Edge and Odds

The enemy of knowledge is not ignorance, it’s the illusion of knowledge (Stephen Hawking)

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)

Edge and Odds

Invest with smart knowledge and objective odds

Month: April 2016

U.S. SERVICES PMIs UP SLIGHTLY

Markit:

U.S. service providers signalled a modest rebound in business activity and robust employment growth during March. However, incoming new business expanded at the slowest pace since the survey began in October 2009, which also contributed to a fall in business confidence to a survey-record low. Meanwhile, input cost inflation remained subdued in March and prices changed by service sector companies increased at only a marginal pace.

The seasonally adjusted final Markit U.S. Services Business Activity Index registered 51.3 in March, up from 49.7 in February and back above the crucial 50.0 no-change value. Nonetheless, the latest reading was still the second-lowest since October 2013 and pointed to only a marginal upturn in service sector output.

Moreover, the average for the first quarter of 2016 (51.4) signalled the weakest expansion of business activity since Q3 2012.

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Adjusted for seasonal influences, the final Markit U.S. Composite PMI™ Output Index registered 51.3 in March, up from 50.0 in February, to signal a return to growth for overall U.S. private sector activity. However, the average index reading in Q1 2016 (51.5) was the weakest seen for any quarter since Q3 2012 (51.3).

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Survey respondents noted that subdued growth of incoming new work persisted in March. The latest expansion of new business volumes was only marginal and the weakest in six-and-a-half years of data collection. Anecdotal evidence suggested that uncertainty about the economic outlook and cautious spending patterns among clients continued to hold back new business growth across the service sector.

Softer growth of incoming new business resulted in another reduction in backlogs of work during March. Work-in-hand (but not yet completed) has now fallen for eight months running, which firms mainly linked to a lack of pressure on operating capacity at their business units. However, service providers boosted their payroll numbers, which continued the upward trend seen in each month since March 2010. Companies that reported a rise in their staffing levels mainly commented on the launch of new products and long-term business expansion plans.

Meanwhile, input cost inflation remained subdued across the service sector in March. Survey respondents noted that lower fuel prices had helped to offset higher costs elsewhere, particularly staff salaries. At the same time, average prices charged by service providers increased only marginally, reflecting strong competition for new work and slower cost inflation than in February.

Service providers indicated sustained optimism (on balance) about the year-ahead business outlook in March. However, the degree of positive sentiment moderated for the second month running and was the lowest since the survey began in late-2009, reflecting heightened economic uncertainty and softer new business growth in recent months.

ISM:

The NMI® registered 54.5 percent in March, 1.1 percentage points higher than the February reading of 53.4 percent. This represents continued growth in the non-manufacturing sector at a slightly faster rate. The Non-Manufacturing Business Activity Index increased to 59.8 percent, 2 percentage points higher than the February reading of 57.8 percent, reflecting growth for the 80th consecutive month, with a faster rate in March.

The New Orders Index registered 56.7 percent, 1.2 percentage points higher than the reading of 55.5 percent in February. The Employment Index increased 0.6 percentage point to 50.3 percent from the February reading of 49.7 percent and indicates growth after a month of contraction. The Prices Index increased 3.6 percentage points from the February reading of 45.5 percent to 49.1 percent, indicating prices decreased in March for the fifth time in the last seven months.

According to the NMI®, 12 non-manufacturing industries reported growth in March. The majority of respondents’ comments indicate that business conditions are mostly positive and that the economy is stable and will continue on a course of slow, steady growth

Doug Short has the charts:

Unlike its much older kin, the ISM Manufacturing Series, there is relatively little history for ISM’s Non-Manufacturing data, especially for the headline Composite Index, which dates from 2008. The chart below shows Non-Manufacturing Composite. We have only a single recession to gauge is behavior as a business cycle indicator.

The more interesting and useful subcomponent is the Non-Manufacturing Business Activity Index. The latest data point at 59.8 percent is up from a seasonally adjusted 57.8 the previous month.

ISM Non-Manufacturing

For a diffusion index, this can be an extremely volatile indicator, hence the addition of a six-month moving average to help us visualizing the short-term trends.

NEW$ & VIEW$ (5 APRIL 2016)

Global manufacturing growth at near three-year low in opening quarter

The J.P.Morgan Global Manufacturing PMI™ rose to 50.5 in March, up from the 50.0 posting that signalled stagnation in the prior month. Moreover, the average PMI reading during the opening quarter (50.4) was the weakest since the second quarter of 2013.

Manufacturing production rose marginally in March, underpinned by a modest improvement in new order inflows. The trend in international trade flows deteriorated
further, as highlighted by a second successive monthly decrease in new export orders. (…)

By sector, modest growth of production was signalled in the consumer, intermediate and investment goods sectors. The sharper pace of increase was seen at
consumer goods producers, while intermediate goods output rose following back-to-back contractions in January and February.

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IMF Sees China Weighing on Global Stocks More

Major emerging markets, led by China, are increasingly likely to spread fear to financial markets and lead to poor stock performance in the U.S. and other developed countries, the International Monetary Fund said Monday.

Equity-market spillovers to advanced economies coming from leading emerging markets have risen 28% since the 2008 financial crisis, according to the IMF’s calculations. The movements of all nations’ equity markets in 2015 were 80% attributable to markets in other countries, compared with a 50% linkage in 1995.

China’s financial system has relatively small direct linkages to economies such as the U.S., compared with the banking and financial ties of other big economies such as Japan’s. Meanwhile, exports make up a relatively small part of the U.S. economy, so worries about China’s economic health shouldn’t sink the outlook for most U.S. companies.

But the IMF found that China appears to have a special ability to trigger market moves in other countries based on the release of economic news and data. With a fragile global expansion, twists and turns of the world’s second-largest economy often appear to be more consequential on Wall Street than what is happening on American main streets. (…)

The IMF identifies stronger trade linkages and “increased market integration” as global trends contributing to equity-market spillovers, particularly those between emerging and developed economies. (…)

China Bulls Become an Extinct Species Few economists now think Beijing can deliver on its promise of 6.5% growth or higher. Instead, 4% to 6% has become “code for doing well.”

(…) At a recent workshop hosted by the Council on Foreign Relations, a nonpartisan U.S. think tank, participants—35 or so academic economists, Wall Street professionals and geopolitical strategists—lined up around three different growth scenarios for China. Only 31% chose the optimistic one, defined as 4% to 6% annual growth, dependent on leaders successfully implementing reforms; 61% foresaw a “lost decade” of 1% to 3% growth; the rest thought a so-called hard-landing, or contraction, was most likely.

Of course it wasn’t a scientific survey, but what’s interesting is that apparently nobody considered the possibility that the Chinese government could deliver on its promise of “medium to fast” growth, meaning 6.5% or higher. (…)

All this matters because, as former U.S. Treasury Secretary Larry Summers wrote recently, China for the first time in centuries “affects the global economy as much as it is affected by the global economy.” (…)

India trims rates amid economic headwinds

(…) Boosted by the impact of lower energy prices, India, a big oil importer, has overtaken China as the world’s fastest-growing large economy. The RBI projected growth in the financial year to the end of March 2017 of 7.6 per cent based on gross value added, while inflation is forecast to decelerate slightly to about 5 per cent.

Even so, India faces economic headwinds and analysts say the country’s loosening cycle has probably come to an end. (…)

Some of the state-controlled banks that dominate lending are crippled by an overhang of bad loans for infrastructure and industry. Exports have fallen as a result of weak international demand and the sharp slowdown in China, and Narendra Modi’s government has so far been unable to generate the surge of investment and job creation it promised when it won the 2014 general election.

Sectors such as steel have been particularly hard hit. “Look at Chinese overcapacity in everything,” said one economist at an international financial institution. “There is no way in hell you’re going to make any investment.” (…)

Lagarde Says Risks to Global Recovery Are Increasing
FED UP, OR NOT?

For their discussions:

Which Wage Growth Measure Best Indicates Slack in the Labor Market?

(…) average hourly earnings (AHE) for production and nonsupervisory workers in the private sector increased a paltry 2.3 percent in March from a year earlier (as did the AHE of all private workers), and is barely above its average course of 2.1 percent since 2009.

In contrast, the Atlanta Fed’s Wage Growth Tracker (WGT) suggests that wage growth has been increasing. The February WGT reading was 3.2 percent (the March data will be available later in April), considerably higher than its post-2009 average of 2.3 percent.

Wage Growth

Why is there such a large difference between these measures of wage growth? Besides differences in data sources, the primary reason is that they measure fundamentally different things. The WGT is an estimate of the wage growth of continuously employed workers—the same worker’s wage is measured in the current month and a year earlier.

In contrast, the AHE measure is an estimate of the change in the typical wage of everyone employed this month relative to everyone employed a year earlier. Most of these workers are continuously employed, but some of those employed in the current month were not employed the prior year, and vice versa. These changes in the composition of employment can have a significant effect. (…)

And this from NBF:

Faced with a steady decrease in the labor force participation rate, economists and policy makers have been debating for the last eight years the reasons underlying the substantial decline in participation that has taken place since the peak in the early 2000s. Some believe that the decrease is a long-term phenomenon resulting from demographic and structural changes occurring in the U.S. economy. Others suggest that the current decline in the participation rate is mainly due to cyclical factors caused by weak demand for labor and insufficient opportunities in the job market: for example, the Council of Economic Advisers assumes that the decline is 84% structural while the Congressional Budget Office assumes that it is no more than 50%. So which is it?

Until now, the bearish (structural) camp has had the upper hand. Before this year, there was nothing good to say about the part-rate as it kept on falling. But things are changing. In March, the labour force participation rate rose for the fifth time in six months. Importantly, the gains were concentrated in the prime-aged workforce (aged 25-54) where participation surged by the most since 1985. As today’s Hot Charts show, even after this rise the level of participation remains low at 81.4%. This means that there is still a huge number of potential workers on the sidelines: 2.4 million if the part-rate was to return to 83%. This positive development has major ramifications for U.S. monetary policy: the higher the part-rate, the more patient the Fed can be in normalizing interest rates.

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Nerd smile Importantly, the number of 25-54 years old employed jumped by 956k in Q1’16, +1.0% YoY. Sixty-three percent of these, or 602k (+2.4% YoY), were in the 25-34-year segment, the early consumers group who, having decided to work, might finally be leaving their parents’ basement, renting or buying, forming families, etc.

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Hmmm…A higher part-rate might restrict wage growth. But if these young adults start consuming…