PMIs

SERVICES PMIs

USA: Sharp upturn in business activity, but inflationary pressures strengthen to record high

US service providers recorded a steep expansion in business activity during April, according to the latest PMI™ data. The rate of output growth eased to the slowest for three months, but was sharp overall. Similarly, higher selling prices weighed on client spending as the pace of new business expansion softened. Nonetheless, demand conditions remained strong and sparked the fastest rise in employment for a year as backlogs mounted at a near-record pace.

Meanwhile, input and labor shortages pushed up cost burdens to the greatest extent on record. In response, firms raised their output charges notably and at the sharpest pace since data collection began in October 2009. Concerns regarding inflation weighed on business confidence, which slipped to the lowest in six months.

The seasonally adjusted final S&P Global US Services PMI Business Activity Index registered 55.6 in April, down from 58.0 in March, but higher than the earlier released ‘flash’ estimate of 54.7. The latest upturn in business activity was sharp overall and quicker than the series average, despite easing to the slowest in three months. Where firms reported a rise in output, this was linked to strong demand conditions and a further increase in new orders. The loosening of COVID-19 restrictions boosted customer spending, according to panellists.

The rate of growth in new business also softened to a three-month low at the start of the second quarter, but was steep. Although higher selling prices dampened demand slightly, firms reported healthy sales volumes to new and existing clients.

Alongside strong domestic demand, new export orders rose at the quickest rate since data collection for the respective seasonally adjusted series began in September 2014. The easing of restrictions in key export markets reportedly boosted footfall and customer activity.

At the same time, cost burdens rose substantially in April. Higher wage, transportation and material costs drove up input prices. Service providers mentioned greater food, energy and fuel costs in particular. The rate of input price inflation accelerated for the third successive month to the fastest in 11-and-a-half years of data collection.

Subsequently, services firms increased efforts to pass-through higher cost burdens on to clients through hikes in selling prices. The pace of charge inflation accelerated notably, and for the fourth month running, to the fastest on record.

Meanwhile, further upticks in new orders and business requirements resulted in another increase in employment at service providers. The rate of job creation quickened to the sharpest for a year and was sharp overall.

Backlogs of continued to rise, thereby extending the current sequence of expansion that began in July 2020. Although employment increased, some firms highlighted that ongoing labor shortages hampered progress with depleting incomplete business. Companies also stated that input delivery delays put pressure on capacity. The rate of growth in unfinished business was broadly in line with that seen in March and the second-fastest on record.

Services firms remained upbeat regarding the outlook for output over the coming year in April. Hopes of increased client demand and greater opportunities to fill vacancies spurred optimism. That said, the degree of business confidence slipped to a six-month low amid concerns regarding inflation.

The S&P Global US Composite PMI Output Index posted 56.0 in April, down from 57.7 in March. Although slightly slower than the upturn at the end of the first quarter, the rise in overall output was sharp overall. A faster expansion in manufacturing production was offset by softer service growth.

 

Similarly, the overall expansion in new business eased following a slower upturn in service sector new orders. Nonetheless, the rise in new sales was sharp as domestic and foreign client demand strengthened. New export orders rose at the fastest pace since May 2021.

Meanwhile, inflationary pressures intensified further in April. Input prices and output charges increased at the sharpest rates on record. Material and labor shortages, alongside greater transportation costs drove the rise in prices.

Although firms registered a further rise in employment, labor shortages continued to be highlighted. As a result, backlogs of work grew at a sharp pace.

Services wages appear to have crested at 5% YoY…

…although their Q1 pace was 6.3% annualized:

Eurozone: Service sector drives eurozone growth higher in April as manufacturing slowdown continues

April survey data highlighted the growing emergence of a two-speed economy across the euro area as faster service sector growth starkly contrasted with a slowdown across manufacturers. Nonetheless, private sector output within the eurozone grew at the fastest pace in seven months at the start of the second quarter as demand continued to be buoyed by fewer COVID-19 restrictions.

Signs of fragility were also apparent across the composite data as new export orders declined for a second successive month, while business confidence remained well beneath February’s level (and therefore prior to Russia’s invasion of Ukraine) as rising inflation and heightened geopolitical tensions both weighed on sentiment.

Prices data meanwhile highlighted the intense inflationary environment across the eurozone in April as prices charged for goods and services increased at an unprecedented rate amid steep cost pressures.

The seasonally adjusted S&P Global Eurozone PMI® Composite Output Index rose to 55.8 in April, up from 54.9 in March and indicative of an accelerated expansion in eurozone economic activity that was the strongest since September 2021.

That said, the improvement in the headline figure masked widely divergent trends at the sector level, with data revealing sharp services activity growth but a sluggish increase in manufacturing output. In fact, the rise in goods production was marginal and the slowest in the current 22-month growth period. By contrast, business activity among services firms rose at the quickest pace in eight months.

By country, latest survey data showed France as the fastest-growing monitored eurozone constituent. The French private sector posted its sharpest expansion in over four years during April. Quicker upturns were also seen in Spain and Italy, while Germany bucked the trend as growth here slowed to a three-month low.

According to surveyed businesses, the lifting of COVID-19 restrictions in recent months continued to support greater levels of activity in April, with some companies catching up on work and reporting greater client appetite. Incoming new business volumes rose strongly and at a faster pace at the beginning of the second quarter amid a further improvement in general demand conditions across the euro area.

That said, increases in new orders were a reflection of domestic market gains in April as new export orders (which includes trade between euro area countries) fell. The reduction, albeit only modest, was the second in successive months and the sharpest since November 2020. Sub-sector data showed a stagnation in overseas demand for services and a continued contraction in goods exports.

The strong trend in jobs growth seen since around the middle of last year continued in April as employment rose at the fastest pace in five months. Overall, the increase in staffing levels was considerably stronger than its historical average, with robust hiring activity recorded across both monitored sectors.

Nevertheless, operating capacities were stretched further during April, as evidenced by a fourteenth successive monthly increase in backlogs of work. The rate of accumulation in outstanding business edged up slightly since March, but remained weaker than the survey highs seen last year.

Regarding prices, latest survey data highlighted intense inflationary pressures across the euro area in April. Input costs rose at the second-sharpest rate in nearly 24 years of data collection, with the rate of increase slowing only slightly from March’s survey record. To protect margins, euro area businesses raised their prices charged to the greatest extent on record (output prices data were first collected in November 2002).

Lastly, business expectations remained somewhat subdued in April, particularly when compared with the levels of optimism seen in January and February. Having slumped to a 17-month low in March, business confidence moved only slightly higher in the latest survey period as the war in Ukraine and concerns surrounding inflation weighed on the outlook.

The S&P Global Eurozone PMI Services Business Activity Index rose to 57.7 in April, from 55.6 in March, signalling a thirteenth successive monthly expansion in services output across the euro area. Moreover, the expansion signalled was the strongest since last August and marked a further improvement from January’s recent low.

Supporting activity was a strong rise in new business during April. The rate of new order growth accelerated to an eight-month high. New export business was unchanged from March, however.

Strong jobs growth continued during the latest survey period and was unchanged from March’s four-month high. Nonetheless, service providers recorded a further increase in their outstanding business volumes.

Steep price pressures remained apparent in April as input costs rose at the second-fastest rate on record. Prices charged for the provision of euro area services rose at the strongest pace on record as firms passed on greater cost burdens to their customers.

Lastly, although the level of business confidence improved since March, it was the second-weakest since November 2020.

The survey data are consistent with GDP rising at a quarterly rate of around 0.7% at the start of the second quarter after signalling a 0.4% rise in the first quarter. (…)

China: Services activity falls at sharper pace in April

The introduction of tighter COVID-19 containment measures in China led to quicker reductions in service sector business activity and overall sales in April. Notably, both activity and new orders fell at the second-sharpest rates since the survey began in November 2005, and were exceeded only by those seen at the initial onset of the pandemic in February 2020. Input costs meanwhile rose solidly, but efforts to attract new business drove a renewed drop in prices charged by services companies.

Encouragingly, business confidence improved slightly on the month, with many firms anticipating that activity levels will rise once pandemic-related restrictions eased. At the same time, service sector employment fell only marginally in April.

The seasonally adjusted headline Business Activity Index slipped from 42.0 in March to 36.2 in April, to signal a second successive monthly fall in services activity. Furthermore, the rate of reduction was the second-sharpest seen in the survey history (behind only February 2020), with companies frequently linking the fall to tighter COVID-19 restrictions and subsequent disruption to operations.

The escalation of measures to contain the spread of the virus, which included restrictions on mobility and lockdowns, also weighed heavily on customer demand at the start of the second quarter. Total new business fell at the second-steepest rate on record (after February 2020), while new export orders declined at the sharpest rate for two years.

Despite the drop in business activity and weaker demand conditions, expectations around future output improved slightly in April. Companies that projected higher business activity often anticipated a strong recovery in demand once pandemic restrictions are eased. However, there were some concerns over how long it may take to fully contain the virus and to return to more normal business conditions. Employment was also relatively resilient, with companies noting only a marginal drop in staffing levels during April. Workforce numbers have now fallen slightly over the past four months. Meanwhile, the escalation of COVID-19 measures restrained firms’ operations and led to a further increase in the level of outstanding business. The rate of accumulation was slower than that seen in March, however, and only slight. Chinese services providers noted a softer, but still solid rise in average input costs during April. According to panel members, greater prices for raw materials, fuel and expenditure on measures to limit the spread of COVID-19 had driven the latest increase in operating expenses. Prices charged by services companies in China meanwhile fell for the first time in eight months. Though modest, the rate of discounting was the quickest seen since May 2020, with a number of firms lowering their fees in order to attract new business amid muted demand conditions.

INFLATION WATCH

Yesterday, Bloomberg posted this chart suggesting peak inflation is here.

It may be, but be aware that the Cleveland Fed numbers only show a marginal improvement so far that keeps annualized inflation in the 5-6% range:

The Cleveland Fed explains:

Our inflation nowcasts are produced with a model that uses a small number of available data series at different frequencies, including daily oil prices, weekly gasoline prices, and monthly CPI and PCE inflation readings. The model generates nowcasts of monthly inflation, and these are combined for nowcasting current-quarter inflation. As with any forecast, there is no guarantee that these inflation nowcasts will be accurate all of the time. But historically, the Cleveland Fed’s model nowcasts have done quite well—in many cases, they have been more accurate than common benchmarks from alternative statistical models and even consensus inflation nowcasts from surveys of professional forecasters. (…)

Across all four inflation measures, the model’s nowcasting accuracy is generally comparable to that of the Federal Reserve’s Greenbook.

Outperforming the Fed’s forecasts is not a particularly spectacular achievement… I would have preferred to know how accurately the model forecasts actual inflation.

Fed Lifts Interest Rates by Half Point in Biggest Hike Since 2000 Central bank officials announce plans to start shrinking $9 trillion asset portfolio, another step to tighten policy and lower inflation

(…) Bonds and stocks rallied Wednesday after Mr. Powell said officials aren’t considering an even larger increase of three-fourths of a percentage point, or 75 basis points, at the Fed’s June meeting.

[But] Fed Chairman Jerome Powell said at a news conference that officials broadly agreed that additional half-point increases could be warranted in June and July given current economic conditions. (…)

Fed officials also said they would start shrinking their mammoth holdings of Treasury and mortgage securities passively—by allowing bonds to mature without reinvesting the proceeds into new securities rather than by selling them in the open market.

Officials will allow up to $30 billion in Treasurys and $17.5 billion in mortgage bonds to roll off every month in June, July and August. After that, they will allow $60 billion in Treasurys and $35 billion in mortgage securities to run off every month. Reducing the portfolio serves as an additional way to remove stimulus and lift borrowing costs. (…)

During the past 80 years, the Fed has never lowered inflation as much as it is setting out to do now—by 4 percentage points—without causing a recession. In this case, the central bank will need a number of factors out of its control to break its way, including help from abroad. (…)

“There’s a path by which we would be able to have demand moderate in the labor market” without causing a recession, Mr. Powell said. He later added: “It’s not going to be easy. And it may well depend, of course, on events that are not under our control.” (…)

The Real Economy Blog

Brazil’s Central Bank Raises Key Rate to 12.75%, Sees Smaller Rate Increase at Next Meeting The Central Bank of Brazil raised its benchmark Selic lending rate to the highest level in five years and said it would continue with its strategy as long as needed until the country’s rapid inflation starts to slow.

Inflation in Turkey soars to almost 70% as cost of food and transport rises

Soaring inflation threatens to plunge Britain into recession, warns Bank of England

• Economy to shrink next year as Bank of England raises interest rates to 1pc

Toronto home sales plunge 27 per cent in April, home prices dip

A little more than 8,000 homes sold last month – down 27 per cent from March and 41 per cent below April of last year – with the biggest declines happening in detached houses in the Toronto suburbs, according to the Toronto Regional Real Estate Board, or TRREB.

The home-price index, which adjusts for pricing volatility and is the industry’s preferred measure of home values, was $1,354,000 in April. That was down 1.6 per cent over March and represents the first monthly decline since October, 2020. From February to March of this year, the index was up 2.7 per cent; in the January period, the typical home price rose 6.4 per cent.

April marked a sharp turnaround for Toronto’s housing market, which over the first two years of the pandemic was characterized by fierce bidding wars and soaring home prices. Today, homes are taking longer to sell. Properties are drawing a handful of showings, if any at all, and some homes are not getting any offers.

“It literally changed overnight,” said Natalie Lewin, a realtor with Re/Max Hallmark Realty Ltd. who has sold homes in Toronto for more than two decades.

(…) some would-be sellers are rushing to put their homes up for sale because they are afraid that the number of buyers will continue to dwindle when the Bank of Canada raises rates again. (…)

In the USA, Redfin says the market remains tight but some signs point to a coming reaction to the 39% jump in the typical homebuyer’s monthly mortgage payment:

• Fewer people searched for “homes for sale” on Google—searches during the week ending April 23 were down 6% from a year earlier.
  

• The seasonally-adjusted Redfin Homebuyer Demand Index—a measure of requests for home tours and other home-buying services from Redfin agents—was flat year over year during the week ending April 24. It dropped 8% in the past four weeks, compared with a 3% decrease during the same period a year earlier.
  

• Touring activity from the first week of January through April 24 was 19 percentage points behind the same period in 2021, according to home tour technology company ShowingTime.
  

• Mortgage purchase applications were down 17% from a year earlier, while the seasonally-adjusted index decreased 8% week over week during the week ending April 22.
• Pending home sales were down 3% year over year, the largest decrease since mid-February.
• On average, 3.5% of homes for sale each week had a price drop. Overall, 14% dropped their price in the past four weeks, up from 11% a month earlier and 9% a year ago. This was the highest share since the end of November.

In Australia:

Building approvals are back to pre-COVID levels in most States

Source: ABS, Goldman Sachs Global Investment Research

ArcelorMittal expects steel consumption to contract as outlook turns gloomier

From Almost Daily Grant’s:

Stateside, conditions for speculative grade corporate borrowers are getting a little hairy. This morning, medical device firm Bioventus shelved a $415 offering of triple-C-plus rated notes after investors balked at the proposed terms, which included a 9.75% to 10% coupon and original issue discount, Bloomberg reports.  The reluctance is understandable, considering the triple-C-rated portion of the Bloomberg High Yield Index posted losses for nine consecutive sessions through Tuesday to sit at 10.59%, its highest since summer 2020.  

On the better-groomed end of high yield, some 25% of the population of double-B-rated corporate bonds had slumped below 90 cents on the dollar as of Friday, strategists at Barclays find, approaching the highest such tally since the 2008 era.

Also from ADG, underscoring the income squeeze:

Perhaps most concerningly, even smokers are pulling back on their fix.  Cigarette sale volumes in the U.S. sank 9.4% year-over-year during the four weeks ended March 26, data from Nielsen show. Coming on the heels of a 7.9% annual contraction in February, the March data are paired against a much easier year-over-year comparison relative to the prior month. Considering that the cigarette industry is thought of as highly price inelastic, those drastic declines underscore the shift in consumer behavior. 

EARNINGS WATCH

We now have 368 reports in, an 80% beat rate and a +7.2% surprise factor.

Q1 EPS are seen rising 9.7% (9.3% yesterday) vs 6.4% on April 1. Trailing EPS are now $213.90.

But Q2 estimates are now declining. Growth is now seen at 5.4% (5.6%), down from 6.8% on April 1. Q3 and Q4 estimates are unchanged at 10.5%.

Corporate guidance is on the same pace as at the same time during the first quarter but the number of companies offering guidance is up 43%. Of the 18 additional companies having given guidance, 11 guidd lower, 5 higher and 2 in line.

TECHNICALS WATCH

Yesterday’s surge in the last hour produced an 80%-up day with strong breadth as traders rushed to reposition from deeply oversold conditions.

SentimenTrader’s Jason Goepfert yesterday tweeted “The S&P 500 is on track for more than a 2.25% gain on a day the Fed hiked interest rates. That’s happened only one other time in 40 years. It was March 21, 2000.”

To which Charles Schwab’s Liz Ann Sonders replied “The ultimate top was 3 days later, on 3/24/00”.

CMG Wealth’s 10 indicators are now all colored in red or orange.

The S&P 500 index 100dma has now crossed below its 200dma which is now declining.

• Dr. Copper is signaling an economic downturn is ahead (red arrow bottom right in the lower clip).

Greg Ip: The Postpandemic Normal Is Here and It Isn’t That Special Plunging shares of pandemic beneficiaries such as Amazon, Netflix, and PayPal suggest a more sober view of economy’s transformation

(…) There are parallels with the dot-com bubble that burst in 2000. In both episodes, technology did fundamentally alter our way of life, but the market, aided by the Federal Reserve’s easy money, drove stock prices to levels that assumed these trends would continue indefinitely. They didn’t.

For instance, 35% of employees teleworked at some point in May 2020 because of the pandemic, during the first lockdowns, according to the U.S. Labor Department. The share has been trending lower ever since, reaching 10% in March. This points to a postpandemic normal where people shop, work and live remotely more than before the pandemic, but such activity doesn’t grow especially quickly. (…)

Amazon was on a hiring and building spree throughout the pandemic to keep up with demand, then found in the first quarter it had overhired and overinvested. “We currently have excess capacity in our fulfillment and transportation network,” Chief Financial Officer Brian Olsavsky said last month. “We hired more people and then found ourselves overstaffed when the Omicron variant subsided rather quickly.” (…)

The bigger problem is that digitization was supposed to boost productivity and efficiency throughout the economy, justifying higher wages, higher profits, and less inflation. However, when the pool of potential new customers shrinks but the labor and facilities needed to serve them keeps growing, those efficiencies fade. In the first quarter, productivity fell 1.4%, according to IHS Markit, leaving it no higher than the third quarter of 2020. Work really has changed in the past two years; it is just not a lot more productive.

Sweden, Finland Win U.S. Security Aid Pledge on Road to NATO

MANUFACTURING PMIs

USA: April PMI rises to seven-month high amid stronger demand, despite sharper price increases

Operating conditions improved markedly across the US manufacturing sector, according to April PMI^TM data from S&P Global. The uptick in the headline figure was driven by a quicker expansion in output, a softer deterioration in vendor performance and a series-record rise in pre-production inventories. Although lead times lengthened further, severe material and capacity shortages at suppliers led to sharper increases in cost burdens and selling prices. Meanwhile, firms continued to hire additional staff to ease pressure on capacity, as backlogs of work rose at the slowest pace since February 2021.

At the same time, firms were strongly upbeat regarding the 12-month outlook for output, but concerns regarding inflation and geopolitical tensions pushed confidence to the lowest for six months.

The seasonally adjusted S&P Global US Manufacturing Purchasing Managers’ Index™ (PMI™) posted 59.2 in April, up from 58.8 in March but lower than the earlier released ‘flash’ estimate of 59.7. The rate of overall growth accelerated for the third month running and was the sharpest since last September.

Contributing to the stronger upturn in the health of the manufacturing sector was a faster rise in output during April. Growth in production was linked to greater new order inflows and the delivery of materials which allowed capacity to expand. The pace of expansion was steep overall and the sharpest since July 2021.

New orders increased at a marked pace at the start of the second quarter, and at a rate broadly in line with that seen in March. Companies reported stronger demand conditions, with some noting that new sales expanded despite substantial rises in prices.

Meanwhile, new export orders grew at the fastest rate for almost a year. The expansion in new sales from abroad was attributed to greater demand in key export markets and the acquisition of new customers.

On the price front, input costs rose substantially and at the sharpest rate in four months. Higher cost burdens were attributed to greater material and supplier prices, notably increased transportation, fuel and metals expenses.

Firms continued to pass higher material and staff costs on to clients in April, as the rate of charge inflation accelerated. The increase in selling prices was the fastest since last October.

In line with a further upturn in new orders, firms raised their input buying at a sharp pace. Many companies stated that higher purchasing activity was linked to efforts to stockpile inputs amid price increases and material shortages. As a result, pre-production inventories expanded at the steepest rate on record. Stocks of finished goods continued to contract, however, the pace of decline eased to the slowest
since February 2021.

At the same time, manufacturers recorded a solid rise in employment in April. Workforce numbers grew following greater production requirements and in response to staff leaving voluntarily. Some firms also stated that job creation was linked to the filling of long-held vacancies. Labor shortages continued to be mentioned as a weight on growth, however.

Although sharp, the rate of expansion in backlogs of work eased to the softest for 14 months. Finally, business confidence remained upbeat. Strong optimism was attributed to hopes of reduced supply chain
disruption and increased hiring. Concerns regarding inflation and geopolitical tensions led the level of positive sentiment to slip to a six-month low.

Wondering what inflation was last October? CPI: +0.86% MoM, PPI: +2.0% MoM:

The ISM Manufacturing survey, more focused on larger companies, is going the other way as the Haver Analytics chart illustrate:

  

The April Manufacturing PMI^® registered 55.4 percent, a decrease of 1.7 percentage points from the March reading of 57.1 percent. (…) This is the lowest reading since July 2020 (53.9 percent).

The New Orders Index registered 53.5 percent, down 0.3 percentage point compared to the March reading of 53.8 percent. (…) The Employment Index figure of 50.9 percent is 5.4 percentage points lower than the 56.3 percent recorded in March. (…) The New Export Orders Index reading of 52.7 percent is down 0.5 percentage point compared to March’s figure of 53.2 percent. (…)

Panelists reported higher rates of quits compared to previous months, with fewer panelists reporting improvement in meeting head-count targets. (…) Surcharge increase activity across all industry sectors continues. Panel sentiment remained strongly optimistic regarding demand, though the three positive growth comments for every cautious comment was down from March’s ratio of 6-to-1.

Panelists continue to note supply chain and pricing issues as their biggest concerns. (…)

WHAT RESPONDENTS ARE SAYING

• “Tier-2 supplier shutdowns in Shanghai are causing a ripple effect for our suppliers in other parts of China. Long delays at ports, including in the U.S., are still providing supply challenges. Inflation is out of control. Fuel costs, and therefore freight costs, are leading the upward cycle. At some point, the economy must give way; it will be tough to have real growth with such pressure on costs. Despite the issues and poor outlook, business remains brisk.” [Chemical Products]
• “Continued strong demand with improvements in the supply chain. Delays still exist, but supply issues are slowly improving. Cost increases in multiple categories.” [Transportation Equipment]
• “Supply chain is still constrained, and prices continue to rise. We are focusing on ways to stay profitable while continuing to fill customer orders. Relationship management and strong negotiation skills are extremely important right now.” [Food, Beverage & Tobacco Products]
• “New order entries are still very strong. Unfortunately, logistics issues have (not) yet improved, so lead times remain extended.” [Machinery]
• “Business is strong. Backlog continues to grow due to new orders and inconsistent supply chain conditions. Shortages of components are the main factor limiting our production.” [Electrical Equipment, Appliances & Components]

• “The shutdowns in China due to a new COVID-19 wave are causing supply concerns for late second quarter and early third quarter. We have extended lead times to customers and are ordering product from China to cover demand through Q4 and early 1Q 2023.” [Miscellaneous Manufacturing]
• “Overall, improvements in supply chain are occurring on larger scale items, but we see suppliers that sell us low-volume items struggling in some cases with getting feed stocks and raw materials they need. Freight continues to plague things as well.” [Nonmetallic Mineral Products]
• “Business is still very robust. Material price increases continue to be passed on (to customers) based on costs of raw materials, logistics and labor to produce products.” [Plastics & Rubber Products]

Seventeen of 17 manufacturing industries reported growth in new orders in March, compared with 15 in March, 16 in February, 11 in January and 13 in December.

• Commodities Up in Price: 36 vs 45 in March, 33 in February, 35 in January, 28 in December and 36 in November.
• Commodities Down in Price: 1 vs 1 in March, 6 in February, 7 in January, 8 in December and 5 in November.
• Commodities in Short Supply: 18 vs 24 in March, 13 in February, 16 in January, 10 in December and 21 in November.

In case you wonder which manufacturing survey to trust, S&P Global’s (formerly Markit) has been more accurate since 2007, but the ISM, having been around forever, is the most widely followed. S&P Global intends to change that.

Canada: Solid growth in manufacturing production sustained in April

April data signalled another robust expansion in operating conditions in the Canadian manufacturing sector, despite a slight moderation since March. Looser COVID-19 restrictions and a general improvement in demand conditions led to strong inflows of new work. Subsequently, output and purchases rose sharply. Meanwhile, strong capacity pressures continued to emerge which firms responded to by raising their staffing levels at an accelerated pace.

As for prices, firms continued to face steep cost pressures with higher charges for transportation, material and fuel reported. Geopolitical tensions were also blamed for elevated rates of inflation, feeding through to sentiment which moderated from March’s five month high.

The seasonally adjusted S&P Global Canada Manufacturing Purchasing Managers’ Index^® (PMI^®) registered at 56.2 in April, down from March’s survey-record high of 58.9. The latest reading continued to indicate robust operating conditions and extended the current period of growth to 22­months, but dipped to a joint 14-month low.

Central to the improvement was a solid uptick in new orders. Firms often mentioned securing new clients in the domestic market. Sales to international clients also increased with exports rising for the second successive month.

With strong demand conditions persisting, firms raised their production levels at the start of the quarter. Output rose sharply, though at a softer pace than that seen in March. Consumer goods firms raised their output levels at the strongest rate followed by those in the investment and intermediate goods sectors, respectively.

Vendor performance deteriorated greatly during the month, although to the joint-weakest degree since November 2020. There were widespread reports of material scarcity, truck shortages and freight delays. Consequently, backlogs rose sharply. Firms did, however, seek to tame the rise in incomplete work by adding to headcounts, though this was not enough to curb an increase in outstanding business.

Firms also mentioned that there were still shortages of skilled labour. Subsequently, firms had little capacity to raise post-production inventories, which fell slightly in April. Raw material scarcity and lengthy lead times prompted Canadian manufacturing firms to raise their pre-production inventories. Stockpiling has now been seen in each of the last 15 months. Purchasing activity, meanwhile, rose substantially, and at the third-strongest rate in the series history.

Turning to prices, input price inflation moderated from March’s peak. The rate of increase was still substantial, however, and among the quickest in the series history. A number of reasons were cited for higher input costs including rising fuel, material, transportation and labour expenses. The war in Ukraine also reportedly drove up input costs.

Consequently, selling prices rose sharply. In fact, the rate of inflation was the second-strongest in the series history surpassed only by that seen in March. Firms reported efforts to protect profit margins and pass on higher transportation and material costs. (…)

Eurozone: Manufacturing growth weakens further amid record output price inflation

Eurozone manufacturers lost further growth momentum at the start of the second quarter as output increased only marginally and at the weakest rate over the current 22-month sequence of growth. The slower expansion was accompanied by a subdued increase in new orders and sustained supply-side pressures as COVID restrictions in China and the ongoing war in Ukraine caused disruptions.

Meanwhile, amid supply-chain challenges, input price inflation accelerated to a five-month high amid soaring fuel and energy costs. Manufacturers responded with the fastest increase in selling prices on record during April.

The S&P Global Eurozone Manufacturing PMI® fell to a 15-month low of 55.5 in April, from 56.5 in March. While still above the 50.0 no-change mark and therefore indicative of improving operating conditions within the goods-producing sector, it marked a sustained loss of growth momentum as the headline PMI fell for the third month running.

  

Headline PMI figures for each of the three broad market groups registered in expansion territory. The highest reading was at investment goods, despite output here declining. Consumer goods saw the second-strongest expansion, while the intermediate goods sub-sector

Of the monitored eurozone constituents, the Netherlands recorded the strongest upturn during April as growth accelerated. Elsewhere, with the exception of France, PMI readings fell over the month and in each case were at their lowest in over a year. Latest survey data for Germany was particularly noteworthy as both new orders and output slipped into contraction territory for the first time since June 2020.

On aggregate, eurozone manufacturing production increased during April. However, the rate of expansion was only marginal and the slowest seen across the current growth sequence which began in July 2020. Consumer and intermediate goods producers drove the latest increase as capital goods makers recorded the first contraction in output for almost two years.

Latest survey data also highlighted subdued order book growth at the beginning of the second quarter. Although still rising overall, the increase in new business was modest and the weakest in the 22-month growth sequence. The softer upturn in demand for eurozone goods was partly reflective of export market weakness as new orders from foreign clients fell for the second month in succession.

Production growth was also weighed down by ongoing and severe supply-chain disruptions in April. Panellists continued to report widespread shortages for numerous raw materials and components, although transportation issues were also reported as a consequence of the war in Ukraine and a tightening of COVID restrictions in China. Overall, the extent to which delivery times lengthened was considerable.

As a consequence of supply shortfalls, vendors raised their prices for raw materials and components in April. Compounding supplier price hikes were soaring fuel and energy costs, with latest survey data signalling a steep rate of input price inflation that was the strongest in five months. To combat margin pressures, eurozone manufacturers increased their factory gate charges by the greatest extent on record (series began in November 2002).

Nevertheless, euro area goods producers continued to make additional purchases during April and were able to stockpile inputs. That said, the increase in buying activity was the weakest since November 2020. On the other hand, warehoused finished goods fell once again.

Meanwhile, evidence of stretched operating capacities were seen as backlogs of work rose once again. However, the rate of accumulation in outstanding business was the weakest since January 2021 amid another strong increase in employment. The rate of jobs growth was slightly faster than in March and outpaced its historical average by a notable margin.

Finally, after slumping to their lowest since May 2020, future output expectations strengthened slightly in April. That said, business confidence remained well below that seen in February as concerns surrounding inflation and the war in Ukraine clouded the 12-month outlook.

Japan: Softer improvement in manufacturing conditions in April

The Japanese manufacturing sector registered a solid, albeit softer improvement in operating conditions at the start of the second quarter of 2022, according to April data. Firms reported a slower expansion in incoming business while growth in production levels was broadly unchanged on the month. Firms were increasingly commenting that delivery delays and material shortages had weighed on demand and output, notably as input prices continued to rise at a substantial rate that was among the sharpest in the survey history. This contributed to a series record increase in output charges in April. Manufacturers also commented that shortages and delays were exacerbated by the Ukraine war and renewed lockdowns in China, which pushed confidence to a 21-month low.

At 53.5 in April, the headline au Jibun Bank Japan Manufacturing Purchasing Managers’ Index™ (PMI) dipped from 54.1 in March, indicating a softer improvement in the health of the sector that was the second-weakest in the past six months.

The lower reading of the headline index was partly the result of a softer rise in new orders. Sales increased for the seventh month running, though growth eased to a milder pace overall. Firms commented that growth was held back by delivery delays and the Russia-Ukraine war. Geopolitical tensions and rising COVID-19 cases in China continued to weigh heavily on export orders, which fell solidly for the second month running.

Production levels increased for the second successive month in April, with the rate of growth little-changed from March. Firms linked the expansion to rising new orders, though difficulty securing inputs had prevented an acceleration in growth.

In response to ongoing supply chain disruption, buying activity rose at the sharpest pace since January at the start of the second quarter. Japanese manufacturers noted ongoing difficulties in sourcing and receiving inputs due to shortages and surging prices. Concurrently, supplier delivery times lengthened at a broadly similar, yet marked degree in April, with average vendor performance among the worst in the survey history. As a result, businesses aimed to build greater inventories of pre-production inventories.

Manufacturers also commented that a lack of raw materials had disrupted the ability to complete existing orders, as evidenced by a sustained rise in outstanding business. At the same time, firms increased employment levels in response to higher production requirements. The rate of job creation was the weakest for nine months, however, amid an increased number of voluntary leavers.

Business confidence regarding activity over the coming year eased further in April. The degree of positive sentiment was strong overall, yet was the weakest since July 2020. Firms cited hopes that a resolution to price and supply issues would trigger a broad economic recovery, though this was dampened by concerns regarding a prolonged impact from COVID-19 and the Russia-Ukraine war.

Note: China PMI was reported yesterday.

Speaking of China, Malcolm Ridell posted an interview with Joerg Wuttke in The Market, a leading German-language financial website. Joerg Wuttke is the president of the EU Chamber of Commerce in China and has lived and worked in China for over 30 years. “He is arguably the most influential foreign business leader in China.”

Please read through, well worth it:

Q: ‘Do you see any indication that the Zero Covid policy, which is behind the lockdowns, is being reconsidered?’

Mr. Wuttke: ‘No, nil.’

‘The authorities have made the Chinese population genuinely afraid of the virus.’

• ‘The authorities do not inform that the Omicron variant is milder, they do not inform that other countries have learned to live with the virus – they can’t admit that people in Europe can fly on vacation again and live largely a normal life.’

• ‘The authorities have spent a year bad-mouthing Western mRNA vaccines, with the result that people in China don’t trust the vaccination – and the authorities can’t admit that it would make sense to use mRNA vaccines in addition to the Chinese vaccines.’

‘For the past two years, the party leadership and government have spun the narrative that China has handled the pandemic much better than the decadent West.’

• ‘Now this narrative is blowing up in their faces.’

‘President Xi wants to be confirmed for a third term at the 20th Party Congress in the fall, so he cannot change his narrative this close to the finish line.’

• ‘Until the 20th Party Congress, they will stick to the Zero Covid policy.’

Q: ‘So given the choice between pandemic control and the economy, the economy gets the short end of the stick?’

Mr. Wuttke: ‘Yes.’

‘The political signaling is clear:’

• ‘They don’t care about the economy in the short term.’

‘The mayors, the regional politicians, they all have only one metric right now:

• ‘Zero Covid.’

‘The system’s focus on Zero Covid leads to many decision-makers being in a kind of self-destruction mode.’

‘Imagine you’re a mayor of a medium-sized city and a truck comes with supplies for a local factory with parts from the Shanghai area.’

• ‘Do you let the truck pass and run the risk that the driver will bring Omicron and you will have local contagions?’

‘You won’t get kicked out of your job if the economy in your area is doing poorly on average.’

• ‘But you will lose your job if you have Covid in your city.’

‘Time and again you get confirmation from above:’

• ‘If you have Covid in your city, you have a problem.’ (…)

‘In current politics, business people’s messages hardly get through anymore.’

• ‘Politicians’ fear is too great.’

Q: ‘Officially, the government expects 5.5% GDP growth this year. Is that still realistic?’

Mr. Wuttke: ‘No.’

• ‘2022 growth will be below 4%; we don’t know how low.’

‘The current lockdown is even more extreme than in early 2020.’

• ‘And the economy is crashing almost as hard.’

‘All signs indicate that the politicians do not want to solve the problem, but only to limit it.’

• ‘I don’t see any vaccination campaign, no information campaign, no imports of mRNA vaccines, and I don’t see the population being told that society can live with it.’

• ‘So I have to assume that Zero Covid will result in locking down this city and then that city on a monthly basis, at least until the Party Congress gives President Xi a third term.’

Q: ‘Did the downturn accelerate in April?’

Mr. Wuttke: ‘Yes, big time.’

‘GDP growth of 4.8% in the first quarter was probably already slightly managed upward.’

• ‘But the real shocker will come with the data for April.’

‘Remember, 2021 was a banner year for China’s economy, especially in the manufacturing sector.’

• ‘January started at a high level, February and March were still okay.’

• ‘But from March 28th, with Covid in Shanghai, everything collapsed.’

Q: ‘To soften the blow, the government is trying to stimulate. Is it working?’

Mr. Wuttke: ‘The stimulus measures are like a band-aid for an amputation.’

‘The People’s Bank of China pumps some liquidity into the system, money flows into infrastructure projects and state-owned enterprises receive support.’

• ‘But that doesn’t get private companies and foreign corporations to invest again.

‘All over China, entrepreneurs look to Shanghai and have to deal with the scenario that the same thing could happen in their city.’

• ‘So, until further notice, they hit the pause button and freeze almost all investment plans.’

• ‘There’s no fiscal policy that can compensate for this restraint.’

• ‘Investment ambitions will not come back until there is confidence that the Covid policy will change.’

Mr. Wuttke: ‘The problem goes far beyond Shanghai.’

• ‘Supply chains within China are so tightly knit that lockdown measures in one place have ripple effects on other regions.’

‘Nationwide, freight volumes in April are down 15% year-on-year.’

• ‘Freight traffic volumes in the Shanghai metropolitan area plunged by 81% year-on-year in the first three weeks of April.’

• ‘Jiangsu province recorded a drop of 30%.’

• ‘In Guangdong province, China’s economic powerhouse, freight volumes have plunged by 17%, even though there is no lockdown.’

• ‘There are currently no trains running between Nanjing and Shanghai; the authorities in Nanjing are so riddled with fear that they won’t allow any traffic.’

‘I hear of car manufacturers that produce in Jiangsu province and are not directly affected by the lockdown.’

• ‘But they can’t get parts from their hundreds of subcontractors, either because the subcontractors can’t produce or because shipments can’t get through the lockdown areas.’

‘Everyone is desperately trying to fill their warehouses.’

• ‘The finely-tuned just-in-time processes are no longer working.’

‘These effects will only be seen in the economic data over the next few months.’

Q: ‘Will this mean continued production stoppages, clogged ports and strained supply chains?’

Mr. Wuttke: ‘Definitely.’

‘Shanghai has the largest port in the world.’

• ‘It’s not in lockdown. It’s running quite well.’

‘But there are not enough trucks to clear the containers.’

• ‘There is an acute shortage of drivers – they all leave because they are tired of being tested over and over again.’

‘Now ships are clogging up the waters off Shanghai.’

• ‘Average waiting times for container ships there have tripled.’

‘Some are being diverted to Ningbo or Shenzhen.’

• ‘But those ports can’t replace the big port in Shanghai.’

Q: ‘How is the impact being felt in Europe?’

Mr. Wuttke: ‘In Europe, you haven’t even begun to see the effects of these problems.’

• ‘The ships coming into Europe today left Shanghai before the lockdown.’

‘Only in May and June will we see where the electronic equipment, the machine parts, the pharmaceutical precursors, and components are missing.’

• ‘That will then lead to further shortages in the global supply chains.’

Q: ‘How are foreign companies in China reacting?’

Mr. Wuttke: ‘China is losing its credibility as the best sourcing location in the world.’

• ‘China has lost its nimbus as a base for sourcing and manufacturing, at least for now.’

‘With the current situation in China comes a huge loss of confidence, which will eventually lead to changes in supply chains.’

• ‘Foreign companies are not packing up and moving out of China, but they are considering moving parts of their investments to other countries.’

‘And I am now hearing from more and more foreign companies that they are trying to move their supply chains to other countries.’

• ‘For the first time, I see a number of companies looking to other Asian countries for their sourcing.’

‘That means their sourcing will be more expensive, because you can’t simply replace the extremely efficient Chinese cluster in many areas.’

• ‘But a more expensive sourcing is better than nothing.’

‘Also China maintains an extremely rigid travel policy.’

• ‘As a CEO or as a purchasing manager, you can’t just fly quickly to Shanghai or to Guangzhou.’

• ‘But today you can easily get to Jakarta, Kuala Lumpur or Manila.’

Q: ‘Do you see any prospects at all for market-friendly reforms in China?’

Mr. Wuttke: ‘My experience in China is that when things get really bad, the technocrats come in.’

• ‘And they do make some reforms that are right.’

‘Perhaps there will be a rethink when the domestic economy hits rock bottom.’

• ‘Perhaps they will realize in Beijing that they need foreign companies after all.’

• ‘Perhaps they will then open the doors wider again.’

• ‘But today, of course, we are not there yet.’

‘For now, China is not getting out of the corner the president has maneuvered the country into.’

• ‘They are prisoners of their own narrative.’

To summarize all of the above,

• North American manufacturing is in boomflation mode.
• The Eurozone and Japan are still strong but seeing softness in new orders.
• Everybody is stockpiling, everywhere.
• Costs keep rising strongly but are passed on easily.
• Supply chains challenges are not easing and are not about to ease given the war China’s problems.

Nordea:

The March CPI reading will likely prove to be the peak in headline year-on-year inflation, but there are more signs that we will see stubbornly high inflation rather than a swift reversing. The first reason is that energy and food inflation has been markedly exacerbated by the war in Ukraine, with the latter showing no signs of slowing. The second reason is that supply side problems are much more sticky than earlier anticipated. Risks are that the slowdown in goods inflation, will take longer to materialise.

Another worry is the strong momentum in nominal wage growth, which is supported by the historically hot labour market, and raise the risks that we will see rising service inflation, as consumers fade goods and shifts into services. If inflation continues to surprise to the upside it will most likely lead the FOMC to act and talk even tougher at upcoming meetings.

The Transcript:

“In terms of inflation in our own businesses it’s extraordinary how much inflation we have seen.” – Berkshire Hathaway (BRK.B) Chairman & CEO Warren Buffett

“We are seeing absolutely record inflation. And the supply chain disruption is still there. So probably one of the more difficult periods that I have known in my career from an operational perspective.” – Mondelez International (MDLZ) CEO Dirk Van de Put

“…our pricing is up roughly 8%. Again, that’s first quarter this year over the first quarter last year — we haven’t seen any substantial increase in consumer resistance from this pricing.” – McDonald’s (MCD) CEO Chris Kempczinski

“Inflation was in the transportation costs, especially in wage inflation last year. It remains there. It’s been amplified a bit by the fuel costs following the Ukraine conflict, which has happened since we last spoke. So, it’s more a factor — those costs will now, we believe, will persist a little longer than we were hoping at the beginning of the year.” – Amazon (AMZN) CFO Brian Olsavsky

The key remains the consumer and David Rosenberg is among the most pessimistic economists, noting that “over 80% of the growth in Q1 real consumer spending all took place in January” and that “in the past, when we had a negative GDP reading in a quarter, for whatever reason, we either were in a recession or heading into one more than 80% of the time.”

But the consumer is in good shape according to credit card companies and bankers as The Transcript reveals:

“At this stage, in terms of volumes, we have seen no noticeable impact due to inflation, supply chain issues, or the war in Ukraine.” – Visa (V) CEO Al Kelly

“On the macroeconomic front, consumer spending remains strong, particularly as economies across the globe continue to reopen and pandemic-related restrictions are lifted — According to our quarter one spending pulse report, which is based on all payment types, including cash and check, US retail sales ex-auto, ex-gas were up 4.7% versus a year ago” – Mastercard (MA) CEO Michael Miebach

“…consumers are out there spending. Now, what’s driving that is the second part of it and what you mean by dry powder. If you look in the consumer accounts so you take, talked yesterday about two cohorts, customers had 1 to $2,000 in their accounts pre-pandemic, average 1,400 or so. They now have about 3,400 or 3,500 in the account. For people who averaged between two and $5,000 average clear balance in their account, they now have, they average about $3,000. They now have about 12, $13,000 in their account.” – Bank of America (BAC) Chair & CEO Brian Moynihan

That may be because of the recent surge in travel spending. From the Chase card spending tracker, spending on “travel and entertainment” is among the only strong categories lately. With data through April 25, Chase estimates that control retail sales (goods) are up 0.8% MoM in April after +0.7% in March, before inflation.

Amazon’s recent results and guidance tend to confirm this. And how about demand for pizza:

“Given the softness in comparable sales trends in the U.S. and the resulting contraction of operating income as a percentage of sales in the first quarter, we expect margins for the rest of 2022 to be pressured.” – Domino’s Pizza (DPZ) CEO Ritch Allison

Workers Strike at Machine Maker CNH Industrial The United Auto Workers union is pushing for better terms at the Deere competitor, amid rising inflation and a tight labor market.

(…) The strike at CNH involves about 1,100 workers at the company’s plants in Racine, Wis., where its farm tractors are built, and Burlington, Iowa, where construction machinery is assembled. The action is the latest in a series of strikes at large U.S. companies where unions have pushed for higher wages and better benefits amid rising inflation, a tight labor market and rising corporate profits. (…)

After approving the contract in November, Deere workers received an immediate 10% raise and each worker received an $8,500 bonus. Additional 5% pay raises will be provided to Deere workers in two other years, and lump-sum bonuses amounting to 3% of workers’ annual pay will be awarded in the three other years. (…)

• Amazon union dealt a setback as it loses vote at second NY warehouse

EU Prepares Phased-In Ban on Russian Oil The bloc’s executive is expected to propose a phased-in embargo on Russian oil, taking effect by year-end, after Germany came out in support of a ban.

• Germany warns EU to expect economic cost from Russian oil embargo Brussels considers next sanctions as Berlin economy minister cautions consumers will feel strain

The Hideous Strength of the U.S. Dollar The U.S. currency’s rapid rise will make it harder for other countries to curb inflation.

(…) The Federal Reserve needs to be mindful of the threat to global growth posed by the U.S. currency’s rapid ascent. (…)

The stronger dollar is also doing the Fed’s work in combating inflation by tightening financial conditions on a trade-weighted basis. Although the U.S is the world’s largest economy and a huge importer of goods, it is relatively insulated from the global energy and food price shock by its domestic production of fuel and foodstuffs. It also benefits because all major commodities are priced in dollars. It’s everyone else’s problem if raw materials suddenly become more expensive in their respective currencies. (…)

The current weakness in the currencies of Japan and Europe would typically be welcomed for juicing their exports. But the recent slippage in the Chinese yuan, the world’s second-most important trade-weighted currency, puts matters into a different league. All three regions are facing an unusual and potentially intractable problem of imported inflation. There’s a clear and present danger of rising prices slowing global economic growth to the extent that a recession is possible, and stagflation a real risk. (…)

For the sake of the global economy, here’s hoping King Dollar’s crown starts to slip.

• Chile’s Boric Takes Aim at High Fuel Costs as Inflation Runs Hot

Nordea:

King dollar. The dollar has reached historically high levels as markets have repriced the Fed’s tightening cycle and investors have sought dollars in times of market turmoil. In the short-term, the dollar is unlikely to see any relief on Fed policy with market sentiment being the most likely catalyst for a retreat in the dollar. The Fed will front-load interest rate hikes and tighten dollar liquidity through QT. We suspect that the Fed actually welcomes a strong dollar to offset goods inflation, especially versus China, which means the king dollar will be difficult to dethrone in the current currency complex for the time being.

SENTIMENT WATCH

Traders Bet New Waves of Bond Selling Will Push Yields Over 3.15%: MLIV Pulse Survey

In the last MLIV Pulse survey, a clear majority of the 807 market participants project the 10-year yield will climb above 3.15% — peaking only in the third quarter — while 41% reckon it will eventually hit 3.4% from about 2.9% currently. (…)

More than half of the survey respondents expect five-year yields adjusted for inflation to turn positive by the end of June, implying a roughly 40-basis-point jump from Friday. To push the rate that high, that fast would require either a rapid move up in the nominal rate thanks to strong growth or lower inflation expectations. The five-year TIPS yield jumped 19 basis points today as the 10-year TIPS yield turned positive.

No wonder AC/DC’s “Highway to Hell” and Bon Jovi’s “Livin’ on a Prayer” were among the most-popular songs chosen by survey participants as the soundtrack for the great monetary tightening campaign of 2022.

The survey respondents consisted of 30% retail investors and 63% institutional, with portfolio managers the largest in the latter category. Slightly more than half of the votes came from the U.S. and Canada. The highest proportion of monetary hawks were risk managers. (…)

Yesterday’s late surge in equities was not enough to give encouraging signals. Six sectors closed up and 5 down. Demand was “modest” and breadth was negative.

Buy-the-dip is dead

Through April, buy-the-dip activity in the S&P 500 is at its 2nd-worst level since the early 1970s. The S&P 500 has lost nearly 0.2% the day following a down day. Year-to-date, the S&P is witnessing one of its worst performances since the 1920s, which may be bad enough to be good longer-term.

This has been one of the worst starts to a year ever for investors, and it’s caused them to abandon BTFD (Buy The F**king Dip).

Bloomberg notes that the tendency of investors to step in after a down day is waning, and S&P 500 pullbacks are lasting longer. (…)

Bloomberg is not wrong. The S&P 500 has returned an average of -0.18% after a down day through April. While it was about as bad in 2018, this is a remarkable change from the past 40 years, when investors greedily snapped up bargains after a down day. Now they’re avoiding dips in case the selling gets even worse, similar to behavior throughout much of the 1930s to 1970s.

The avoidance of buy-the-dip was an excellent sign for contrarians four years ago; the S&P dipped a few more days into early May, then rose steadily through September. Historically, though, it wasn’t a consistent buy signal. The “sell in May” phenomenon typically put a damper on rallies, and over the next one and two months, returns were poor.

If we look at the opposite condition, when investors showed the most eager BTFD attitudes through April, forward returns were much better, and “sell in May” didn’t have much of a hold on their mentalities. (…)

The trouble with statistics is that there’s always something we can show to prove whatever point we wish to make. That’s why we try to always look from multiple angles, keep context in mind at all times, and let data form opinions instead of the other way around. When we look only at poor returns in April, the modest positive bias from multiple weekly losses evaporates. A bad April showed a strong tendency to lead to even worse losses. About the only solace is that there are few precedents in modern times.

As sample sizes constrict, relying on precedents gets harder and harder. So taking this with an even bigger grain of salt, this is only the sixth time in history that the S&P 500 ended April in correction territory for the year. The last time it showed a year-to-date loss of more than 10% through April was 1970, which was the only precedent since 1950. That year preceded even more losses in the months ahead before staging a furious rebound.

If we relax the parameters to generate a larger sample size, 17 years showed at least a 5% YTD loss through April. These showed mostly weak returns over the next couple of months. It’s interesting that since 1950, almost every signal showed a negative return at some point between 3-12 months later.

Overall, the behavior of investors last month tilts to the negative side for the months(s) ahead, but it becomes less clear the further out we look. Performance has been so bad that longer-term returns tend to be above average. It’s the summer months that look to be the most dangerous. We’re in an unhealthy environment with risk-off behavior. Despite some scattered evidence of truly extreme pessimism, our models are not stretched yet, particularly if we’re in a bear market.

EARNINGS WATCH

We now have 279 companies in, an 81% beat rate and a +6.7% surprise factor.

Form ZeroHedge:

So far so good, but that’s as good as it gets. Because while consensus 2022 EPS rose 1% since April 1, it was entirely driven by Energy (and dropped -0.2% ex-Energy). Worse, when looking forward, both BofA’s guidance ratio (sliding to just 0.7x in April) and its earnings revision ratio (0.8x) have plummeted to the lowest since 2Q20, confirming the collapsing outlook trend we first noted one week ago.

It’s not just guidance that is imploding: according to Bofa’s Predictive Analytics team corporate sentiment sharply fell this quarter, representing the lowest level since 2Q20. Other than the COVID-impacted 1Q-2Q20, this marks the lowest level since 2Q16 when trailing 12-mo. EPS fell 2.7% peak-to-trough.

Worst of all, the sentiment score has also been highly predictive of the following quarter’s earnings growth YoY (54% r-sq), and points a sharp drop in earnings ahead.

Adding insult to injury, companies’ mentions indicate a sharp drop in business conditions, with the spread between “better” or “strong” vs. “worse” or “weaker” falling to the lowest level since 2Q20. (…)

Meanwhile, oblivious to reality, Wall Street consensus remains – as usual – too optimistic: as BofA notes, history shows analysts typically start the year too optimistic and cut estimates throughout the year. Since 2001, actual EPS came in 5% below where consensus stood at the beginning of the year on average (-1% excluding 2008 and 2020).

Consensus EPS for both 2022 and 2023 continued to climb higher YTD (+3% and 2%, respectively) driven by higher Energy earnings…

… but expect this to tumble once the weak guidance and slowing macro conditions finally make it clear to Wall Street that the euphoria is now officially over.