlands and Austria). Weaker expansions were also seen in Germany, France and Greece, with France dropping to the bottom of the growth league table. Third-placed Ireland saw growth pick up to a five-month high, while a mild acceleration in Italy was insufficient to prevent it registering the second-worst overall performance. The pace of expansion was unchanged in Spain.
Output and new order growth have both eased sharply since the end of 2017. In June, the rates of expansion in production and new business were the weakest since November 2016 and August 2016 respectively. This in turn had an impact on business optimism, which slumped to its lowest level in over two-and-a-half years.
The easing was widespread by sector, with output and new order growth slowing across the consumer, intermediate and investment goods segments. Producers of investment goods registered the strongest rates of increase in both measures.
June data signalled that growth of new export orders remained relatively mild and substantially weaker than at the start of the year, despite picking up slightly since May. Exporters are becoming increasingly concerned about the potential impact of tariffs and other trade restrictions on growth. (…)
Manufacturing employment continued to increase in June, with the rate of job creation ticking higher. Staffing levels were raised in all of the nations covered by the survey, with rates of increase strengthening in Germany, Italy and Ireland. Expansions were registered across the consumer, intermediate and investment goods sectors, with the steepest gain in the latter.
(…) the rate of expansion in outstanding business eased to a 22-month low, mainly reflecting the slowdown in new order growth.
Input price inflation across the eurozone manufacturing sector rose to a four-month high in June. Further widespread lengthening of suppliers’ delivery times – a key indicator of demand for inputs outstripping supply – meant vendors were often able to raise their charges. Manufacturers also mentioned higher oil and fuel costs.
In contrast, output charge inflation eased to a nine month low in June, but remained strong nonetheless. (…)
The biggest concern is the extent to which export order book growth has cooled since the start of the year, and could soon go into decline. The survey reveals mounting worries from companies relating to the impact of tariffs and trade wars, suggesting firms are bracing themselves for the potential for further export losses. Not surprisingly, business expectations for future production deteriorated in June to the lowest November 2015.
At the same time there are signs that political uncertainty is also dampening business spirits, most evidently in Italy, which was consequently the second-worst performer of all countries surveyed in June ahead of France.
China’s manufacturing sector expanded further in June, with companies registering sustained increases in output and new orders. That said, demand from overseas remained subdued, as new export sales fell for the third month running. At the same time, optimism towards the year ahead fell to a six-month low, while employment declined at the quickest pace since July 2017.
Inflationary pressures picked up at the end of the second quarter, with input costs and output charges rising at the fastest rates in five and 11 months respectively.
The headline seasonally adjusted Purchasing Managers’ Index™ (PMI™) fell fractionally from 51.1 in May to 51.0 in June, to signal a further marginal improvement in operating conditions. The health of the sector has now strengthened in each of the past 13 months, with the latest improvement broadly in line with the historical trend.
June survey data signalled a further increase in Chinese manufacturing production, with the rate of growth edging up to a four-month high. That said, the pace of expansion remained moderate overall.
Supporting the latest upturn in production was a sustained rise in new business. As was the case for output, the rate of growth was moderate and similar to those seen in the prior two months. In contrast, new export sales fell for the third month in a row amid reports of subdued foreign demand.
The index for new export orders fell to a low for the year so far and remained in contraction territory, pointing to a grim export situation amid escalating trade disputes between China and the U.S., which led to weak demand across the manufacturing sector.
Manufacturers signalled a further reduction in workforce numbers during June. Anecdotal evidence indicated that lower headcounts were due to retirements, company downsizing policies and insufficient workloads. Notably, the rate of job shedding was the steepest seen for 11 months. Reduced payrolls meanwhile contributed to a further modest rise in backlogs of work.
Increased production needs led firms to expand their purchasing activity again in June, albeit to the weakest degree in three months. At the same time, firms exhibited a relatively cautious approach to their inventory levels, with stocks of both purchased and finished items declining at the end of the second quarter.
Low stock levels among vendors and strict environmental policies led to a further deterioration in supplier performance in June.
The rate of input price inflation picked up to the sharpest in five months in June. A number of monitored firms commented on rising raw material costs, including items such as steel. As a result, manufacturers raised their prices charged, and at the steepest rate since last September.
Corporate profits could have been squeezed due to the rapid rise in input prices, leading to a dip in the future output index.
Finally, goods producers in China remained optimistic that production levels would rise over the next year. However, the level of positive sentiment was the lowest recorded for six months, amid concerns of rising costs and stricter environmental policies.
Business conditions in the Japanese manufacturing sector improved further at the end of the second quarter. The upturn was supported by increased inflows of new work, which encouraged businesses to expand both output and employment at faster rates. However, for the first time since August 2016, export sales declined. Nevertheless, overall growth in new work kept pressure on operating capacities, with backlogs of work rising at a sharper pace.
On the price front, selling charges were raised to the greatest extent in five months amid sharper input price inflation.
The headline Nikkei Japan Manufacturing Purchasing Managers’ IndexTM (PMI)® posted 53.0 in June, up from 52.8 in May, to indicate a stronger improvement in the manufacturing sector. Japan’s goods-producing sector has observed growth in each of the past 22 months. Moreover, the latest rate of expansion was above the average seen over this sequence.
New orders increased during June, albeit to the weakest extent in ten months. Nevertheless, demand has improved in each month since October 2016. Meanwhile, sales to overseas clients declined for the first time in 22 months. Panellists mentioned that a combination of higher prices and weaker demand from North America and China had
impacted export performance.Nonetheless, overall inflows of new work tested capacities at Japanese goods producers in June, as signalled by a rise in outstanding business. Although backlogs of work were accumulated at a faster rate, the rise was only modest overall. To help alleviate this pressure, production was expanded at an accelerated rate in June. Furthermore, extra staff were hired at a faster pace in order to improve output capabilities. That said, the rate of job creation was still the second-slowest in 2018 so far.
Supply chain troubles were also apparent in June, with average lead times for the delivery of inputs lengthening to a sharp extent. Panellists noted that a combination of raw material shortages and stronger input demand had hampered vendor performance. Purchasing activity was ramped up by Japanese manufacturers in June. Anecdotal evidence indicated that additional materials were acquired in line with higher new order volumes.
However, input prices continued to rise at a steep pace at the end of the second quarter. In fact, the rate of inflation rose to a three-and-a-half year high amid reports of increased costs for oil and metals.
Businesses responded by hiking selling charges at the quickest pace in five months. That said, the rate of increase in output prices was only modest overall and markedly slower than that of input costs.
Looking ahead, firms remained optimistic that output growth will continue over the coming 12 months. Positive sentiment was attributed to planned new factory openings and product launches, as well as forecasts of greater demand.
The J.P.Morgan Global Manufacturing PMI™ fell to an 11-month low of 53.0 in June, down from 53.1 in May. The rate of expansion was steepest in the investment goods sector, followed by consumer goods, despite both industries seeing growth slow. (…)
World manufacturing production rose at the slowest pace since July last year, as growth of new order inflows eased to a 19-month low. This was partly the result of subdued international trade flows, as new export orders rose only slightly and to the weakest extent during the current 23-month sequence of expansion. Developed markets saw (on average) a modest increase in new export business, whereas emerging nations registered a decline for the third straight month. (…)
Price pressures increased again in June, with both input costs and output charges rising at faster rates. Purchase price inflation was the joint-highest in the past seven years, while the increase in charges was the steepest since May 2011. For both measures, rates of inflation remained (on average) sharper in developed nations compared to emerging markets.
China’s Currency Just Hit Its Weakest Point Against the Dollar in Almost a Year The gap between the yuan’s value in mainland China and trading hubs like Hong Kong has started to widen, a sign that foreign investors who can access the offshore market could be growing more bearish on the Chinese currency.
Millennials’ favourite gadgets dragged into trade war Vaporisers, scooters and smart home devices caught by US tariffs on imports from China
Copper Prices Hit Lowest Level in Nearly a Year
Mall Vacancies Hit Six-Year High as Online Shopping Takes a Toll Malls are the emptiest they’ve been since 2012, when the U.S. economy was still struggling to recover from the last recession, as more consumers shifted their shopping online.
The vacancy rate reached 8.6% in the second quarter, up from 8.4% in the first quarter, as more consumers shifted their shopping online, according to data from real-estate research firm Reis Inc. REIS 0.46% The highest postrecession vacancy was in the third quarter of 2011, when it hit 9.4%, Reis said. (…)
The impact is especially severe among strip malls and other neighborhood and community shopping centers, which suffered their worst quarter in nine years. About 3.8 million square feet of space was emptied from April to June, pushing the vacancy rate for this type of mall up to 10.2%, Reis said. (…)
For every person in the U.S., there is 24 square feet of retail space, far more than Canada’s 16 square feet per capita, Australia’s 11 square feet and five square feet in the U.K.
Not all is gloomy in the retail world. Some well-located malls that cater to more-affluent consumers are still seeing strong tenant demand and rent growth. Reis data showed that mall rents grew 0.3% in the second quarter despite rising vacancies. (…)
EARNINGS WATCH
We got the first batch of Q2 earnings releases last week. Eighteen of the 20 companies that reported beat estimates by 4.6% on average. Twelve of these are consumer companies and 11 beat by 15% (Cons, Discretionary) and 3.0% (C. Staples).
Earnings guidance and revisions should be closely monitored in coming weeks given apparent cost pressures building and trade issues which could be discussed in earnings calls.
At present, Q2 EPS are forecast up 20.7%, ex-Energy +17.0%
2018 Mid-year U.S. Equity Outlook: Headwinds and Tailwinds Facing Off
Extracts from Charles Schwab’s Liz Ann Sonders analysis:
(…) Many who are still brushing off a possible trade war often cite the limited impact of the currently-proposed tariffs on gross domestic product (GDP) growth—especially since it’s dwarfed by the benefits of fiscal stimulus. The problem with that argument is that it only considers “first order” effects; while not considering “second order” effects—which include, most importantly, the impact on business and consumer confidence. (…)
History has not been kind to midterm election years in terms of stock market weakness. As you can see in the chart below, the average maximum drawdown in midterm years since 1950 has been -17%, with the weakness tending to be concentrated in the pre-election day period—specifically in the summer months. But there’s a good news caveat here: as you can also see in the chart, there has been a consistent tendency historically for post-drawdown rallies, averaging a hefty +32% in the subsequent year. (…)
BITTERSWEET TWEETS
Our model for the S&P has caught all the major cycles since 2000. What it suggests now is that following the recent bounce towards in the S&P towards 2800, the highs are in and while the initial sell-off shouldn’t be too rapid, the next big target is 2200.
SMART Index which tries to capture institutional flow in the Dow has collapsed since the election (see chat
@jessefelder) https://bit.ly/2KkdHsY Why? Discussions with managers confirm that like CalPERS their clients are selling https://reut.rs/2CF2Sdd .Is Dow finally reacting?
Hmmm…
(Ed Yardeni)
FYI
Twists and Turns in the Tesla Story : A Boring, Boneheaded Update!
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Tesla hits production target, can it sustain it?
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Shouting CEO, changing rules: inside Tesla’s Model 3-building sprint A tense and short-tempered Chief Executive Elon Musk barked at engineers on the Fremont, California assembly line. Tesla Inc pulled workers from other departments to keep pumping out the Model 3 electric sedans, disrupting production of the Model S and X lines. And weekend shifts were mandatory.
I hope Musk makes it but would not bet on it…
In U.S., Record-Low 47% Extremely Proud to Be Americans
For the first time in Gallup’s 18-year history asking U.S. adults how proud they are to be Americans, fewer than a majority say they are “extremely proud.” Currently, 47% describe themselves this way, down from 51% in 2017 and well below the peak of 70% in 2003. (…)
While the 47% who are extremely proud to be Americans is a new low, the vast majority of Americans do express some level of pride, including 25% who say they are “very proud” and 16% who are “moderately proud.” That leaves one in 10 who are “only a little” (7%) or “not at all” proud (3%).
The combined 72% who are extremely or very proud to be Americans is also the lowest in Gallup’s trend. (…)
