COMPOSITE PMIs
The U.S. service sector reported a strong expansion in business activity in October. The rate of growth rebounded from September’s weather-related weakness, but was also buoyed by a sharp rise in new business. Capacity was often reported to have come under some strain, however, and difficulties finding suitable candidates were partly to blame for the rate of job creation easing to a nine-month low. Meanwhile, price pressures intensified, with rates of both input cost and output charge inflation accelerating.
The seasonally adjusted final IHS Markit U.S. Services Business Activity Index registered 54.8 in October, up from September’s recent low of 53.5 and broadly in line with the earlier ‘flash’ reading of 54.7. Output growth regained momentum to run just below the average for 2018 so far. Service providers commonly linked the rise in business activity to increased new business and a pick up in demand after inclement weather in September.
A sharp expansion in new business drove overall output growth, with the pace of increase above the long-run series trend and close to rates seen earlier in the year. Survey responses indicated that the upturn stemmed from more favourable demand conditions and new product launches.
In line with a steep rise in new business, staffing levels rose further in October. That said, the rate of job creation lost some momentum and eased to a nine-month low. Some respondents stated that difficulties finding suitable candidates had limited employment growth. Therefore, capacity pressures remained, with backlogs rising further.
Business confidence meanwhile recovered from September’s recent low in October, with the level of optimism improving to a five-month high.
October data saw a further sharp rise in input costs paid by service providers. Moreover, the rate of input price inflation quickened to the fastest in just over five years. A number of firms noted that greater input prices, including wages, and higher borrowing costs were behind the third acceleration in input cost inflation in as many months.
Firms often sought to pass higher expenses on to clients through greater output charges, facilitated by the recent strength of demand. The rate of charge inflation was the second-fastest in the nine-year series history.
At 54.9 in October, the final seasonally adjusted IHS Markit U.S. Composite PMI™ Output Index picked up from 53.9 in September. The upturn was supported by robust expansions in both the manufacturing and service sectors.
Chris Williamson, Chief Business Economist at IHS Markit:
(…) Comparisons with GDP indicate that the latest survey data translate into an annualised rate of economic growth of around 2.5%, representing a solid start to the fourth quarter. Expectations of future business growth spiked higher, suggesting companies are expecting a strong end to the year for the economy. Average selling prices for goods and services rose at a rate only marginally below September’s ten-year survey record high, however, indicating that intensifying inflationary pressures remain a key concern.
Price rises often reflected the need to pass higher costs on to customers, in turn often linked to tariffs, upward wage growth and higher interest rates. Consumer price inflation therefore looks set to remain elevated.
The Institute for Supply Management on Monday said its index of nonmanufacturing activity—tracking industries including health care, finance, agriculture and construction—fell to 60.3 in October from 61.6 in September, which was the highest reading on record going back to 2008. (…)
The report showed businesses are expressing uncertainties regarding tariffs, as building price pressures in the manufacturing sector have impacted some nonmanufacturing companies. (…)
- “we anticipate that price increases may start to work into the supply chain early in the first quarter.”
- “Tariffs are beginning to impact business. We ask our suppliers to hold pricing for six months, but we are experiencing difficulties,”
October saw the euro area economy expand at its slowest rate for more than two years, according to the final IHS Markit Eurozone PMI® Composite Output Index. Despite coming in higher than the earlier flash estimate of 52.7, October’s final reading of 53.1 was down from the previous month’s 54.1 to the lowest since September 2016. Both the manufacturing and service sectors recorded slower rates of growth during October.
Following on from September, manufacturing registered the weaker increase in output, posting its lowest growth in nearly four years. Despite remaining at a solid level, the service sector saw its slowest expansion since the start of 2017. (…) Both France and Spain recorded firmer gains in activity, with growth in each case remaining above historical averages. In contrast, Germany saw growth slump to a 5-month low and the joint lowest in over two years, whilst Italy registered a fall in activity for the first time since the end of 2014.
The downturn in overall activity growth was linked to a weaker gain in incoming new business. October’s survey data showed new work rising at a modest pace that was the slowest since September 2016.
Capacity remained under some pressure in October as backlogs of work increased again. Although modest, backlogs have risen continuously for nearly three-and-a-half years, a rise which continued to encourage companies to take on extra staff. Indeed, employment rose markedly, extending the current sequence of growth to four years. Staffing levels rose at elevated rates in Germany, France and Ireland, compared to much more modest gains in Italy and Spain.
Meanwhile, prices data signalled another sharp increase in company operating expenses. Rising energy and fuel prices were widely reported to have underpinned inflation, whilst there was some evidence of higher labour costs (especially in Germany).
In response to higher costs, companies increased their output prices at a historically elevated rate, although inflation varied by country. Whilst Germany recorded a strong increase in prices charged, there was only modest inflation in France and Spain, plus little change in prices recorded in Italy. (…)
While the PMI numbers hint at an upward revision to the 0.2% flash estimate of third quarter GDP growth, it’s clear that the economy has slowed and that the weakness has intensified into the fourth quarter.
(…) “If the world order becomes defined by continuous conflict between the U.S. and China, sooner or later it risks getting out of control,” said Kissinger, who brokered the U.S. rapprochement with China as former president Richard Nixon’s secretary of state more than four decades ago and has advised U.S. presidents ever since.
“Some disagreements are inevitable but the objective needs to be that both countries recognize that a fundamental conflict between them will destroy hope for the world order,” he said. “I think that that objective can be achieved and I am in fact fairly optimistic that it will be achieved.”
Americans need to learn that not every crisis is caused by ill will, while China must evolve beyond the model of being the leading great power of Asia, Kissinger said.
“The world would be in terrible shape” if the U.S. and China allowed commercial issues to evolve into strategic conflict, he said, adding: “I think we have high incentives to avoid catastrophe.”
(…) Projects being showcased in Zhuhai included a full-scale mock-up of a widebody CR929 jet being jointly developed by Commercial Aircraft Corporation of China and Russia’s United Aircraft Corporation (UAC) in hopes of eventually competing with Boeing’s 787 and Airbus’ A350 jets.
The global market for widebody jets is estimated to be worth $2.5 trillion over the next two decades, according to Boeing, with the fleet size more than doubling to 9,180 jets.
Widebodies account for around 20 percent of projected global jet deliveries over that period but almost 40 percent by value.
Hundreds of spectators and industry executives at the airshow were also treated to a roaring flight demonstration that involved three of China’s Chengdu J-20 stealth fighters, which debuted at the show two years ago with a 60-second flypast.
China put the J-20 into service last year that experts say is a part of Beijing’s plan to narrow a military technology gap with the United States and its F-35 stealth fighter.
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Frost thaws in U.S.-China ties ahead of G20 meeting The United States and China will hold a delayed top-level security dialogue on Friday, the latest sign of a thaw in relations, as China’s vice president said Beijing was willing to talk with Washington to resolve their bitter trade dispute.
(…) In a concrete sign of the unfreezing, the U.S. State Department said Secretary of State Mike Pompeo, Defense Secretary Jim Mattis, Chinese politburo member Yang Jiechi and Defense Minister Wei Fenghe will take part in diplomatic and security talks later this week in Washington. (…)
Mattis did meet Wei in Singapore on Oct. 18 and told him that the world’s two largest economies needed to deepen high-level ties to reduce the risk of conflict.
Speaking in Singapore on Tuesday, Chinese Vice President Wang Qishan, who is close to Xi, reiterated China’s readiness to hold discussions and work with the United States to resolve trade disputes as the world’s two largest economies stand to lose from confrontation. (…)
“The Chinese side is ready to have discussions with the U.S. on issues of mutual concern and work for a solution on trade acceptable to both sides,” he said.
“The world today faces many major problems that require close co-operation between China and the United States,” Wang said.
Wang echoed comments made by Xi on Monday at a major import fair in Shanghai that Beijing will embrace greater openness. (…)
Amazon Offering Free Shipping on Holiday Orders Dropping minimum purchase and Prime membership requirements, retailer vies with rivals Walmart and Target
(…) Amazon last year offered free holiday shipping to customers without Prime memberships but required a minimum order of $25.
Target last month said it would offer free two-day holiday shipping on hundreds of thousands of items without a minimum purchase or membership, a shift from earlier this year, when shoppers could receive free shipping only if they spent $35 or used a Target loyalty card.
Walmart, which already offered free two-day shipping in the U.S. on purchases of at least $35, last month said millions of items sold by third-party merchants in its marketplace would also get free two-day shipping with no membership fee. (…)
Mark your calendar: brick and mortar stores are now competitive enough to force Amazon to react and accept higher costs.
Another sign of times:
When Steve Jobs took a swipe at Amazon.com Inc.’s Kindle in 2009, he pointed to the online retailer’s decision not to report unit sales of its reading device as evidence it wasn’t selling many.
Nearly a decade later, Apple AAPL -2.84% is following a similar path. The company said it would stop disclosing data on the number iPhones, iPads and Macs it sells, eliminating a performance metric it has provided since the 1980s. (…)
While tech’s main cost is skyrocketing amid rising global scarcity:
Amazon.com Inc.’s decision to split its new headquarters exposes a secret known to many companies: It is tough to find top tech talent.
As The Wall Street Journal reported Monday, the e-commerce company has scuttled its original plan to pick a single location for a second headquarters, opting instead to build two hubs, according to a person familiar with the matter. The move stems from Amazon’s need for that talent—and lots of it—so increasing the number of locations will provide better access.
The competition for high-tech workers spans all of Corporate America. Today, companies from auto makers to insurers to health-care providers are duking it out with West Coast tech firms to attract and retain people with expertise in fields like software development, machine learning and big data. (…)
Hourly wages in the tech-heavy information sector rose more than 30% since the labor market began its postrecession expansion in 2010. That is the best gain among a dozen broad sectors tracked by the Labor Department, and well outpaces the 20% wage growth for all private-sector workers.
“There is a gold rush for certain kinds of tech talent, particularly in the areas of artificial intelligence and machine learning, which Amazon is quickly moving into,” said Erik Brynjolfsson, an economist and director of the MIT Initiative on the Digital Economy. He pointed to skyrocketing compensation for people with the right mix of technical skills. (…)
“We had been a magnet for tech talent for a long time,” Mr. Brynjolfsson said. “But with the way our immigration policy is headed, both in the laws and the posture, we’ve frighten away a lot.”
President Trump has backed reductions to legal immigration, arguing that foreigners provide unneeded competition for Americans.
TECHNICALS WATCH
Lowry’s Research yesterday p.m.: “The DJIA and S&P 500 extended last week”s rally today, finishing with gains of 0.76% and 0.56%, respectively. But, the market also continued the mediocre Demand that was behind last week”s price gains as today”s Up Volume was 72% of total NY Up/Down Volume while, at 3.6 billion shares, NY Comp. Volume was far below the 5 billion shares that was the average on last week”s three rally days.”
EARNINGS WATCH
With 381 companies having reported, the beat rate is 77% and the beat factor a strong +6.6%. Q3 earnings are now seen up 27.4% (24.0% ex-Energy), bettering Q1 and Q2, and nearly 6% better than the Oct. 1 estimate.
Trailing EPS are now $157.25 or $159.75 pro forma the tax reform for the full 12 months. Full year EPS are pushed up as a result. They were seen at $162.67 yesterday but in light of the strength in Q3, there is further upside to this number.
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