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THE DAILY EDGE: 27 APRIL 2022: Consumer Watch

U.S. Durable Goods Orders Increase Moderately in March

Manufacturers’ new orders for durable goods increased 0.8% (10.2% y/y) during March following a 1.7% February decline, revised from -2.2%. A 1.0% increase had been expected in the Action Economics Forecast Survey. Excluding transportation, orders rose 1.1% (8.9% y/y) following a 0.5% February decline, revised from -0.6%. (…)

Motor vehicle & parts orders rose 5.0% (8.2% y/y) but defense aircraft orders dove 25.6% (-16.5% y/y).

Nondefense capital goods orders excluding aircraft rose 1.0% in March (10.2% y/y) after easing an unrevised 0.3% in February. (…)

Capex are booming in the U.S.. They reached $80B, 18% above all previous peaks of the last 20 years. They were up 1.0% MoM in March and 6.9% a.r. in Q1 after +15.1% in 2021.

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CONSUMER WATCH

The consumer is key, in the USA, in Europe and in China. Not looking good, wherever one looks.

Friday we get March consumer spending for the U.S.:

Personal income is expected to rise 0.4 percent in March with personal consumption expenditures expected to rise 0.6 percent. Inflation readings are expected at monthly gains of 0.9 percent overall but only 0.3 percent for the core (versus 0.6 and 0.4 percent respective gains in February) for annual rates of 6.8 and 5.3 percent (versus February’s 6.4 and 5.4 percent).

So consensus real expenditures are seen down 0.3% MoM following -0.4% in February.

But check the ranges! How’s that for consensus!

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Meanwhile, real data from the Chase card spending tracker, through April 18, show a sharp recent break down. This is nominal dollars.

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Inflation Forces Budget-Squeezed Americans to Ask Family and Friends for Loans

Some 25.6 million people — more than 10% of all adults — relied on loans from those close to them to meet spending needs, according to the Census Bureau’s latest Household Pulse survey of finances, which covered the period from March 30 to April 11. That figure was up from 19.1 million a year earlier, when the question was first asked.

Millennials were the most likely to borrow from family and friends. Almost 40 million households are headed by a Millennial — almost as many as those led by Boomers — yet they hold just 6.4% of the total national wealth, while Boomers have more than half of it. What’s more, many Millennials entered the job market in the long downturn that followed the 2008 crash, and have struggled with mounting student debts. 

(…) Mr. Biden didn’t detail his plans, but responded positively when lawmakers pushed him to forgive $10,000 in student debt, the people said, suggesting they would be happy with his final decision. He also indicated he is open to further extending the current pause on student-loan payments, which is set to expire on Aug. 31.

The president told the lawmakers that he was weighing the timing of any announcement and wanted to make sure it didn’t contribute to inflation, one of the people said. (…)

Payments and interest accrual have been suspended for borrowers with federal student loans since March 13, 2020, at the start of the Covid-19 pandemic. (…)

About 40 million people owe around $1.6 trillion in federal student debt, which makes up around 90% of student debt outstanding. (…)

U.S. Consumer Confidence Slips in April

The Conference Board Consumer Confidence Index during April weakened 0.3% (-8.7% y/y) to 107.3 from 107.6, revised from 107.2. A reading of 107.5 had been expected in the Action Economics Forecast Survey.

The Present Situation Index fell 0.8% this month (+15.7% y/y) to 152.6 after rising 7.6% in March to 153.8. The Consumer Expectations index improved 0.7% in April (-28.5% y/y) to 77.2, following three straight months of sharp decline.

The jobs gap, representing the difference between respondents indicating that jobs are plentiful and those saying jobs are hard to get, slipped to a 44.6% from the record 47.1% in March. Calculated by Haver Analytics, this series has had a 69% correlation with the unemployment rate over the last ten years. The jobs plentiful measure fell this month to 55.2% from the record 56.7% in March. The jobs hard-to-get measure rose to 10.6% of respondents.

Current business conditions were perceived as good by an increased 20.8% of respondents in April. Expectations that business conditions would improve in six months fell to 18.1% of respondents, down from 42.5% in April 2020. More jobs were expected in six months by a lessened 17.4% of respondents, half the percentage twelve months ago. The percentage expecting rising income improved to 16.5% of respondents.

The expected inflation rate in twelve months slipped to 7.5% from 7.9% in March. It remained up from a 4.4% low in January of 2020. Roughly two-thirds of respondents expected that interest rates would rise over the next twelve months, the most in three years.

The share of respondents planning to buy a home within six months held fairly steady m/m at 5.9% and remained below a June 2020 high of 6.8%. Those planning to buy a major appliance rose sharply m/m to 49.8% of respondents, but remained below 53.9% registered in July 2021.

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U.S. New Home Sales Fall for the Third Straight Month in March

New single-family home sales fell 8.6% m/m (-12.6% y/y) to 763,000 units at an annual rate in March after drops of 1.2% to 835,000 in February (initially 772,000) and 3.0% to 845,000 in January (previously 788,000), according to the U.S. Census Bureau. The March level was the lowest since November. The Action Economics Forecast Survey expected 774,000 sales in March. Supply continues its revival as the number of new homes for sale rose to 407,000 in March, the highest level since August 2008, from 392,000 in February.

By region, sales in March fell in all the major regions. Sales in the South slid 10.2% (-24.7% y/y) to 414,000 at an annual rate after a 1.1% decline to 461,000, registering the third consecutive monthly slide to the lowest level since October. Sales in the Midwest dropped 8.7% (-13.8% y/y) to 94,000, reversing a 9.6% gain to 103,000. Sales in the West fell 6.0% (+21.0% y/y) to 202,000, the third straight m/m fall to a five-month low, after a 14.3% decrease to 215,000. Sales in the Northeast declined 5.4% (+12.8% y/y) to 53,000 after having recovered 64.7% to 56,000.

The median price of a new home rebounded 3.6% (21.4% y/y) to a record high $436,700 in March following a 2.2% decline to $421,600 in February. The average sales price of a new home increased 3.1% (26.3% y/y), the third successive m/m rise to a record high $523,900. These sales price data are not seasonally adjusted.

The seasonally adjusted supply of new homes for sale rose to 6.4 months in March, the highest since October, from 5.6 in February. The record low was 3.5 months in August, September and October of 2020. The median number of months a new home stayed on the market edged up to 3.0 months in March from 2.9 in February. The record low was October’s 2.5 months These figures date back to January 1975.

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The YoY comparisons are distorted by the pandemic. Still on their long-term trends but there are warning signs.

This was only the second time in recorded history (since 1963) that sales NSA in March were below sales NSA in February for the same year. The first time was in 2020 – and was due to the pandemic impacting sales in March 2020. This decline might be revised away, but this also might be an indication of some slowing in new home sales.

  • 6.4 months of supply exceeds the normal 4-6 months.

On the other hand, labor and material shortages may be problematic as CR explains:

The inventory of completed homes for sale – at 35 thousand (…) is about half the normal level of completed homes for sale. The inventory of homes under construction at 267 thousand is the highest since 2007. The inventory of homes not started is at a record 105 thousand. (…)

The inventory of new homes under construction is at 4.2 months (blue line) – well above the normal level [~3 months]. This elevated level of homes under construction is due to supply chain constraints.

And 105 thousand homes have not been started – about 1.7 months of supply (grey line) – almost double the normal level. Homebuilders are probably waiting to start some homes until they have a firmer grasp on prices.

Or they are having more difficulty selling them at prices 20-25% above last year and mortgage rates above 5% from 3% since mid-2020. John Burns’ Rick Palacios tweeted on April 12 that “Many builders shifted to speculative housing starts last 3-6 months, holding sales releases until stage of construction they’re comfortable with for cost visibility. Creates added risk if buyers aren’t lining up to purchase when the homes are released into 5% mortgage backdrop.”

The jump in housing costs and the sharp and quick rise in mortgage rates have real consequences for most people. The own-vs-rent data has deteriorated much faster than in 2004-05. Spec builders may get a shock…

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(…) There are early signs that the market is cooling from its frenzied pace. About 13% of sellers dropped their list prices in the four weeks ended April 17, the highest share since the end of November, according to real-estate brokerage Redfin Corp. (…)

The median existing-home price rose 15% in March from a year earlier, NAR said, to $375,300, a record high in data going back to 1999. (…)

U.K. Retailers Had Poor April as Cost of Living Crisis Deepened Six in 10 said sales were lower than a year earlier, the highest proportion in 13 months, and more than 40% placed fewer orders with suppliers.

Consumer headwinds in China

Retail sales growth has been in long-term decline in China. Efforts to rebalance China’s economy towards a more consumer-oriented growth model have met with little success.  A recent resurgence of cases of COVID-19 has helped to leave the consumer side of the economy looking particularly weak.

Retail sales returned to contractionary territory, falling by 3.5% on a twelve-month basis in March, after increasing 6.7% on a similar basis in the January-February period. Significant weakness was evident in catering services, which fell 16.4% amid the sharp spike in virus cases. Automobile sales were 7.5% lower than a year earlier.

With virus cases and lockdowns increasing in April, the near-term outlook looks bleak for households. Indeed, the urban unemployment rate has increased by 0.7 percentage points this year to 5.8% in March, and wage growth slowed sharply in 2022 Q1.

Amid a slowing economy, the Chinese authorities have been enacting measures to support growth, although there has been a lack of emphasis on boosting consumer spending. Without a meaningful shift to a more consumer-oriented economic model, trend growth will continue to slow and China will struggle to catch up with the US.And housing looks pretty bad…plus reshoring, nearshoring and friendshoring…

(…) In response to Mr. Xi’s call to rev up growth, Chinese government agencies are discussing plans to accelerate big construction projects, especially in the manufacturing, technology, energy and food sectors, as well as to issue coupons to individuals to spur consumer spending, the people said.

The U.S. economy outpaced China’s economy in the final quarter of 2021, growing 5.5% year-on-year compared with China’s 4.0%. President Biden claimed credit at the time by saying it was the first time in 20 years that the U.S. economy grew faster than the Chinese economy, which raised hackles among senior officials in Beijing. (…)

The authorities should “make sure the economic growth rate in the second quarter can return to more than 5%, which is particularly important for laying the foundation for the country to achieve the expected target of 5.5%,” Mr. Wang [a member of the monetary policy committee of China’s central bank] told attendees at an economic forum in Beijing this week. China’s GDP grew 4.8% in the first quarter, though many economists say that number likely overstates the strength of the country’s economy. (…)

Beijing is also reversing its policies in other sectors, such as real estate, to prop up the economy. Some local governments have in recent weeks eased their restrictions on home purchases, while China has also put off plans to expand a trial of a property tax, part of a push to restore confidence in the sector. (…)

The International Monetary Fund slashed its growth forecast for China’s economy this year, to 4.4% from 4.8% previously, citing growing pressures from Covid-19 lockdowns and Russia’s invasion of Ukraine.

That more modest expansion should still outpace growth in the U.S., according to the fund’s latest outlook for the global economy, published this month. The IMF expects the U.S. to post growth of 3.7%, compared with 4.0% previously. (…)

Like if the world, not to mention Powell and co., needed China in reflation mode!

HERE, THERE AND EVERYWHERE

Australia: Inflation breaches 5 percent You have to go back to 2Q 2001 to find a headline inflation rate in Australia that is higher than the latest 5.1%YoY figure. Core inflation is also up. The Reserve Bank of Australia (RBA) will not be able to ignore this

Headline and core rates of inflationunnamed - 2022-04-27T075138.044

Source: CEIC, ING

SUPPORT NEEDED

S&P 500: to hold or not?

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QQQ: to hold or not?

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John Authers

There has been plenty of volatility over the last two years. There always is. But this particular selloff looks more significant than those that preceded it. The last five days have seen the biggest percentage fall for the S&P 500, and very dramatically for the FANG index, in two years. This follows a brief return to the FANGs early in the Ukraine war as traders reverted to treating them almost as a modern equivalent of Treasury bonds, whose earning power meant that their cash flows were virtually guaranteed. This appears to be a major change in assumptions:

Worst 5 days for the S&P 500, and FANG stocks, since March 2020

For more evidence that this is more than a correction, or the latest wobble, look to valuations. The FANGs have long commanded a huge premium over the S&P 500 in term of price to expected earnings. At the peak of the pandemic surge, buoyed by retail investors armed with “stimmy” checks, the FANGs traded at almost double the multiple of the S&P. That gap is now as narrow as it has been since the FANGs have been a thing. That in turn implies that assumptions they can keep minting money in perpetuity are at last coming into question:

The NYSE Fang+ index once traded at twice the S&P 500's multiple

EARNINGS WATCH

We have 134 companies in, an 81% beat rate and a +9.4% surprise factor. Consumer Discretionary, with only 14 companies in out of 45, show a 57% beat rate.

Trailing EPS are now $212.58. Full year 2022e: $228.34. 12m forward EPS: $234.73e.

Revisions are minimal for Q2 and actually up for Q3 and Q4!!!image

Russia Halting Gas Flows to Poland, Bulgaria Over Payment Terms The move is the first time Moscow has followed through on a threat to cut off countries that don’t pay for their gas on new, wartime terms outlined in March by Russian President Vladimir Putin.

The move marks a major escalation by Russia, which has tried to bolster its currency by insisting customers pay for gas in rubles, and introduces the possibility that more economies in Europe, deeply dependent on Russian gas, could be targeted. Gas prices in Europe rose by more than 10% late Tuesday as traders weighed risks to already tight supplies. (…)

As in Poland, the issue appeared to be a new demand from Russia that European countries pay for their gas in rubles. (…)

The decision will have little effect on Poland, which was already set to become independent of Russian gas by the end of this year. It is a much bigger deal for Bulgaria, which gets more than 75% of its gas from Russia and has few immediate options to fully replace it.

The action sets a worrisome precedent for the broader Europe Union, which before the war in Ukraine sourced as much as 40% of its gas from Russia. That gas heats European homes and powers factories, especially in Germany and Austria, which source more than half of their supplies from Moscow. (…)

European countries such as Germany might need to resort to rationing and closing factories if Russian gas deliveries are cut off, other energy analysts have said. Germany would enter a sharp recession if Russian natural-gas deliveries are cut off, the country’s leading economic think tanks said in a report earlier in April. (…)

Earlier in April the German government temporarily took control of a local Gazprom unit in a bid to make sure gas would keep flowing. Europe’s biggest countries are betting that Russia won’t cut them off, because it isn’t easy to reroute huge quantities of natural gas and sell it in other markets. (…)

The cancellation of gas supplies appears to be an effort by Moscow to pressure Sofia into not sending military support to Ukraine, said Dimitar Abadjiev, who focused on Bulgarian energy security as ambassador to Saudi Arabia, a post he recently left. Bulgaria is a major producer of non-NATO standard weapons and ammunition sought by Kyiv and lawmakers there are due to vote on supplying Ukraine next week, he said. (…)

(…) But exports hit a snag in recent days when Rosneft ROSN 2.86% Oil Co. struggled to find buyers for enough oil to fill a fleet of tankers, traders familiar with the sale said. The producer, in which the government owns a large minority stake, had invited companies to bid for the oil last week, according to traders and a document seen by The Wall Street Journal. (…)

But sanctions already in place, laid out by the EU in mid-March, and replicated by Switzerland, will ban companies from reselling Rosneft oil outside of Europe. This includes sales into the big Asian market, especially India, which has soaked up some of the Russian oil demand since Moscow invaded Ukraine. (…)

If Rosneft keeps struggling to sell, it would represent a further shock for an economy already locked out of much of Western finance and commerce. The company says it is Russia’s biggest taxpayer, contributing a fifth of budget revenue. In total, Russia’s oil and gas sales made up 45% of the federal budget in 2021, according to the International Energy Agency.

“If they can’t sell, they’ll have to start shutting down,” said Adi Imsirovic, senior research fellow at the Oxford Institute for Energy Studies and former head of oil trading. (…)

Rosneft’s tender was an attempt to export crude that trading companies were no longer willing to handle, people familiar with the sale said.

Unlike the U.S., Russia doesn’t have much space to store oil, so dwindling demand quickly backs up through the supply chain and prompts producers to throttle back output. Once wells are turned off, they can be hard to turn back on to their previous capacity. (…)

The scale of the production decline would be the most significant since the 1990s when the oil industry suffered from underinvestment.

Russian oil output started to decline in March and had fallen by around 7.5% by mid-April. (…)

According to the document, Russian oil output may decline to between 433.8 million and 475.3 million tonnes (between 8.68 million and 9.5 million barrels per day) in 2022 from 524 million tonnes in 2021.

That would be the lowest since 2003, when Russian oil output stood at 421 million tonnes. (…)

Oil exports are seen declining to between 213.3 million and 228.3 million tonnes (4.27 million to 4.57 million bpd) from 231 million tonnes in 2021.

THE DAILY EDGE: 1 APRIL 2022

Payroll employment rises by 431,000 in March; unemployment rate declines to 3.6%
  • Overall, job growth averaged 562,000 per month in the first quarter of 2022, the same as the average monthly gain for 2021. However, employment is down by 1.6 million, or 1.0 percent, from its pre-pandemic level in February 2020.
  • The change in total nonfarm payroll employment for January was revised up by 23,000, from +481,000 to +504,000, and the change for February was revised up by 72,000, from +678,000 to +750,000. With these revisions, employment in January and February combined is 95,000 higher than previously reported.
  • The labor force participation rate, at 62.4 percent, changed little in March.
  • In March, 2.5 million persons reported that they had been unable to work because their employer closed or lost business due to the pandemic—that is, they did not work at all or worked fewer hours at some point in the 4 weeks preceding the survey due to the pandemic. This measure is down from 4.2 million in the previous month.
  • Among those not in the labor force in March, 874,000 persons were prevented from looking for work due to the pandemic, down from 1.2 million in the prior month.
Consumer-Spending Growth Falters Consumer spending increased 0.2% in February, the Commerce Department said, a slowdown from the prior month as inflation stayed elevated.

U.S. households boosted their spending at a seasonally adjusted 0.2% pace in February from the month before, down from a revised 2.7% rate in January, when spending rebounded from an Omicron-related dip in December, the Commerce Department said Thursday. (…)

Personal income increased by 0.5% in February over the prior month, a pickup after it was nearly flat in January, but inflation rose more quickly. Income after taxes, adjusted for inflation, fell for the seventh straight month in February to the lowest level since March 2020, the Commerce Department said. (…)

Consumer prices rose 0.6% on the month and 6.4% on the year, a new 40-year peak as measured by the department’s personal-consumption expenditures price index, the Federal Reserve’s preferred gauge. Annual core PCE inflation, which strips out volatile food and energy prices, rose to 5.4% in February. (…)

Services spending rose by 0.9% in February, the most since last July, while goods spending declined by 1%, largely due to lower spending on vehicles as prices continued to rise and supply chain issues hurt availability. (…)

There are several very different angles one can use to assess the health of the American consumer as this Haver Analytics table shows.

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Wages and Salaries are booming, up 11.5% YoY in February after +9.4% in 2021. But the growth rate slowed to 7.8% a.r. in the last 3 months and 6.1% in the last 2 months.

PCE inflation is eating more and more of that away, being up 6.6% a.r. in the last 2 and 3 months.

The ending of virtually all pandemic stimmies brought nominal disposable income up 4.6% YoY in February but only 3.2% annualized in the last 3 months. Real disposable income is thus negative YoY and has declined sequentially every month since August 2021. Real disposable income is now only 1.5% above its pre-pandemic level.

fredgraph - 2022-04-01T060203.810

The tight relationship between income and spending is slowly being restored. Real expenditures are up 6.9% YoY and 4.6% above their February 2020 level. But they are up 1.2% annualized in the last 3 months and only 0.6% a.r. in the last 4 months to include Thanksgiving.

Much hope is still resting on so-called excess savings but the savings rate ticked up from 6.1% to 6.3% in February. The amount of time the savings rate spent below 6.0% in the last 62 years defies reasonable probabilities of that happening now.

Americans borrowed heavily between 1998 and 2006 to speculate on housing. Even if they wished to do that now, there are so few available houses nowadays, particularly at the mass affordable price levels, it seems unlikely it could happen to a similar extent.

fredgraph - 2022-04-01T062231.240

Helping spending and the economy now is the rapid rise in employment. But inflation needs to abate rapidly, otherwise gains aggregate spending power will all go into higher prices. PCE inflation is up 6.4% YoY in February, core PCE +5.4%, with little slowdown lately. Durable goods inflation was zero in February, not a sign of rising demand.

As I reported on March 28, the mid-March Chicago Fed Advance Retail Trade Summary projected that March sales would decrease 3.2% from February on a seasonally adjusted basis and to decrease 4.4% when adjusted for inflation.

The Chase consumer spending tracker, updated through March 28, suggests that late March sales improved. Its estimate for control retail sales (ex-cars) is up 1.0% MoM in nominal terms, so down 0.2% in real terms using the same deflator used by the Chicago Fed. That would follow -1.5% in February.

Meanwhile, real spending on services was up 0.6% MoM in February, from +0.3% in January and 0.1% in December as reopening spurs people to eat out, entertain and travel.

Inflation on services was restrained to +0.3% MoM in February but is nonetheless up 4.9% annualized since last November. Accelerating wage gains will likely keep services inflation above 5% for a while.

In all, the splurge on goods seems to be abating along with real disposable income. Services will likely keep total spending up but inflation is seriously eroding spending power.

fredgraph - 2022-04-01T082851.679

MANUFACTURING PMIs

The U.S. PMI is out later this morning.

Eurozone: PMI slides to 14-month low in March amid rising inflation and geopolitical tensions

The Eurozone manufacturing sector registered a further slowdown in growth at the end of the first quarter, with the headline PMI slumping to a 14-month low. A rise in geopolitical tensions was mentioned as a factor weighing on demand, and had a noticeable impact on business confidence, which fell to its weakest level since May 2020. The weaker upturn was accompanied by an intensification of supply chain pressures over the month as rising COVID-19 infections in China and Russia’s invasion of Ukraine reportedly led to longer lead times.

Meanwhile, amid surging commodity, fuel and energy costs, input price inflation re-accelerated in March and hit a four-month high. To offset margin pressures, eurozone manufacturers raised their charges to the greatest extent in the series history.

The S&P Global Eurozone Manufacturing PMI® fell to 56.5 in March, from 58.2 in February, and signalled the slowest improvement in operating conditions faced by goods producers since the beginning of 2021.

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Notwithstanding a greater lengthening in average lead times (the Suppliers Delivery Times Index is inverted in the calculation of the headline PMI), the slowdown would have been much steeper as the remaining four sub-components all declined over the month.

imageBy nation, Ireland registered the strongest improvement in manufacturing operating conditions during March, marginally outpacing the expansion seen in Austria. Aside from these two, rates of expansion slowed in all of the remaining monitored eurozone constituents.

Manufacturing output across the eurozone continued to increase in March, in line with the trend observed since July 2020. However, the rate of growth was the slowest seen over the current expansion period as firms struggled to obtain raw materials and other necessary components. COVID-related staff absences, Russia’s invasion of Ukraine, and sluggishness within the automotive industry were also reported as drags on growth.

New orders increased solidly at the end of the first quarter, although growth momentum eased notably as rising geopolitical tensions led to increased hesitancy among clients. Export demand declined during March for the first time since June 2020, reflecting lower new orders from customers in overseas markets. According to anecdotal evidence, intra-European trade was particularly impacted by the war in Ukraine.

Latest survey data also pointed to a significant reduction in business confidence during March. Although manufacturers were optimistic on average, the Future Output Index fell by its largest margin since the onset of the pandemic just over two years ago and was at its weakest since May 2020.

Supplier delivery times continued to lengthen at a substantial rate at the end of the first quarter. In fact, vendor performance deteriorated to the greatest extent since December and ended a four-month sequence of easing supply chain pressures. According to panellists, rising COVID-19 cases in China and the war in Ukraine exacerbated ongoing bottlenecks.

Consequently, cost pressures intensified during March as supply issues were compounded by rising commodity, fuel and energy prices. Overall, the rate of increase in input costs quickened and was among the fastest seen in the survey history. To protect profit margins, eurozone manufacturers raised their charges at a record pace.

Meanwhile, purchasing activity rose at the slowest rate in 14 months during March, although the increase was sufficiently strong to support stockpiling efforts, as latest survey data signalled a further, albeit slower, increase in pre-production inventories.

Lastly, manufacturing employment was expanded once again in March. The rate of jobs growth was stronger than the series average, but the weakest since February 2021. Despite continued hiring activity, capacity pressures remained evident as backlogs of work rose for a twentieth successive month. Panellists commonly linked the increase in outstanding business to input shortages.

China: Manufacturing performance dampened by latest COVID-19 wave in March

The introduction of tighter restrictions to contain the spread of the latest wave of COVID-19 in China weighed heavily on manufacturing performance in March. Companies registered the quickest falls in output and new business since the initial onset of the pandemic in February 2020, with restrictions around mobility also leading to a steeper deterioration in supplier performance.

Cost pressures meanwhile intensified, with input costs and output charges both rising at the sharpest rates for five months. The ongoing disruption to business operations, rising costs and recent invasion of Ukraine all weighed on business confidence for the year ahead, which slipped to a three-month low in March.

The headline seasonally adjusted Purchasing Managers’ Index™ (PMI™) fell from 50.4 in February to 48.1 in March, to signal a renewed deterioration in business conditions. Though modest overall, the pace of decline was the quickest seen since February 2020.

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The drop in the headline PMI was partly driven by a renewed and solid fall in production at Chinese manufacturing firms in March. Furthermore, the rate of contraction was the steepest seen for 25 months. Companies frequently mentioned that the measures to contain the spread of COVID-19 had disrupted operations, supply and dampened customer demand.

New orders likewise fell at the sharpest rate since February 2020 in March. Companies commented that both domestic and foreign demand had waned, with new export business declining at the fastest pace for 22 months. The pandemic, and difficulties shipping items to clients, as well as greater market uncertainty due to the Ukraine war had dampened sales, according to panellists.

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Disruption to business operations and logistics due to containment measures led to a further deterioration in average supplier performance. Notably, the rate at which delivery times increased was the fastest since last October.

Higher COVID-19 case numbers and increased restrictions also added pressure to capacities, as backlogs of work rose slightly for the second month in a row. This was despite a marginal increase in staffing levels.

Greater market uncertainty and lower sales led firms to cut back on their purchasing activity, though the rate of contraction was only marginal. At the same time, stocks of both inputs and finished goods fell as firms made greater usage of current inventories amid softer demand conditions. There were also reports that high purchasing costs had contributed to greater utilisation of current stocks.

Overall input costs rose at a sharp and accelerated pace in March, with the rate of inflation hitting a five-month high. Firms sought to pass on additional expenses to clients in the form of higher selling prices. The rate of charge inflation was the quickest since last October and solid overall.

Business expectations regarding future output waned to a three-month low in March. Companies cited a number of headwinds to the outlook, most notably, uncertainty relating to the pandemic, the war in Ukraine and steep rises in costs. Optimism was generally attributed to company expansion plans and hopes that global economic conditions will strengthen as the pandemic recedes.

Japan: Stronger expansion in manufacturing in March

Japanese manufacturers signalled a quicker improvement in operating conditions in March, as respondents registered a renewed expansion in production levels. At the same time, new order growth regained some of the momentum lost in February. That said, total new order growth was still held back by a solid reduction in new export sales, which fell at the sharpest pace since July 2020, as firms cited that external demand was dampened by renewed lockdown restrictions in parts of China and the Russia-Ukraine war. The latter also exacerbated price pressures and supply chain disruption, which prompted firms to increase stockpiles of pre-production inventories at a series record rate.

The headline au Jibun Bank Japan Manufacturing Purchasing Managers’ Index™ (PMI) rose from 52.7 in February to 54.1 in March. This signalled the fourteenth consecutive improvement in the health of the sector and one that was solid overall.

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The improvement partly stemmed from a renewed rise in production volumes in March. Firms often attributed this to greater new orders, although growth was slightly held back by reports of higher raw material prices. Output volumes have now increased in five of the last six months.

Japanese goods producers also signalled a further expansion in new order inflows in March, the sixth in as many months. The rate of growth quickened from February as firms reported domestic sales in particular were boosted by the easing of COVID-19 restrictions. That said, stricter restrictions in key export markets, particularly China, led to a sharp reduction in export orders. The contraction was solid overall and the quickest since July 2020. Foreign sales were also hindered by the Russian invasion of Ukraine.

Input cost inflation strengthened further in March. The pace of inflation was rapid overall and the strongest since August 2008. Manufacturers widely linked an increase in average input prices with rapidly rising raw material costs. Concurrently, average prices charged for Japanese manufactured goods rose at a marked pace as firms sought to pass increased cost burdens on to clients. The rate of factory gate inflation quickened, and was the third-fastest in the survey history.

Supply chain disruption continued to disrupt manufacturing activity in March, with average lead times lengthening at a marked pace that was the most substantial for three months. Delays in receiving shipments led manufacturers to increase purchasing activity solidly in a bid to build safety stocks. As a result, stocks of purchases rose at the strongest rate on record.

Additional pressure on capacity led to Japanese manufacturers expanding employment levels for the twelfth month running. The rate of job creation eased slightly to a five-month low, yet remained moderate overall. Backlogs of work also rose at a sharper pace, providing further evidence of pressure on existing capacity in March. The latest accumulation extended the current sequence to 13 months.

Looking forward, business confidence regarding output over the year ahead remained positive with sentiment underpinned by hopes that the pandemic would end and boost domestic demand, while an end to the Russia-Ukraine war would bolster international demand and stabilise price and supply pressures.

Morgan Stanley Slashes China GDP Forecast, Citi Warns of Risks

Economists at Morgan Stanley led by Robin Xing downgraded their full-year forecast to 4.6% from 5.1% on Friday. China’s “strict adherence” to its no-tolerance policy is expected to stay in the coming months “despite the more transmissible omicron,” they said.

Citigroup economists said gross domestic product growth could take a hit of as much as 0.9 percentage points in the second quarter.

Morgan Stanley cited low overall vaccination rates for third doses, especially among the elderly, as a reason why authorities will likely stick with Covid Zero policies for most of this year. (…)

In a worst-case scenario, China could delay its exit from Covid Zero until the first half of 2023, “and recurring lockdowns could result in more severe supply chain disruption and merely 4% GDP growth,” they said.

China Home Sales Slump Worsens Despite Vows to Support Market

The 100 biggest companies in China’s debt-ridden property industry saw a 53% drop in sales from a year earlier, according to preliminary data from China Real Estate Information Corp. That’s the steepest decline this year. (…)

In an early promising sign, March sales grew 27% from February, according to CRIC, driven by state-backed and strong private developers. The roll-back of policy curbs may kickstart a “slow and gradual” recovery in developers’ sales, Bloomberg Intelligence analyst Kristy Hung wrote in a Friday note. (…)

Buyer confidence remained subdued and real estate companies turned inactive in marketing new projects, they said. Covid outbreaks and lockdowns in cities including Shanghai added to the gloom. (…)

Funding difficulties and sizable refinancing needs for the rest of 2022 will further strain liquidity and increase defaults, Moody’s Investors Service analysts led by Daniel Zhou wrote in a note Thursday. (…)

Stressed developers face at least $3.1 billion of payments on dollar and onshore public bonds this month, according to data compiled by Bloomberg. The sector also has 53.6 billion yuan ($8.4 billion) of trust payments due, according to data tracker Use Trust.

Car Sales Seen Sputtering as Supply-Chain Woes Hurt Production Auto makers are projected to report lower year-over-year sales amid tight inventories. “This market is stuck in low gear,” said one industry watcher.

Sales of new vehicles are projected to fall 16% in the first quarter from the year-ago period and represent the second-worst quarterly total in a decade, behind the pandemic-affected second quarter of 2020, according to Cox Automotive. (…)

The rate of sales is expected to slow in the first quarter to 12.7 million annually, according to J.D. Power. In comparison, auto makers last year sold just shy of 15 million vehicles in the U.S., the firm said, up slightly from 2020. For five straight years before the pandemic, the industry had eclipsed the mark of 17 million vehicles. (…)

The average new car price is about $44,700, according to Cox, with a total available inventory of 1.1 million vehicles, down 59% from the same period in 2021. The average listing for a used vehicle sits at $27,600, the firm said, with 2.62 million unsold used vehicles available, a nearly 5% increase from March 2021.

Also affected are car leases, which are at their lowest level since 2009. Average lease payments have soared during the pandemic as auto makers dropped the incentives that typically make leasing a more affordable option, reducing the way many buyers enter the market. (…)

(…) Last month, Ford halted production at its Kansas city assembly plant that makes F-150 pickup vehicles for a week due to the chip shortage. (…) GM last week said it would halt production for two weeks at an assembly plant in Fort Wayne, Indiana, that builds the Chevrolet Silverado 1500 and GMC Sierra 1500 pickup trucks, beginning April 4, over the semiconductor chip shortage.

War to Prompt NATO Countries to Raise Military Spending Alliance military outlays, which have grown since Moscow annexed Crimea in 2014, will step upward with Germany’s armaments pledge

The North Atlantic Treaty Organization’s 30 countries have in the past year increased their military spending by roughly 2% overall, according to the alliance’s annual report released Thursday. Of NATO members’ roughly $1 trillion in total military spending this year, the U.S. accounts for almost 70%. (…)

Following Russia’s seizure of Crimea from Ukraine in 2014, NATO members pledged to spend at least 2% of their gross domestic product on defense by 2024.

Only eight countries, including the U.S., already cross the 2% threshold, according to NATO’s report, a decline from the previous annual report, in which 11 countries met the target. (…)

Germany currently spends less than 1.5% of its GDP on defense, according to NATO’s report. Since the country has Europe’s largest economy, an increase in military spending of more than 0.5 percentage point of its GDP would make a significant difference in NATO’s total European outlays. (…)

Pointing up NATO members are now also for the first time considering permanently stationing troops in members that joined after the end of the Cold War and were once Soviet satellites. Under an agreement struck between NATO and Russia in 1997, the alliance had agreed not to permanently station troops in those countries. NATO leaders say that Russia’s invasion of Ukraine rendered that agreement void, so the alliance can now deploy troops as it sees fit.

OPEC Sticks to Production Plan Cartel agrees to keep small output increase despite rocketing prices

The Organization of the Petroleum Exporting Countries said there is nothing it can do to stop rising oil prices, as it decided again Thursday to stick with a Moscow-backed production plan that has done nothing to tame the market during the Ukraine war.

In its second meeting since the Kremlin ordered the assault on Ukraine, a partnership between OPEC and a group of Russia-led countries, dubbed OPEC+, declined again to tap into its millions of barrels of remaining capacity to pump more oil. Instead, they agreed to raise their collective oil output by a modest 432,000 barrels a day, rejecting calls from oil-consuming countries to do more.

The reason: Most OPEC+ members are already pumping at their maximum capacity, while Saudi Arabia and the United Arab Emirates—which have so-called spare capacity to raise their production—say beefing up output would actually raise prices, not lower them.

OPEC’s spare capacity still stands at 4.19 million barrels a day, including 3.2 million barrels a day from Saudi Arabia and the U.A.E., according to the International Energy Agency, a group that assesses the oil market and advises oil-consuming nations.

The Saudis and Emiratis said this week they won’t break up their energy-market alliance with Russia and pump more to help the U.S. and the West in their confrontation with Moscow. Higher oil prices fuel Russia’s state revenue and complicate efforts by the U.S. and Europe to exert maximum pressure on Moscow with energy sanctions. (…)

In recent months, U.S. officials say they have stopped asking the Saudis to pump more oil and have instead pressed them to not react in some unexpected way to a petroleum-reserve release, such as by cutting output. (…)

Already about 2 million barrels a day of oil supplies have been disrupted since the war started, Amos Hochstein, the U.S. State Department official in charge of energy security, told a Dubai energy conference on Monday.

In addition, OPEC delegates say they are worried about a resurgence of Covid-19, which has led to new lockdowns in China. They also see the U.S. holding talks that could lift sanctions on about 1.5 million barrels a day of Iranian oil production and about 300,000 barrels a day of Venezuelan output. (…)

Eurozone Inflation Soars to 7.5%, Raising Pressure on ECB Investors in government bonds have begun to anticipate rises in the central bank’s key interest rate later this year

(…) The European Union’s statistics agency on Friday said consumer prices were 7.5% higher in March than a year earlier, a jump from the 5.9% rate of inflation recorded in February. (…) National figures suggest that the current rate of inflation could be even higher. Germany’s measure of inflation for March was the highest since 1981, while Spain’s was the highest since May 1985. (…)

Much of the pickup in inflation has been driven by energy prices, which were 44.7% higher than a year earlier, having been 32% higher in February. Food-price inflation also picked up, to 5% in March from 4.2% in February. (…)

The ECB’s economists now expect the inflation rate to average 5.1% this year, having raised their forecast from the 3.1% projected in December. Economists said a 7.1% increase is possible if energy prices are higher than they assume. (…)

Figures released by Eurostat Thursday showed the eurozone’s unemployment rate fell to a record low of 6.8% as 181,000 workers found jobs. The decline had been particularly rapid among younger workers over the previous 12 months, with the unemployment rate for people aged 25 years or under falling to 14% in February from 18.6% a year earlier. That drop was more than three times as large as for the working-age population as a whole. (…)

Asian Liquefied Natural Gas Demand Is Cooling Fast

(…) The carnage this winter is already impressive. Overall, Asia Pacific LNG imports are down 10% in the first quarter of 2022 from a year earlier, according to data from consultancy Wood Mackenzie. Chinese, Japanese and Indian LNG imports are down 11%, 14% and 25% respectively.

Asian LNG prices had roughly quintupled over the past year to $34 per million British Thermal Units (MMBtu) as of late March but still lagged behind the European benchmark which hit $39 per MMBtu, according to Rystad Energy, a consultancy. Some Asian buyers began redirecting purchased cargoes to take advantage of sky high European prices even before the war broke out: Around 10 LNG cargoes were redirected from Asia to Europe in December, according to Xi Nan, vice president of LNG markets at Rystad.

There is also some evidence of a switch back toward coal and oil. Valery Chow, vice president at Wood Mackenzie, observed that China, India and Southeast Asia have been resorting to increased coal use for power generation, while industrial customers in India have been switching to naphtha and furnace oil in the face of persistently high and volatile LNG prices.

While it may be still too early to speak of permanent gas demand destruction across Asia, high LNG spot prices will probably persist for several years, weakening Asian demand growth—and potentially impacting further planned LNG export developments in Western Australia. Should new Russian pipelines begin supplying large additional volumes of gas to China, as seems likely, that would magnify the impact. (…)

Asia’s energy demand continues to gallop ahead and there is little reason to doubt that will change. But for the next several years, overall Asian LNG demand growth might be lackluster. Coal and renewable power vendors will celebrate. And LNG merchants heavily dependent on the region will be shielded to an extent from weak demand by their long-term sales contracts. But getting new contracts over the finish line—unless offered on very favorable terms relative to current spot prices—could prove challenging.

Developers Sempra Energy (SRE.N) and New Fortress Energy Inc (NFE.O) advanced agreements on separate projects, one of which could be producing LNG within 12 months. These plants typically requires long-term contracts for about 85% of output to kick off, and take years to complete.

But growing demand among customers, especially in Europe, was behind New Fortress Energy’s decision to invest its own money to build a 2.8 million tonne per annum (MTPA) plant off the coast of Louisiana. (…)

GameStop Shares Jump 15% on Stock-Split Request The videogame retailer says it will seek shareholder approval to increase the number of common shares for a stock split, which would follow the recent path of Tesla, Alphabet and Amazon.com.
Chinese Developer Stocks Suspended as Results Deadlines Pass Several large Chinese property stocks stopped as part of a wave of share suspensions for Hong Kong-listed companies that couldn’t publish annual results on time.
EU to Warn China It Will Hurt Global Role by Helping Russia

European Union leaders plan to tell President Xi Jinping in a summit that China will hurt its global stature if it hands Russia an economic or military lifeline, a pointed message that will test Beijing’s commitment to keep the war from damaging its ties with Brussels.

European Commission President Ursula von der Leyen said China had a “special responsibility” to demand that Russia respect international law and to defend Ukraine’s sovereignty.

“No European citizen would understand any support to Russia’s ability to wage war,” she said in a statement to Bloomberg ahead of the virtual summit Friday. “It would lead to major reputational damage for China here in Europe.” (…)

U.S. has inescapable responsibilities for Ukraine crisis

This is from the People’s Daily, i.e. the Chinese government.

For balance, this is from NATO:

NATO-Russia relations: the facts