ISM Manufacturing Index Signals Expansion in April A closely watched gauge of U.S. factory activity slipped in April but continued to signal growth in the manufacturing sector, which has been battered by low oil prices and a strong dollar.
(…) Now, the clouds seem to be lifting. Oil prices have moved higher in recent months and the dollar has weakened against other major currencies as Federal Reserve policy makers signaled a willingness to move slowly on raising short-term interest rates, potentially offering some relief for American manufacturers.
“The worst is behind us,” said Bradley Holcomb, who oversees the ISM survey.
More sectors in April reported increased production and new orders compared with March, Mr. Holcomb said, offering “a broader base of growth across more industries.” The ISM’s export index rose to its highest level since November 2014. (…)
The ISM clouds may be lifting as the WSJ likes to see it but the fog underneath remains heavy. The ISM and Markit surveys diverged strongly in recent months (Zerohedge chart at right) with the ISM getting much weaker at the end of 2015 and bouncing back recently on new order numbers in March that were suspiciously strong given the state of world economies. The overall ISM is now in line with Markit which has a clearly less hopeful view of the same manufacturing sector (my emphasis):
April data indicated that U.S. manufacturers started the second quarter of 2016 with a renewed slowdown in production and new business growth. At the same time, employment levels were close to stagnation and input buying dropped at the fastest pace for two-and-a-half years, amid reports of slower than expected demand during the latest survey period. (…)
The latest reading was weaker than the average seen in Q1 2016 (51.7) and signalled the slowest improvement in overall business conditions for just over six-and-a-half years. (…)
Manufacturers recorded another modest increase in overall new work at the start of the second quarter, but the rate of expansion was the weakest since December 2015. Reduced export demand had a negative influence on manufacturing order books in April, with new work from abroad decreasing at the fastest pace for nearly one-and-a-half years.
A lack of pressure on operating capacity persisted across the manufacturing sector during April, as highlighted by a decline in backlogs of work for the third month running. Moreover, the latest fall in unfinished business was the sharpest since September 2009. This contributed to a near-stalling of payroll numbers in April, with the rate of job creation the weakest for just under three years. (…)
EU Sees Weaker Growth as China Slowdown Weighs
According to the forecasts by the European Commission, the EU’s executive arm, the economy of the 19-country eurozone is expected to grow 1.6% this year. This is slightly below the 1.7% expansion the commission had forecast in February, and the 1.7% it expanded in 2015.
In 2017, the eurozone economy will expand by 1.8%, the commission said, slightly lower than earlier predictions which saw it growing 1.9%.
Growth in the 28-country EU is seen at 1.8% this year, down slightly from the commission’s February forecast and lower than the 2% it recorded in 2015. The EU’s economic output will likely expand 1.9% next year, also below the 2.0% forecast earlier this year.
(…) the commission cautioned that both external and internal risk factors could further curb growth in the coming years. On the external side, a slowdown in emerging markets—especially in China-—could trigger significant spillovers in Europe and the world, the commission said, adding that weaker growth in a number of advanced economies, such as the U.S. and Japan, is further clouding the global outlook. (…)
The commission also warned of downside risks to growth stemming from uncertainty linked to heightened geopolitical tensions and uncertainty surrounding the U.K.’s referendum on its EU membership, set for June 23. (…)
The commission now expects the rate of inflation in the eurozone to be just 0.2% this year, down from the 0.5% previously forecast. In 2017, inflation in the currency union is now seen at 1.4%, down from the 1.5% predicted earlier and still below the close-to-2% targeted by the ECB.
In the EU, consumer prices are expected to grow 0.3% this year and 1.5% next year, both lower than in previous forecasts. (…)
Rocketing yen leaves Tokyo with dilemma Japan under intense pressure to hold fire as yen soars
(…) Given that currency depreciation was the only component of Abenomics to have much impact on the economy, the obdurate appreciation of the yen this year must be a serious concern. And given the size of the current account surplus, the Y10tn-worth of intervention permitted under the US Treasury’s third criterion would be more pea shooter than bazooka.
At the weekend Japanese finance minister Taro Aso made it clear he did not share the US Treasury’s view that the yen market was orderly and suggested that the US initiative would not be a constraint on intervention. So there could be friction ahead.
Yet the “war” is arguably pointless, for as economists Barry Eichengreen and Jeffrey Sachs showed in papers in the mid-1980s, uncoordinated monetary expansion via supposedly beggar-thy-neighbour trade policies was benign in the 1930s because it increased the global money supply. The difference today, as Japan has found, is that monetary expansion is becoming difficult to pull off even with negative interest rates.
EARNINGS WATCH
- 323 companies (75.0% of the S&P 500’s market cap) have reported. Earnings are beating by 4.2% while revenues have missed by -0.2%.
- Expectations are for a decline in revenue, earnings, and EPS of -1.7%, -7.9%, and -5.5%.
- EPS is on pace for -4.5%, assuming the current beat rate for the remainder of the season. This would be +0.5% excluding Energy. (RBC)
