Edge and Odds

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Month: January 2018

THE DAILY EDGE (25 January 2018): Flash PMIs

FLASH PMIs
  • Flash U.S. Composite Output Index at 53.8 (54.1 in December). 8-month low.
  • Flash U.S. Services Business Activity Index at 53.3 (53.7 in December). 9-month low.
  • Flash U.S. Manufacturing PMI at 55.5 (55.1 in December). 34-month high.
  • Flash U.S. Manufacturing Output Index at 56.2 (55.9 in December). 12-month high.

January data indicated another solid expansion of U.S. private sector business activity, underpinned by the fastest rise in new work for five months. Manufacturing production continued to increase at a much faster pace than service sector activity.

At 53.8 in January, down from 54.1 in December, the seasonally adjusted IHS Markit Flash U.S. Composite PMI Output Index signalled the least marked rate of business activity expansion since May 2017.

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Slower private sector output growth reflected the weakest rise in services activity for nine months. In contrast, manufacturers experienced one of the strongest rates of production growth since the first quarter of 2015, supported by improving domestic sales and sustained inventory building in January.

The latest survey revealed a robust and accelerated upturn in new order books across the private sector economy. Survey respondents attributed greater sales to improved business and consumer confidence. Manufacturers signalled the second-fastest expansion of incoming new work since March 2015.

Payroll numbers continued to increase at the start of 2018. (…) Input price inflation meanwhile intensified in January, with the latest rise in cost burdens the fastest since September 2017. A number of firms cited higher fuel, energy and oil-related costs during the latest survey period. (…)

Although the overall pace of economic growth signalled by the surveys waned to an eight-month low, the forward-looking indicators suggest the slowdown will prove transitory. In particular, business optimism about the year ahead improved markedly and inflows of new orders hit a five-month high. Growth should therefore pick up again in coming months.

Inflationary pressures meanwhile kicked higher, with January seeing the second-largest monthly increase in input costs since 2015. Higher oil prices were widely reported but, more generally, stronger demand is also helping companies push through price hikes.

  • Eurozone starts 2018 with fastest growth for nearly 12 years
    • Flash Eurozone PMI Composite Output Index at 58.6 (58.1 in December). 139-month high.
    • Flash Eurozone Services PMI Activity Index at 57.6 (56.6 in December). 125-month high.
    • Flash Eurozone Manufacturing PMI Output Index at 61.1 (62.2 in December). 2-month low.
    • Flash Eurozone Manufacturing PMI at 59.6 (60.6 in December). 3-month low.

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The eurozone started 2018 with a further acceleration of growth to a near 12-year high, accompanied by the largest payroll gain since 2000 and the highest price pressures for nearly seven years. (…)

An acceleration of service sector growth to the fastest since August 2007 was partly countered by a slowdown in manufacturing output growth, though the latter remained very buoyant.

The latest three months have seen the strongest factory output increase since 2000. Activity was buoyed by a further marked and broad based increase in new business. Although down fractionally on the rise seen in December, January’s inflows of new orders were the second-largest since July 2007, reflecting a further improvement in demand for both goods and services. (…)

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Despite the increased workforce numbers, capacity continued to show signs of being stretched. Although down to a three-month low, growth of backlogs of work once again ran at one of the highest rates seen over the past decade. Similarly, supplier lead times to factories showed one of the longest lengthenings on record, highlighting the extent to which demand has exceeded supply for many inputs.

Price pressures meanwhile intensified during January, in part reflecting improved pricing power as demand outpaced supply, as well as rising oil prices. Average input costs and selling prices both showed the biggest monthly increases since April 2011, with rates of inflation accelerating in both manufacturing and services. (…)

The eurozone has got off to a flying start in 2018, with business activity expanding at a rate not seen for almost 12 years. The acceleration of growth pushes the survey data into territory consistent with the economy expanding at a super-strong quarterly rate approaching 1%.

With employment growing at the fastest pace for 17 years, an improving labour market should feed through to higher consumer spending, which should help further drive the economic upturn as 2018 proceeds, as well as higher wages.

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Source: @fwred (via The Daily Shot)

  • Japan: Operating conditions improve at stronger pace
    • Flash Japan Manufacturing PMI® rises to 54.4 in January (54.0 in December.
    • Output expands at quickest rate in 47 months.
    • New orders continue to rise sharply. Inflationary pressures intensify.

January flash PMI data for the Japanese manufacturing economy signalled further positivity. The sector has observed accelerated rates of improvement in each of the past three months.

The strongest reading in the PMI since February 2014 was supported by quickened rates of output and employment growth, in addition to a relatively sharp expansion in new orders.

Strikingly, output price inflation accelerated to the fastest rate since October 2008 amid sharper rises to input costs. With a low rate of unemployment and sustained growth in official GDP data, inflationary pressures should continue to mount.

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December Existing Home Sales Wrap Up Best Year Since 2006

Existing-home sales fell 3.6% in December from the prior month to a seasonally adjusted annual rate of 5.57 million, the National Association of Realtors said Wednesday.

For 2017 as a whole, though, sales increased 1.1% to 5.51 million, the best year for sales since 2006’s 6.48 million. (…)

At the current sales pace, the stock of homes on the market would be gone in 3.2 months, which the NAR says is the lowest inventory since it began tracking these data in 1999. (…)

The median sale price for an existing home in December was $246,800, up 5.8% from a year earlier. (…)

large image(Haver Analytics)

Draghi takes swipe at US for talking down dollar Euro climbs further as ECB shrugs off currency’s recent strength
US warns it will step up trade measures in 2018 Mnuchin and Ross defend Trump administration against charges of protectionism
U.S. has not moved an inch during the NAFTA talks, say sources
Larry Fink Joins Ray Dalio in Warning Against Sitting in Cash

THE DAILY EDGE (24 January 2018): Keep on Trucking!

U.S. Regional Banks Say Tax Overhaul Jump-Started Loan Demand

(…) After struggling with slowing loan growth throughout much of 2017, U.S. regional bank executives said the promise of lower taxes spurred a pick-up in commercial loan demand in the fourth quarter, as well as a rise in consumer spending on credit and debit cards. That, along with increased interest rates, prompted many of the lenders to raise their loan growth and profit outlooks for the coming year.

“It was almost like a dam broke when the tax legislation got enacted,” said Steve Steinour, chief executive officer of Huntington Bancshares Inc. in Ohio. “We had a massive amount of activity in those final three weeks of the year.” (…)

The chart is as of Jan. 10. The biz end has yet to really bounce.

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A Shortage of Trucks Is Forcing Firms to Cut Shipments or Pay Up A nationwide truck shortage is forcing thousands of shippers into a tough choice: postpone all but the most important deliveries, or pay dearly to jump to the front of the line.

(…) Freight volumes in December hit near-record levels for that time of year, on the back of a strengthening economy. Retailers are replenishing stocks after one of the strongest holiday sales seasons in recent years. Manufacturers are also shipping more cargo; in December, industrial production had the largest year-over-year gain since 2010, according to the Federal Reserve.

What’s more, bad weather and a new federal safety rule that took effect in December have crimped the supply of available trucks. Diesel prices are near a three-year high, adding to transportation costs. (…)

Spot-market prices for dry vans, the most commonly used big rig, are up more than 20% year-over-year. Analysts expect long-term contract rates that shippers negotiate with carriers to rise by between 5% and 8% this year. (…)

January is typically a quiet month for freight. But in the first three weeks of January, national average spot truckload rates were higher than during the peak season in 2017, according to DAT. (…)

Analysts expect capacity to become scarcer in April, when produce shipments pick up and full enforcement of the ELD rule kicks in. Vehicles without the devices may be removed from the road.

The normal seasonal decline in shipments has not happened:

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Expenditures are up more than twice the rate of shipments growth:

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Because costs have exploded:

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Consumer goods manufacturers use a lot of trucking, yet their operating margins are already under pressure:

Price War Pressures Consumer-Goods Giants Household goods from diapers to toilet paper to razors are getting cheaper, but what is a boon for shoppers is squeezing profits at the world’s biggest consumer-goods companies.

(…) The dynamics are setting up a tug of war this year between consumer-products companies that are pouring money into new products and marketing in hopes of commanding higher prices, and retailers and shoppers increasingly accustomed to discounts.

Kimberly-Clark Chief Executive Tom Falk said in an interview that P&G ’s discounting, along with pressure from retailers and a decline in the U.S. birthrate, have reduced demand for the company’s baby-related products and other items. That is driving the industrywide push to cut prices, he said. (…)

Trump Team at Davos Backs Weaker Dollar, Sharpens Trade War Talk

South Korea has responded quickly and forcefully to a US decision to slap tariffs on imported washing machines and solar panels, with officials in the east Asian nation seeking to reinstate levies on imported American products. (…)

(…) Stephen Schwarzman, the CEO of Blackstone who led the president’s Strategic and Policy Council before it was dismantled last summer, said there would be “a lot” of financial inflows into the U.S. “There are companies from all around the world who are looking at the U.S. and saying this is the place to be,” he added. (…)

New Rules Could Make U.S. a Tax-Friendly Regime A provision in the newly revised tax code slashes the income tax that companies pay on royalties from the overseas use of intellectual property, making it more attractive to house these rights on American soil.

The new tax break, for what is dubbed foreign-derived intangible income, effectively reduces tax on foreign income from goods and services produced in the U.S. using patents and other intellectual property to 13.125% until the end of 2025, after which the rate rises to 16.4%. Previously, royalties paid to a unit in the U.S. would have been taxed similarly to other U.S. income, for which the top corporate tax rate was 35%. The new headline corporate rate is 21%. (…)

The new U.S. deduction comes as Ireland is set to phase out, by the end of 2020, the most storied version of this maneuver, the Double Irish—which has been used by large firms, including Facebook Inc., Google parent Alphabet Inc. and drugmaker Allergan PLC. (…)

“Now the U.S. has to enter your consideration, absolutely,” said Anna Scally, head of the tech and media practice in Ireland for accounting firm KPMG. She added that firms are currently crunching numbers to find the best alternative locales that comply with tax rules. “It’s not a slam dunk,” Ms. Scally said of the U.S. “But it is an option.” (…)

The U.S.’s elevation as a tax-efficient locale may face challenges from other countries that claim the new foreign-derived tax deduction is an unfair trade subsidy, tax advisers say. Also, the effective FDII rate is set to rise to 16.4% in 2025—without taking into account additional U.S. state taxes—and could make the break less attractive.

The possibility of a political reversal has also made businesses more cautious, experts say.

“I don’t think any firm would be well served by betting the ranch on the stability of the new tax law,” said Edward Kleinbard, a former U.S. tax official who is now a tax professor at the University of Southern California law school.

SENTIMENT WATCH

The bank’s cross-asset measure of risk appetite around the world is the highest since it started the gauge in 1991. Euphoria is turbo-charging global equities while 10-year U.S. government bonds are suffering their worst performance in risk-adjusted terms, according to Goldman. (…)

“While high risk appetite increases risk of disappointment, we find historically that the signal from macro data tends to trump the signal from risk appetite,” Goldman said.

  • The S&P 500 Relative Strength Indicator (RSI) (The Daily Shot)

This is not only the highest level for RSI on a “weekly” basis but also one of the highest levels on a “4-year quarterly” basis as well.

Surprised smile Number of stock indices at 3m dwarfs tally of quoted companies Proliferation reflects investor focus on ‘top-down’ analysis of markets

There are now more than 70 times as many stock market indices as there are quoted stocks in the world, according to a groundbreaking survey by the Index Industry Association. A census of its members found that they publish and regularly re-calculate 3.28m indices, of which 3.14m cover stock markets. According to the World Bank, there are only 43,192 public companies in existence. (…)

Party smile How about ETFs and ETNs?

  • Like tech stocks, FANG? How about 3 x FANG? Here is a scary new ETF for you. (The Daily Shot)

For you? Be aware that:

  • The underlying FANG+ Index comprises equal weighted holdings of Facebook, Inc., Apple, Inc., Amazon.com, Inc., Netflix, Inc., and Alphabet, Inc., plus Alibaba Group, Baidu, Inc., Nvidia Corporation, Tesla, Inc., and Twitter, Inc,. I will let you calculate the average P/E of this ETN.
  • ETNs are no ETFs. ETNs don’t own a portfolio of stocks. They are simply debt issued by banks that promise a return to the investor linked to the performance they track. Sounds familiar.
  • A leveraged ETF keeps its leverage constant by boosting its indebtedness – drawing on its swap arrangements – as the value of its assets appreciates.

Maybe we should start buying the VIX!

What Consumers Think About Amazon Go

Infographic: What Consumers Think About Amazon Go | Statista

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