tax rates

THE PMIs

USA: November PMI at seven-month high amid stronger upturn in new orders

November data indicated a faster rate of improvement in operating conditions across the U.S. manufacturing sector.
Overall growth was supported by quicker expansions in
production and new orders, with both domestic and foreign
client demand strengthening. Manufacturers also increased
their workforce numbers at a quicker pace amid reports
of greater operational requirements. Business confidence
remained historically muted, however, as global economic
uncertainty continued to weigh on expectations.
Meanwhile, rates of input price and output charge inflation
picked up due to supplier shortages, tariffs and higher raw
material costs.

The seasonally adjusted IHS Markit final U.S. Manufacturing
Purchasing Managers’ Index™ (PMI™) posted 52.6 in November,
up from 51.3 in October, to signal the strongest improvement in
the health of the manufacturing sector since April. The reading
was above the earlier ‘flash’ figure of 52.2, but remained below
the long-run series trend and indicative of only a modest upturn
overall.

The rate of output growth accelerated further from July’s
recent low in November, with the pace of expansion reaching
a ten-month high. Companies commonly linked the upturn in
production to stronger client demand.
New order volumes also increased at the fastest pace since
January, reportedly buoyed by greater marketing activity and
a reduction in hesitancy among customers in placing orders.

Foreign client demand also picked up midway through the final
quarter, with new export orders increasing at the quickest rate
since June. The upturn was often attributed by firms to greater
interest from key export partners.
In line with stronger client demand, manufacturers expanded
their workforce numbers, and at the fastest pace since March. Pressure on capacity was also reflected in the first rise in
backlogs of work since June.

Nonetheless, confidence among firms of a rise in output over the
coming year remained historically subdued. Ongoing economic
uncertainty reportedly weighed on expectations, as the level of
optimism slipped to a three-month low.

On the price front, although inflationary pressures intensified
in November, the rate of increase in input costs was relatively
muted. Where a rise was reported, firms commonly linked this to
higher raw material prices, often due to supplier shortages and tariffs. That said, others noted that increases were generally only
slight overall. Output charges also rose at a modest pace, the
rate of inflation rising to a four-month high, with manufacturers
seeking to protect their margins by partly passing higher costs,
including tariffs, on to clients.

Finally, goods producers recorded a second successive monthly
increase in purchasing activity in November, reportedly
stemming from greater production requirements and efforts to
replenish stocks following stronger new order growth.

• The ISM:

The November PMI^® registered 48.1 percent, a decrease of 0.2 percentage point from the October reading of 48.3 percent. The New Orders Index registered 47.2 percent, a decrease of 1.9 percentage points from the October reading of 49.1 percent. The Production Index registered 49.1 percent, up 2.9 percentage points compared to the October reading of 46.2 percent. The Backlog of Orders Index registered 43 percent, down 1.1 percentage points compared to the October reading of 44.1 percent. The Employment Index registered 46.6 percent, a 1.1-percentage point decrease from the October reading of 47.7 percent. The Supplier Deliveries Index registered 52 percent, a 2.5-percentage point increase from the October reading of 49.5 percent. The Inventories Index registered 45.5 percent, a decrease of 3.4 percentage points from the October reading of 48.9 percent. The Prices Index registered 46.7 percent, a 1.2-percentage point increase from the October reading of 45.5 percent. The New Export Orders Index registered 47.9 percent, a 2.5-percentage point decrease from the October reading of 50.4 percent. The Imports Index registered 48.3 percent, a 3-percentage point increase from the October reading of 45.3 percent.

This a.m.:

@realDonaldTrump

Brazil and Argentina have been presiding over a massive devaluation of their currencies. which is not good for our farmers. Therefore, effective immediately, I will restore the Tariffs on all Steel & Aluminum that is shipped into the U.S. from those countries. The Federal Reserve should likewise act so that countries, of which there are many, no longer take advantage of our strong dollar by further devaluing their currencies. This makes it very hard for our manufactures & farmers to fairly export their goods. Lower Rates & Loosen – Fed!

5:59 AM · Dec 2, 2019·Twitter for iPhone

China: Manufacturers signal further modest improvement in operating conditions

PMI data signalled a further modest improvement in the health of China’s manufacturing sector during November. New business rose strongly, which underpinned a further solid increase in production. Notably, new export orders saw the first back-to-back monthly rise for over a year-and-a-half. Staffing levels were broadly stable following a seven-month sequence of decline, but capacity pressures persisted, with backlogs of work expanding again. Average input costs meanwhile rose marginally, while factory gate charges fell slightly amid reports of a general drop in market prices.

Despite further increases in output and new orders, the level of positive sentiment towards the 12-month outlook for production slipped to a five-month low in November. Stricter environmental policies and market uncertainty were key factors weighing on confidence.

The headline seasonally adjusted Purchasing Managers’ Index™ (PMI™) edged up from 51.7 in October to 51.8 in November, to signal an improvement in overall operating conditions for the fourth successive month. Though modest, the pace of improvement was the strongest since December 2016.

The latest upturn in the health of the sector was partly supported by a further rise in new business placed with Chinese manufacturers. Despite easing from October, the rate of new order growth remained solid overall, with a number of firms citing firmer underlying demand conditions. Demand from overseas also improved, with export sales picking up for the second month in a row. Though only marginal, it marked the first back-to-back increase in new orders from abroad since early 2018.

In response to rising new workloads, manufacturers increased output again in November. The rate of expansion was little-changed from that seen in October and solid.

After falling for seven months in a row, employment at Chinese manufacturing companies was broadly stable midway through the final quarter. Nonetheless, capacity pressures persisted, as highlighted by another rise in backlogs of work.

To accommodate higher production, firms increased their buying activity, and at the strongest pace since January 2018. This placed further pressure on supply chains, with firms registering a deterioration in vendor performance again in November.

Higher buying activity contributed to an increase in stocks of purchases, albeit only marginal. Meanwhile, inventories of finished goods fell slightly.

Prices data showed that overall inflationary pressures remained weak, with average cost burdens rising only slightly while output charges fell again.

• China’s Manufacturing Resumes Growth After Six Months of Decline Activity in China’s factories resumed its expansion in November, ending six months of contraction, as domestic and external demand showed signs of improvement.

(…) China’s official manufacturing purchasing managers index came in at 50.2 in November, the National Bureau of Statistics said Saturday, up from 49.3 in October—and the first time since April that this key gauge of manufacturing activity registered above the 50 mark that separates expansion from contraction. (…)

The production subindex for November was 52.6, up from 50.8 in October. A reading of total new orders rose to 51.3 from 49.6; new export orders, to 48.8 from 47. Import orders improved to 49.8 from 46.9. (…)

Nonmanufacturing PMI rose to 54.4 in November from 52.8 in October, as services and logistics related to factory productions registered big jumps, the statistics bureau said. (…)

China seems to be on the recovery road thanks mainly to better domestic demand although exports also look somewhat better, unlike Japan and the Eurozone.

Japan: Sharper fall in exports drives further manufacturing deterioration

The Japanese manufacturing sector remained stuck in a downturn
midway through the fourth quarter as falling order book volumes
led to an eleventh successive month-on-month fall in production.
Weakness was particularly apparent in overseas markets, with
export demand deteriorating at the fastest pace in five months.
Firms took action and discounted their output prices, taking
advantage of slower input cost inflation. The only real positive from
the survey came on the jobs front, with manufacturing employment
rising at an accelerated pace.

The headline Jibun Bank Japan Manufacturing Purchasing
Managers’ Index™ (PMI)® remained below the 50.0 no change
mark in November for a seventh straight month, posting
48.9 (48.4; October), to signal a continuation of the downturn in
Japan’s manufacturing sector. Economic decline was apparent
in the investment and intermediate goods sub-categories, while
consumer goods makers observed a marginal improvement from
October.

Latest survey data pointed to lower output volumes across the
Japanese manufacturing sector. Although the decrease was softer
than in October, it was broadly equal to the average seen across
the current 11-month contraction period. Weak demand was the
key factor driving production cutbacks, according to panel member
comments.

New orders remained in contraction during the latest survey
period. The decrease was the second-fastest since mid-2016,
outpaced only by that seen in the previous month. Furthermore,
the sub-sector split showed that weaker demand was broad-based
during November. Anecdotal evidence indicated that underlying
demand conditions had deteriorated further, while numerous
firms mentioned weakness had stemmed from foreign sources,
particularly China. New export orders dropped for the twelfth time
in as many months during November, with the increase gathering pace to be the strongest since June.

Reduced output requirements led to the tapering of purchasing
activity in Japan’s manufacturing sector during the latest survey
period. Firms instead opted to run down existing stocks of inputs in
order to contain costs. Pre-production inventories fell at the fastest
rate in almost three years.

More positively, latest survey data indicated further gains on the
employment front in Japan’s manufacturing sector. The rate of
job creation quickened from October and was the most marked
since April. Panellists mentioned that new trainees were recruited
to replace those that were retiring. The combined effect of greater
workforce numbers and lower incoming new order volumes led to
the fastest rate of depletion in backlogs since December 2012.

Meanwhile, prices data showed a softening of the rate of input cost
inflation during November. Panellists indicated that weak demand
had led some suppliers to reduce their prices. Sluggish demand
also induced firms to discount their charges to try and boost sales.
Finally, business confidence remained subdued, with external
and domestic economic headwinds expected to impede growth
opportunities in the year ahead.

Eurozone: PMI improves to three-month high, but signals ongoing contraction

November saw the continued contraction of the euro
area manufacturing economy, albeit at the slowest
rate for three months. The IHS Markit Eurozone
Manufacturing PMI® improved to 46.9 in November,
compared to October’s 45.9 and above the earlier
flash reading (46.6). Whilst a relative improvement,
the PMI nonetheless remained well below the crucial
50.0 no-change mark and extended the current period
of contraction to ten months.

At the market groups level, both the intermediate and
investment goods sectors remained inside contraction
territory during November, although in each case
rates of decline were weaker. Operating conditions for
consumer goods producers were unchanged
compared to October.

Of the eight countries covered by the survey, only
Greece and France posted manufacturing expansion
on a month-on-month basis in November. Germany
remained bottom of the table, despite recording its
best PMI reading in five months. Austria and Spain
were the next worst performing, but similarly recorded
weaker rates of contraction, whilst Italy registered its
lowest PMI print for eight months. (…)

At the aggregate eurozone level, ongoing declines in
output and new orders were again recorded. For
production, the rate of contraction was however the
slowest in three months, whilst new work recorded its
mildest fall since June.

November’s reduction in new work nonetheless
maintained a run of contraction that began in October
2018. A similar trend was seen for new export orders*,
which also fell for a fourteenth successive month but
at the weakest pace since June.

Spare capacity remained prevalent in the
manufacturing economy during November, as
signalled by a fifteenth successive monthly reduction
in work outstanding. Despite easing to the slowest
since February, the rate of contraction remained
marked and helped to explain another decline in
employee numbers (the seventh in successive
months). Job losses were again most notable in
Germany and Austria. In contrast, jobs growth was
seen in France, Greece and the Netherlands.

Manufacturers continued to reduce their purchasing
activity in November, preferring instead to focus on
utilising existing stocks in production wherever
possible. There was subsequently little pressure on
vendors, who were able to improve their delivery
performance for a ninth successive month.

A lack of any noticeable supply side pressures was
also seen in prices data. Input costs fell sharply, and
at a rate only slightly slower than October’s 43-month
record, amid reports of lower prices being paid for
inputs such as metals and plastics.
Faced with falling costs, weaker underlying demand
and rising competitive pressures, manufacturers cut
their own charges for a fifth successive month.
Moreover, the rate of discounting was the sharpest
recorded by the survey since April 2016.

Finally, there was a notable improvement in business
confidence to a five-month high in November as
sentiment continued to recover from August’s near
seven-year low. All nations covered by the survey
indicated some optimism that output would be higher
than present levels in 12 months’ time, albeit to
varying degrees.

Chris Williamson, Chief Business Economist at IHS
Markit

A further steep drop in manufacturing output in
November means the goods-producing sector is
likely to have acted as a major drag on the eurozone
economy again in the closing quarter of 2019. The
survey data for the fourth quarter so far are indicating
a quarterly rate of contraction in excess of 1% for
manufacturing

Although still signalling a steep rate of decline, the
manufacturing PMI nonetheless brings some
encouraging signals which will fuel speculation that
the worst is over for euro area producers, barring any
new set-backs (notably in relation to Brexit and trade
wars). In particular, November saw the rate of loss of
export sales easing further from July’s recent record,
helping pull other indicators such as output,
employment, order books and purchasing off their
recent lows

Perhaps most promising is a marked upturn in
business sentiment, particularly in Germany, with
optimism about production in the year ahead hitting
a five-month high in November. Producers’ renewed
optimism in part reflects reduced concerns over
trade wars. We nevertheless still need to see a
further notable easing in the rate of loss of orders
before getting too excited about the prospect of an
imminent return to growth for manufacturing.

German car industry reels as Daimler cuts 10,000 jobs Some 50,000 cuts have been announced across the sector as automakers restructure

Consecutive RevPAR dips make it official: Upcycle over

U.S. hotel industry revenue per available room dropped 1.2% year over year in October, marking the second straight month of decline, which is the technical definition of a downcycle.

Occupancy has now declined in five of the past nine months.

And when occupancy declines, so does pricing power (ADR = avg daily rate)

Raymond James has great coverage of the hotel industry with up-to-date data. Through November 16, Q4 quarter-to-date occupancy is down 1.2%, ADR –0.2% and RevPar –1.3%.

The lodging industry continues to reckon with trade and tariff headlines, softer inbound international travel, deteriorating
corporate CEO confidence, weak leisure demand, and persistent supply deliveries in many of the most important lodging markets. Rising wage
pressures, higher property taxes, and higher property insurance rates are pushing the required level of RevPAR growth needed to maintain
margins to cyclical highs. (…)

We continue to remind investors that urban and luxury results, as calculated by STR, are materially impacted by results at New York City hotels,
which last week reported an 11.0% RevPAR decrease as occupancy decreased 3.2% (to 88.1%) and ADR decreased 8.1%; results came against
a tough +7.7% comp. Over the past four weeks, RevPAR in New York City is down 5.0%.

These stats are directly from the hotel industry. One wonders where the NY Fed got its input for its November Beige Book (info collected up to Nov. 18):

Businesses across almost all service industries reported
some weakening in activity, on balance, since the last
report. A notable exception has been in the leisure &
hospitality sector, where contacts noted moderate
growth in activity.

Huawei Produces Smartphones Without U.S. Parts American tech companies are getting the go-ahead to resume business with Chinese smartphone giant Huawei, but it may be too late: It is now building smartphones without U.S. chips.

Huawei’s latest phone, which it unveiled in September—the Mate 30 with a curved display and wide-angle cameras that competes with Apple Inc.’s iPhone 11—contained no U.S. parts, according to an analysis by UBS and Fomalhaut Techno Solutions, a Japanese technology lab that took the device apart to inspect its insides. (…)

Huawei has made significant strides in shedding its dependence on parts from U.S. companies. (At issue are chips from U.S.-based companies, not those necessarily made in America; many U.S. chip companies make their semiconductors abroad.)

Huawei long relied on suppliers like Qorvo Inc., the North Carolina maker of chips that are used to connect smartphones with cell towers, and Skyworks Solutions Inc., a Woburn, Mass.-based company that makes similar chips. It also used parts from Broadcom Inc., the San Jose-based maker of Bluetooth and Wi-Fi chips, and Cirrus Logic Inc., an Austin, Texas-based company that makes chips for producing sound. (…)

While Huawei hasn’t stopped using American chips entirely, it has reduced its reliance on U.S. suppliers or eliminated U.S. chips in phones launched since May, including the company’s Y9 Prime and Mate smartphones, according to Fomalhaut’s teardown analysis. Similar inspections by iFixit and Tech Insights Inc., two other firms that take apart phones to inspect components, have come to similar conclusions. (…)

Huawei’s drive to shake off its dependence on U.S. parts goes beyond smartphones. John Suffolk, the company’s top cybersecurity official, said in an interview that the company is now capable of producing—without U.S. components—the 5G base stations that are a key part of the infrastructure needed for the high-speed network. (…)

At its launch in September, the Mate 30 was Huawei’s first major phone to launch without Google’s proprietary apps. Google declined to comment.

The Chinese company’s booming smartphone business could suffer—especially in overseas markets—if it doesn’t regain access to the apps, analysts have said. Huawei has unveiled a self-developed operating system, called HarmonyOS, to replace Android. But the operating system wasn’t originally designed for smartphones and Huawei executives have said they would prefer to stick with Android.

Through Nov. 29, 488 companies in the S&P 500 Index have reported earnings for Q3 2019. Of these companies,
75.2% reported earnings above analyst expectations and 18.0% reported earnings below analyst expectations. In a
typical quarter (since 1994), 65% of companies beat estimates and 20% miss estimates. Over the past four quarters,
74% of companies beat the estimates and 18% missed estimates.

In aggregate, companies are reporting earnings that are 4.5% above estimates, which compares to a long-term (since
1994) average surprise factor of 3.3% and the average surprise factor over the prior four quarters of 5.3%.

Of these companies,
58.2% reported revenues above analyst expectations and 41.8% reported revenues below analyst expectations. In a
typical quarter (since 2002), 60% of companies beat estimates and 40% miss estimates. Over the past four quarters,
59% of companies beat the estimates and 41% missed estimates.

In aggregate, companies are reporting revenues that are 0.9% above estimates, which compares to a long-term (since
2002) average surprise factor of 1.5% and the average surprise factor over the prior four quarters of 0.9%.

The estimated earnings growth rate for the S&P 500 for 19Q3 is -0.4%. If the energy sector is excluded, the growth
rate improves to 2.2%. The estimated revenue growth rate for the S&P 500 for 19Q3 is 3.8%. If the energy sector is excluded, the growth rate
improves to 5.2%.

The estimated earnings growth rate for the S&P 500 for 19Q4 is -0.1%. If the energy sector is excluded, the growth
rate improves to 2.2%.

Bottom-up Q4 is seen as a replica of Q3 with ex-Energy earnings rising 2.2% on ex-Energy revenues growing 5.2%, same as in Q3. May I remind you of these tight relationships, courtesy of Ed Yardeni:

Some trends need to change course pretty soon. Drilling down, however, we find that analysts do see growth deceleration in 7 sectors and that only Financials (see below) and Utes are expected to grow revenues at a clearly accelerating rate in Q4.

Revisions remain marginally positive:

But corporate guidance (notice Refinitiv’s typos) has worsened relative to Q4’18:

Trailing EPS are now $163.87, down 0.3% from $164.43 and $164.31 at the end of August and September respectively.

• US Bank Earnings Are Falling

(…) As we have been writing for almost two years in The Institutional Risk Analyst, the steady increase in bank funding costs have slowed and now reversed the steady growth in bank income since 2008.  The one time increase in “returns to us” caused by the 2017 tax legislation is now long behind bank stock investors.

Our friends in the worlds of asset management and financial journalism have trouble describing a decline in income to their various constituencies, but the numbers tell the tale very simply. US banking Industry net income peaked at almost $62 billion in Q3 2018 and has now fallen to $57.3 billion last quarter.  That’s a ten percent decline, but you rarely read or hear that fact in the financial press. We must always be constructive, even if it means misleading the investing public.

While the rate of increase in bank interest expense has slowed since Q2 2019, the deterioration in bank asset and equity returns is clear.  The peak of bank asset and equity returns was Q3 2018 at 14.8% and 1.4%, respectively.  Income is falling, but the total assets of the industry continue to rise. (…)

The continued increase in bank funding costs, regardless of what the Fed does or does not do, will remain a negative factor affecting bank earnings.  Even with the change in direction of US monetary policy since the end of 2018, the pressure on bank earnings continues both due to rising funding costs and secular pressure on asset returns in the age of negative interest rates.  A decade since the financial crisis, US banks have still not recovered to previous levels of asset and equity returns and are now losing ground.

Ed Yardeni shows the downtrend in Financials’ dollar profits:

Yet, consensus estimates show Q4 Financials earnings rising 12.4% YoY, second best growth rate after Utilities’ +14.7%. But Net Earnings Revisions are increasingly negative…

FYI:

Source: Capital Economics (via The Daily Shot)

Fed considers letting inflation run above target Bid to avoid sclerotic price growth would be biggest policy revamp since 2012

The FT says that “the central bank is considering a promise that when it misses its inflation target, it will then temporarily raise that target, to make up for lost inflation”, citing Eric Rosengren, president of the Federal Reserve Bank of Boston who told the FT last week that “the new policy would require “making it clear that it’s acceptable that to average 2 per cent, you can’t have only observations that are below 2 per cent.”

TECHNICALS WATCH

Lowry’s Research reminds us that “at this time last year, the market was in the
midst of the fourth quarter selloff that
ultimately bottomed on Dec. 24.” Its analysis now concludes that “major market indexes are in the midst of
strong primary and intermediate-term rallies and
reaching new all-time highs. An examination of
the forces of Supply and Demand reveals a bull
market that remains alive and well.”

While Supply has been declining more slowly than Demand has been advancing in recent months “there is no evidence of the
sustained rising trend in Selling Pressure that has
preceded every major market top since 1929.”

Lowry’s notes the “expanding
breadth across all three market segments (Large,
Mid and Small Cap), historically, a characteristic
of sustainable rallies and a key feature of the
strongest phase of a bull market.” It also sees “strength
becoming more broadly-based in the small cap
market segment, the opposite of the deteriorating
strength that typically occurs among small caps
as an old bull market enters its final stages.”

In reality, the push to new highs is recent. The S&P 500 Index is up 7.2% from its September 2018 peak, all happening in the last month.

And largely confined to large caps:

Trailing EPS peaked in August but have only marginally declined since. The P/E on trailing earnings peaked at 19.1 in September 2018, caved to 14.6 in December and is now back to 19.1. The Rule of 20 P/E was 21.2 in September 2018, dropped to 16.9 in December and is now 21.4.