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It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so (Mark Twain)

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U.S. FLASH MANUFACTURING PMI DROPS TO 50.8

At 50.8 in April, down from 51.5 in March, the seasonally adjusted Markit Flash U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) signalled the weakest upturn in overall business conditions since September 2009. The flash PMI index, which is based on approximately 85% of usual monthly survey replies, was only marginally above the crucial 50.0 no-change threshold. As a result, the headline figure was slightly weaker than the previous post-crisis low recorded in October 2012 (51.0). Softer rates of manufacturing output and new business growth, alongside a weaker rise in staffing numbers, were the main factors weighing on the headline PMI figure during April.

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The latest upturn in production levels was only fractional and the slowest recorded by the survey since the recovery began in October 2009. Manufacturers cited generally subdued demand conditions, delays to spending decisions among clients and ongoing weakness within the energy sector.

April data pointed to a renewed slowdown in new business growth, with the latest expansion the least marked so far in 2016. Some survey respondents suggested that uncertainty in relation to the economic outlook and political climate had weighed on client spending in April. Moreover, export sales continued to act as a drag on overall new business volumes. Although only modest, the latest survey pointed to the sharpest drop in new work from abroad since November 2014.

Backlogs of work fell for the third successive month in April, thereby suggesting a lack of pressure on operating capacity across the manufacturing sector. The latest decrease in work-in-hand (but not yet completed) was the fastest for just over six-and-a-half years. This contributed to a near-stalling of jobs growth among manufacturing firms in April, with the latest rise in payroll numbers only fractional and the weakest since June 2013.

Manufacturers indicated that tighter inventory management strategies persisted in April, led by the sharpest drop in stocks of purchases since the start of 2014. At the same time, post-production inventories decreased at a moderate pace and manufacturers recorded a renewed fall in purchasing activity. Despite softer demand for inputs, latest data signalled the sharpest deterioration in vendor performance since September 2015, which some survey respondents linked to insufficient stocks and capacity cuts among suppliers.

Average cost burdens increased slightly in April, thereby ending a seven-month period of sustained input price declines. Manufacturers noted that higher labor costs and rising prices for metals and plastics had contributed to the overall increase in their cost burdens.

Factory gate charges decreased for the third month running in April, albeit at only a marginal pace. Companies that reported a drop in their output charges generally cited subdued market conditions and corresponding pressure on operating margins.

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Chris Williamson, chief economist at Markit:

US factories reported their worst month for just over six-and-a-half years in April, dashing hopes that first quarter weakness will prove temporary.

Survey measures of output and order book backlogs are down to their lowest since the height of the global financial crisis, prompting employers to cut back on their hiring.

The survey data are broadly consistent with manufacturing output falling at an annualized rate of over 2% at the start of the second quarter, and factory employment dropping at a rate of 10,000 jobs per month.

With prior months’ survey data pointing to annualized GDP growth of just 0.7% in the first quarter, the deteriorating performance of manufacturing suggests that growth could weaken closer towards stagnation in the second quarter.

The survey responses reveal an increase in business uncertainty in relation to both the economic and political outlook during the month, which is weighing on spending and investment decisions and exacerbating already-weak demand both at home and abroad.

NEW$ & VIEW$ (22 APRIL 2016): Recession Watch; Earnings Watch

RECESSION WATCH

The National Activity Index from the Federal Reserve Bank of Chicago fell to -0.44 during March. It was the weakest reading since January 2014, suggesting that economic growth was slightly below trend. At -0.18, the three month moving average has been in negative territory since February 2015. During the last ten years, there has been a 77% correlation between the Chicago Fed Index and the q/q change in real GDP.

From Doug Short:

The next chart highlights the -0.70 level and the value of the CFNAI-MA3 at the start of the seven recession that during the timeframe of this indicator. The 1973-75 event was an outlier because of the rapid rise of inflation following the 1973 Oil Embargo. As for the other six, we see that all but one started when the CFNAI-MA3 was above the -0.70 level.

CFNAI and Recessions

From the CB:

The Conference Board LEI for the U.S. increased in March, after declining for the prior three consecutive months. Positive contributions from the financial components more than offset the large decline in building permits. In the six-month period ending March 2016, the leading economic index increased 0.7 percent (about a 1.3 percent annual rate), slower than the growth of 1.5 percent (about a 3.0 percent annual rate) during the previous six months. In addition, the strengths among the leading indicators remained balanced with its weaknesses.

“With the March gain, the U.S. LEI’s six-month growth rate improved slightly but still points to slow, although not slowing, growth in the coming quarters,” said Ataman Ozyildirim, Director of Business Cycles and Growth Research at The Conference Board. “Rebounding stock prices were offset by a decline in housing permits, but nonetheless there were widespread gains among the leading indicators. Financial conditions, as well as expected improvements in manufacturing, should support a modest growth environment in 2016.” [Full notes in PDF]

From Doug Short:

(…) the LEI has historically dropped below its six-month moving average anywhere between 2 to 15 months before a recession. The latest reading of this smoothed rate-of-change suggests no near-term recession risk.

Smoothed LEI

Fingers crossed Here is a twelve month smoothed out version, which further eliminates the whipsaws:

Smoothed LEI

U.S. Jobless Claims Fall to 4-Decade Low The number of U.S. workers who applied for new unemployment benefits declined last week to the lowest level in 43 years, a sign of the labor market’s vitality.

Initial jobless claims fell by 6,000 to a seasonally adjusted 247,000 in the week ended April 16, the Labor Department said Thursday. That was the lowest level for jobless claims since the week of Nov. 24, 1973.

That also marked the 59th straight week that initial jobless claims remained below 300,000, the longest such streak in more than four decades. (…)

The Easter holiday, which moves on the calendar each year, can distort seasonal adjustments to the data during March and April. The four-week moving average, which smooths out volatility, fell by 4,500 last week to 260,500. That level has stayed fairly consistent since early March.

Still, there was one other historical point of strength in the latest reading. A measure of the number of people on unemployment rolls, which are reported with a one-week lag, fell by 39,000 in the week ended April 9 to the lowest level recorded since 2000.

Here’s the widely used chart:

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This chart takes into account the fact that the number of employed Americans has grown over the years:

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Sure looks like a tight market to me.

Home-Price Surge Stymies First-Time Buyers

(…) With mortgage rates at historic lows, unemployment at its lowest in eight years and housing inventories shriveling, particularly on the lower end of the spectrum, U.S. housing markets are becoming less affordable compared with historical norms. That puts the most pressure on first-time home buyers, who accounted for less than a third of home purchases last year, the lowest level in nearly three decades, according to the National Association of Realtors. (…)

Three-quarters of real-estate markets in U.S. counties larger than 100,000 people are less affordable now than a year ago, according to a recent analysis from data company RealtyTrac. Home prices have outpaced wage growth in 94% of those counties since home prices hit bottom in each of the locations, the analysis found.

Of 132 markets tracked by John Burns Real Estate Consulting of Irvine, Calif., 27 are less affordable than historical averages, up from 16 last year. (…)

Meanwhile:

NMHC: Apartment Market Tightness Index declined in April Survey

Apartment markets appeared mixed in the April 2016 National Multifamily Housing Council (NMHC) Quarterly Survey of Apartment Market Conditions, with two of four indexes landing below the breakeven level of 50. The Market Tightness (43) and Equity Financing (45) indexes showed declining conditions for the second quarter in a row, while Sales Volume (53) and Debt Financing (50) indicated improving and steady conditions, respectively.

“We continue to see some softening in the market relative to one of the strongest runs in recent memory for the apartment industry,” said Mark Obrinsky, NMHC’s Senior Vice President of Research and Chief Economist. “As new apartment construction catches up with demand, we expect to see moderation from record rent growth as well as more selectivity from equity and debt financing sources.” (…)

Here’s Bill McBride’s chart:

This could help keep the U.S. CPI low.

From Mario With Love: How ECB Cash Could Boost U.S. Stocks

The European Central Bank may be about to hand billions of euros to American shareholders.

On Thursday, the ECB set unexpectedly generous conditions for buying corporate bonds, part of its effort to refloat the eurozone economy with a deluge of free money.

The relaxed conditions mean the money can easily wash up on U.S. shores. Big American companies have long sold bonds in Europe, and last year these “reverse Yankee” issues hit a record after European interest rates turned negative. Reverse Yankee issuance hit €66 billion ($74.6 billion) in 2015, according to Dealogic. That was a fifth of all euro-denominated bond issuance, says Fitch Ratings. This year, so far, the level is the second highest on record.

Euro-denominated bonds issued by any eurozone-based company will qualify for ECB buying, so long as the company isn’t a bank. All a U.S. company has to do is set up a eurozone subsidiary to issue its debt. Even better: The ECB can buy up to 70% of each bond, and can buy at issue.

If the ECB spends money on U.S. debt, that cash is likely to end up in the hands of shareholders. Large U.S. companies have been rapidly increasing their borrowing and using the money mainly to finance share buybacks, rather than to increase investment.

Handing out money to foreign companies may prove controversial for the ECB, particularly because the central bank will take a financial hit if the bonds aren’t repaid in full.

(…) Europe is awash in spare production capacity, and there is no sign that big investments have been on hold awaiting access to bond finance.

It is also unlikely that European companies will buy back shares en masse. For one thing, eurozone companies have shown little desire to take on extra leverage, unlike their cousins across the Atlantic. In part this is because of the economic outlook; after years of weak growth, uncertainty is widespread, and European boardrooms are more focused on preserving what they have than on expanding. Indeed, they have been strengthening their balance sheets through share issues, the opposite of what has been happening in the U.S.

For another, European compensation structures don’t encourage companies to take on debt to buy back shares. Only four in 10 chief executives of the biggest European companies have compensation linked to stock performance, Goldman Sachs calculates, while in the U.S. two-thirds of big-company CEOs do. (…)

Even if foreign borrowers take a big chunk of the ECB’s handouts and pass them on to U.S. shareholders, it could still help the central bank achieve its aims, by weakening the euro. Borrowers would swap their euros for dollars, pushing up the greenback and so importing inflation into the eurozone. (…)

Yen tumbles on renewed rate cut talk
EARNINGS WATCH
  • 121 companies (33.5% of the S&P 500’s market cap) have reported. Earnings are beating by 3.6% while revenues surprised by 0.4%. Expectations are for a decline in revenue, earnings, and EPS of -1.5%, -9.1%, and -6.9%.
  • EPS is on pace for -4.5% (-3.4% yesterday) , assuming the current beat rate for the remainder of the season. This would be +0.7% (+1.7%) excluding Energy.