U.S. Auto Sales Remain Strong, but Tariffs Could Squash Momentum U.S. auto sales have proved resilient so far in 2018, with many of the largest car sellers posting increases over the first six months of the year despite predictions that demand would cool.
(…) Overall U.S. auto sales increased by 1.9% in the first half of the year. June sales increased by about 5%, according to analysts, boosted by an additional selling day compared with last year. (…)
Looks like some Americans did some front running on tariffs:
(…) America’s obsession with gas-guzzlers means consumers are buying up models that are most exposed to President Donald Trump’s proposed duties on imported vehicles and parts, not to mention oil prices that are at a four-year high.
(…) auto-loan terms have been stretched to close to 70 months, vehicle-finance interest rates are at a nine-year high, and the number of buyers who owe more than than their car is worth hasn’t retreated from recent peaks, according to auto market researcher Edmunds. And there are those rising oil prices. (…)
Wage Growth Is ‘Missing in Action’ and Workers Are Not Happy
The weak wage growth that’s characterized global labor markets since the financial crisis has hit poorer workers most, compounding inequalities and fueling dissatisfaction, according to the OECD.
The Paris-based body said pay increases are “missing in action,†even with rising employment, and any gains haven’t been equally distributed. In its Employment Outlook, the OECD said real labor incomes of the top 1 percent of earners have risen much faster than those of median full-time workers. (…)
And yet,
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In This Economy, Quitters Are Winning Workers are choosing to leave their jobs at the fastest rate since the internet boom 17 years ago and getting rewarded for it with bigger paychecks and/or more satisfying work.
(…) Labor Department data show that 3.4 million Americans quit their jobs in April, near a 2001 peak and twice the 1.7 million who were laid off from jobs in April.
Job-hopping is happening across industries including retail, food service and construction, a sign of broad-based labor-market dynamism. (…)
Workers tend to get their biggest wage increases when they move from one job to another. Job-switchers saw roughly 30% larger annual pay increases in May than those who stayed put over the past 12 months, according to the Federal Reserve Bank of Atlanta.
More than one in seven of the nation’s 6.1 million jobless Americans in May were voluntarily unemployed, having left a previous position to look for another, the highest share of voluntary unemployment in more than 17 years. (…)
Dave Pavelka, president of Kenny Electric in Denver, has been recruiting and training inexperienced workers to deal with a desperate labor shortage. His firm has about 350 field electricians but could hire another 50, he said.
A number of recent hires have come from the hospitality industry, Mr. Pavelka said. (…)
Something’s gotta give:
It’s happening!
Meet Hadrian, The Brick Laying Robot That Will Make Construction Workers ObsoleteMeanwhile in Europe
Eurozone pay rises a relief for unions and ECB alike
RECESSION WATCH
Charts from Jeffrey Gundlach’s June 12 presentation: low odds of recession over the next 12 months.
LEI (YoY) Heading into Recessions
January 31, 1968 to April 30, 2018
ISM PMI Leading Up to Recessions
December 31, 1947 to May 31, 2018
But there is this lingering trade issue:
With Clock Ticking, China Warns U.S. on Pulling Tariff Trigger U.S. tariffs on Chinese products will hurt companies world-wide as $20 billion of the $34 billion in goods targeted are made by foreign companies in China, officials said.
(…) Barring an 11th-hour reprieve, the U.S. is scheduled to impose tariffs on $34 billion of Chinese imports starting 12:01 a.m. Eastern time Friday.
China will counter with corresponding tariffs on U.S. imports immediately after the U.S. tariffs take effect, Chinese customs officials say. U.S. exports of sport-utility vehicles as well as soybeans and other cash crops are among the goods that will be hit by the Chinese tariffs. (…)
Steel tariffs that went into effect the first week of June are causing a factory in Missouri to lay off dozens of workers due to lost business from cancelled customer orders.
At the MidContinent Steel and Wire plant in Poplar Bluff, Missouri, where Magnum Fasteners products are made, 60 employees were laid off this month as certain operations were idled due to lost business from increased steel costs.
The company is the largest nail manufacturer in the U.S. and employs hundreds of people in Poplar Bluff. It is owned by Deacaro, a Mexico-headquartered firm which ships steel from its mills in Mexico into the U.S. for a variety of finished products. The administration’s steel tariffs add a 25 percent penalty to the raw material. (…)
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Take Our Cheese, Please: American Cheese Makers Suffer Under New Tariffs Cheese makers that rely on foreign sales are strained as China and Mexico raise tariffs on U.S. mozzarella and provolone.
BelGioioso Cheese Inc., a second-generation family company in Wisconsin, has seen sales to Mexico drop since officials there implemented tariffs of up to 15% in early June on most U.S. cheese. The levies were a response to tariffs the U.S. placed on Mexican steel and aluminum.
On Thursday, Mexico was slated to raise its levy on most U.S. cheese to as much as 25%, while China on Friday is implementing tariffs on $34 billion of U.S. goods, including cheese and whey, a dairy byproduct often fed to livestock.
“It’s a nightmare,†said BelGioioso President Errico Auricchio. (…)
July milk futures have dropped 12% since Mexico announced May 31 that it would strike back with tariffs. The price for a barrel, or 500 pounds, of white cheddar last week hit its lowest level since 2009. More cheese is in cold storage in the U.S. than any time since the U.S. Department of Agriculture began keeping track in 1917. (…)
BelGioioso is charging some overseas customers less to keep their business. Cheese producers said that many Mexican buyers have paused ordering, and that they may end up making fewer fresh cheeses and more parmesan, asiago and other versions with longer shelf lives to avoid losses while the tariffs are in place and orders remain in flux. Manufacturers also said some of the mild white cheese they make for sale in Mexico may be sold at a loss or donated to food banks as expiration dates draw near.
“It’s going to put pressure on our sales team to find customers in a hurry,†said Jeffrey Schwager, president of Wisconsin-based Sartori Co. He estimated the tariffs will cut 15%, or around $40 million, from his roughly $265 million in annual cheese sales.
“Uncertainty is devastating,†he said. (…)
“Farmers have been in the red for three or four years. This is the last thing we need,†she said. (…)
U.S. dairy exports last year totaled $5.5 billion, including $1.3 billion to Mexico, the top market, according to the Export Council. China, meanwhile, bought more than $577 million in U.S. dairy products last year, nearly half of it whey. (The recent tariffs don’t affect all dairy exports to Mexico and China.) Almost half of U.S. whey sales went to China last year, the Export Council said. The threat of the Chinese tariffs that take effect Friday has already hurt those sales.
Trump tariffs trigger anxiety for US chipmakers American groups fear disruption to China trade links and politically motivated reprisals
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Food prices fall on trade wars
Worries about escalating trade wars weighed on food prices, with the UN Food and Agricultrual Organization’s food price index posting its first month-on-month decline this year, despite adverse weather conditions in the world’s growing areas. The June index, which looks at prices of food commodities including grains, vegetable oils, meat and dairy, was down 1.3 per cent from May and down 1 per cent from a year before. (…)
(…) The new-exports portion of JP Morgan’s Global Manufacturing PMI fell to 50.5 in June, its weakest in nearly two years. The figure remains above 50, indicating export orders are still rising, but it has grown weaker every month since hitting its most recent peak at 54.2 in January. (…)
The latest manufacturing PMI from Germany, an outsize player in global supply chains, offers some weight to that interpretation. Export sales growth there was the weakest in over two years, and a number of businesses cited declining orders from the U.S. and China. (…)
In truth, while the U.S. economy shows signs of booming, Markit reports that
Growth in total new orders has fallen steadily since the start of the year, and rose to the weakest extent since November 2016 in June. The waning of growth of demand was to a large extent the result of a further slowing in global trade flows. New export orders rose only marginally in June, registering the smallest rise seen since the latest export rally began two years ago. (…)
The deterioration in export performance was broad-based: while developed world exporters reported a modest increase in trade, the export rise was the smallest for 22 months. Emerging market producers meanwhile saw exports fall for a third successive month, signalling the toughest export phase seen for these countries in one and a half years.
Of the eight nations reporting a drop in exports in June (up from seven in May), the list notably included the US, China and Japan. (…)
Will somebody please tell commodity shippers there’s a trade war going on?
Whether it’s the price of hiring giant freighters to haul hundreds of millions of tons a year of iron ore and coal, or smaller carriers moving grains, there’s a theme emerging: dry-bulk shipping rates are rallying despite an escalating trade war that may yet damage China’s economy. (…)
This next chart going back to 2000 from Harper Peterson & Co., a ship broker, puts the recent move in rates in perspective.
And here’s the one-year chart, suggesting that there might have been a rush to ship goods prior to tariffs implementation and that has come to an end.
Trump to OPEC: ‘Reduce pricing now!’
COMPOSITE PMIs
U.S. business activity growth remains sharp in June
The seasonally adjusted final IHS Markit U.S. Services Business Activity Index registered 56.5 in June. Although down slightly from 56.8 in May, the rise in output was the second-fastest since April 2015. Panellists linked the upturn to greater client demand and the acquisition of new customers. At 56.0, the average index reading in the second quarter marked the strongest quarterly expansion in three years.
New business received also increased sharply, despite the rate of increase softening to a three-month low. The pace of the latest upturn was above the series trend and widely attributed to increased referrals from current clients and favourable market conditions.
Average cost burdens faced by service providers rose sharply in June. The rate of input price inflation matched that seen in May and was consequently the joint-fastest since September 2013. Anecdotal evidence largely indicated that higher costs were associated with supplier shortages and recently introduced tariffs, accompanied by widespread reports of higher fuel prices.
Reflecting improved pricing power amid strong demand conditions, average charges rose further in June. The rate of inflation was one of the fastest in the current 28-month sequence of increase. A number of panel members noted that higher input costs were partly passed on to clients.
As the upturn in new business continued to outpace that of output, backlogs of work increased solidly. Although the rate of accumulation eased slightly from May’s recent peak, it was the second-strongest in over three years.
Meanwhile, greater business requirements drove the latest rise in employment. The rate of job creation was the second-fastest since September 2015, with some firms also noting that the launch of new products supported hiring.
At 56.2 in June, the final seasonally adjusted IHS Markit U.S. Composite PMIâ„¢ Output Index fell slightly from 56.6 in May. Although slightly weaker than the previous month, the overall private sector expansion was the second-fastest since April 2015 and signalled a strong end to the second quarter.
At this level, the survey’s employment indices are historically consistent with a non-farm payroll rise in the order of 230k.
Euro area output and new orders expand at faster rates in June
The final IHS Markit Eurozone PMI® Composite Output Index posted 54.9 in June, up from 54.1 in May and the earlier flash estimate of 54.8. However, the average reading over the second quarter as a whole (54.7) was the weakest registered since the final quarter of 2016.
The trends in euro area new business followed a similar pattern to output. New orders increased at a faster pace, with accelerations seen in Germany, France, Italy and Ireland. The mild improvement in demand growth partly reflected a recovery after an unusually high number of holidays depressed activity and new order inflows in May. The latest increase in new business was sufficiently robust to test capacity, with backlogs of work rising for the thirty-seventh successive month.
Recent surveys have nonetheless seen increased company reports of conditions slowing compared to earlier in the year. In some cases this has been due to concerns about rising trade worries, political uncertainty and the impact of ongoing capacity constraints on the pace of economic expansion in the coming months. This was reflected in the trend in business optimism, which dipped to a 19-month low.
June saw further job creation, with the rate of expansion remaining solid and picking up slightly compared to the prior survey month. Employment rose in all of the nations covered, with growth improving in Germany, France and Ireland.
Price pressures increased at the end of the second quarter. Input costs rose to the greatest extent in five months. This fed through to higher selling prices, which increased at the quickest pace since February. (…)
The final IHS Markit Eurozone PMI® Services Business Activity Index posted a four-month high of 55.2 in June, up from May’s 16-month low of 53.8 and the earlier flash estimate of 55.0. (…)
However, the average reading over the second quarter as a whole (54.5) was down from the opening quarter (56.4) and the worst outcome in one-and-a-half years. (…)
Eurozone services new business also rose at the fastest pace for four months in June, with rates of expansion picking up in all of the nations covered bar Spain. This was sufficient to maintain pressure on capacity, leading to a rise in backlogs of work for the twenty-fifth month in a row. Job creation accelerated to a two-month high in response, with sharper increases registered in Germany, France and Ireland.
Price pressures crept higher at the end of the second quarter. Input price inflation remained strong and accelerated to an 86-month high. Companies reported higher fuel and staff costs. Part of the increase in input prices was passed on in the form of higher output charges, which rose to one of the greatest extents in the past decade.
Eurozone growth regained momentum in June, rounding off a respectable second quarter performance, for which the survey data point to GDP rising by just over 0.5%. June also saw new orders and employment growth perk up, suggesting rising demand continues to motivate companies to expand capacity. (…)
China composite output expands at quickest pace for four months in June
Latest Caixin China Composite PMIâ„¢ data (which covers both manufacturing and services) showed that Chinese business activity continued to expand at the end of the second quarter. Notably, the Composite Output Index rose from 52.3 to 53.0 in June, to signal a solid rate of growth that was the steepest recorded since February.
The improvement in the headline Composite Output Index was supported by stronger growth across both the manufacturing and service sectors. Services activity expanded at the quickest rate for four months in June, as highlighted by the seasonally adjusted Caixin China General Services Business Activity Index rising from 52.9 in May to 53.9. At the same time, growth in manufacturing production also improved to a four-month record, but remained moderate and weaker than that seen in the service sector. However, rates of increase across both sectors remained weaker than those seen at the start of the year.
As was the case for output, new business continued to rise at both manufacturing and services companies during June. While new order growth across the goods-producing sector was little-changed from the previous month and modest, service providers signalled a slightly stronger rate of expansion. According to panellists, new product offerings and improved marketing strategies helped to boost new work. At the composite level, new business rose at a modest pace that matched that seen in May.
After stabilising in the prior two months, composite employment fell fractionally during June. Sector data indicated that a steeper rate of job shedding at manufacturing companies offset a slightly stronger rise in service sector staff numbers. Notably, goods producers registered the quickest reduction in headcounts for nearly one year. In contrast, services companies hired additional employees at the quickest rate since last August amid reports of rising business requirements.
June data pointed to divergent trends with regards to backlogs of work, with manufacturing firms signalling greater amounts of unfinished business and services firms a decline. That said, the rate of accumulation at goods producers was unchanged from the previous month and moderate. Meanwhile, outstanding workloads fell marginally across the service sector for the second month in a row. Backlogs at the composite level therefore rose only slightly at the end of the second quarter.
Chinese companies signalled a stronger increase in input costs during June. The rate of input price inflation reached a five-month high across the manufacturing sector, while services companies noted the steepest increase in costs since February. Panel members widely commented on greater prices for raw materials, transportation and staff in the latest survey period. Overall, input costs at the composite level rose at the sharpest rate for four months.
Higher cost burdens prompted companies to increase their prices charged again during June. Factory gate prices rose at a solid pace that was the quickest recorded since last September. Services companies meanwhile raised their charges to the most marked extent for three months, though the rate of inflation remained marginal overall. At the composite level, selling prices increased at the fastest pace since last September.
Business sentiment towards the 12-month outlook for output dipped across both monitored sectors in June. Although service providers expressed a stronger degree of optimism than manufacturers, confidence remained weaker than the historical trend.
Truck-Factory Backlogs Soar on Heavy Demand for Big Rigs Purchases of big rigs are accelerating during a normally slow summer period as truckers respond to strong freight demand.
(…) “We’re expecting in June that the backlog will rise to a level we haven’t seen since about 1999,†said Kenny Veith, president of Columbus, Ind.-based ACT. The backlog-to-build ratio was about 9.6 months at the end of May, he said, meaning most trucks ordered in June won’t arrive until the first half of 2019.
June is typically a weak month for truck orders. But the persistent robust demand for the heavy-duty vehicles used for long hauls meant carriers ordered new trucks at a seasonally adjusted rate of 492,000 vehicles in the first six months of this year—“the strongest six-month order period that we have in our database, which goes back to 1982,†Mr. Veith said. (…)
(RBC)
SENTIMENT WATCH
‘Slo-Mo Credit Crunch’ Has Already Taken Hold, Bond Guru Says
Stock market selloffs, volatility blow-ups, collapsing crypto currencies. They’re all the symptoms of an unfolding global credit squeeze, according to famed HSBC Holdings Plc bond guru Steven Major. It just happens to be developing at a snail’s pace.
Major and his team see what they call a “long list†of selloffs in risk market across the world as evidence of the disruption wrought by tighter dollar liquidity. In response they’ve slashed their forecast for bund yields, turned more bearish on credit and become even more cautious on emerging-market debt. (…)
Risk appetite at panic level!
Small Chinese banks face regulatory capital wipeout More than 50 institutions to fall below provision requirements under new rules on bad loans
New rules for recognising bad loans in China are set to obliterate regulatory capital at several banks and are expected to lead to a 14 per cent rise in non-performing loans across the sector this year. (…)
The Tax Wrinkle That Is Making Pension Funds Buy More Treasurys U.S. companies are funneling extra money into their pension funds to take advantage of temporary tax savings, moves that are helping suppress yields on long-term Treasurys.
S&P 500 companies are contributing to pension plans this year at a pace expected to nearly match 2017’s level, which at $63 billion was the most since 2003, according to Goldman Sachs Asset Management. Last year’s contributions were spurred in part by companies anticipating changes in the U.S. tax-code overhaul.
That and continued contributions this year have been a boon for the Treasury market because pension funds tend to invest in long-dated bonds to match their long-term liabilities. The yield on the 30-year bond has been falling recently, closing at 2.959% on Tuesday, down from a recent peak of 3.245% in mid-May. (…)
Firms that contribute through mid-September of this year can receive deductions based on the old 35% corporate tax rate, rather than the new 21% rate. A company that contributes $1 million to an underfunded pension plan could have $350,000 in tax savings before the deadline, but would have savings of just $210,000 after September.
Those making discretionary pension contributions include Verizon Communications Inc.,which added $1 billion to its pension plan in the first three months of the year, a large enough sum that the telecom giant won’t have to make mandatory contributions for eight years, the company said in April.
PepsiCo Inc. said in April that it made a discretionary contribution of $1.4 billion. Deere & Co. and United Parcel Service Inc. both have cited the tax law as the reason for increasing their voluntary pension contributions. (…)
This tax window closes mid-September.
