Month: July 2019

Measure of household spending rose 0.4%, showing consumers remain steady pillar in economy

(…) Spending growth also was stronger in April than previously thought. The department lifted its estimate to 0.6% from an originally reported 0.3%.

Helping to fuel spending was strong income growth. Americans’ pretax earnings from wages, salaries and investments climbed 0.5% in May from April, matching the best monthly gain so far this year. (…)

The Fed’s preferred inflation measure, the price index for personal-consumption expenditures, is offering signs of positive momentum, though. The index rose 0.16% in May from April, the third straight month it has met or exceeded the monthly pace needed to hit the central bank’s 2% yearly target.

The broad PCE price index in was up 1.52% in May from a year earlier, while the so-called core measure, which excludes volatile food and energy prices, was up 1.6%. (…)

Forecasting firm Macroeconomic Advisers raised its forecast of second-quarter growth in gross domestic product to a 2.1% annual rate from 2% after Friday’s spending and income numbers were released. (…)

On June 17, posting on the May Retail Sales report, I wrote

Looking at retail sales on a quarterly basis, real growth was negative in Q4’18 and in Q1’19 and in April, before surging in May (which may be revised…). If we annualize April and May, real sales are up 2.6% but this follows –1.6% annualized in the previous 2 quarters. On a trailing 6-month basis, real sales have totally stalled since last October.

The FOMC has to deal with this erratic behavior and decide if this stalling is transitory, the month of May perhaps being a solid, though revisable, evidence of consumer strength, or if we are seeing a repeat of 2000 and 2007 when real sales stalled in the year before the recessions.

Last Friday we got the important Personal Income and Outlays report. It will make the FOMC err to the brighter side. Real expenditures have grown at a 5.3% annualized rate in the 3 months since March, a major turn from the –1.9% annualized rate in the previous 3 months. Notably, April was revised from zero to +0.24%. Also notable is the improvement in nominal disposable income growth from a weak 2.5% annualized rate in Q1 to +5.5% in April and May.

Americans tend to sync spending with income over time. This recent acceleration in disposable income bodes well for the summer months, especially if inflation is quiet.

The Fed will find some relief from the uptick in core inflation in April and May, back to the 2.0%+ annualized range after 3 months below 1.5%. On the other hand, it might also worry from the fact that most of the acceleration in core PCE inflation is from Services (+3.6% annualized in April-May) while Durable Goods remains in deflation (-3.0% annualized last 4 months). Higher inflation stemming from wage cost push is much less desirable than demand-pulled goods inflation.

But since Jay Powell wants higher wages, this report should be well received by the Fed:

• The consumer is not retrenching as the Retail Sales reports were suggesting.
• Disposable income growth is accelerating much faster than inflation.
• Wages and Salaries are up in the 3.5-4.0% range but do not seem to be running away just yet.
• Real spending on Goods has strengthened considerably in the last 3 months, up 13.0% annualized after down 7.8% annualized between December and February.
• Durable Goods are particularly strong: +25.8% annualized last 3 months vs –16.5% previous 3 months.

Higher spending on goods should feed manufacturing demand, something crucially lacking in the U.S. in recent months following the very poor retail sales number since last November. Hasn’t happened yet.

 

THE MANUFACTURING PMIs

USA: New orders return to growth in June 

June data signalled a further near-stagnation of operating conditions across the U.S manufacturing sector. The rate of overall growth held close to May’s near-decade low. On a positive note, the rate of output growth quickened slightly amid a renewed rise in new orders. However, in line with muted increases in output, firms reined in staff hiring, expanding workforce numbers at the slowest pace for almost three years. Subsequently, output expectations remained subdued.

On the price front, inflationary pressures remained muted despite slight accelerations in rates of output charge and input price inflation.

The seasonally adjusted IHS Markit final U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) posted 50.6 in June, broadly in line with 50.5 in May, to signal only a marginal
improvement in the health of the U.S manufacturing sector. The latest headline reading picked up from the recently released June ‘flash’ PMI figure (50.1), but was nonetheless the second-lowest figure since September 2009.

Supporting the headline number was a renewed rise in new business in June. The upturn was linked by panellists to the acquisition of new clients. That said, the rate of increase was only modest overall and among the slowest seen over the last three years. In contrast, the pace of growth in new business from abroad was the quickest in 2019 so far, following a slight fall in May.

Consequently, manufacturers registered a faster rise in production in June. Nevertheless, the rate of expansion was only moderate and the second-slowest since June 2016 (behind May’s recent low), as firms continued to report difficult demand conditions.

Uncertainty surrounding future output growth weighed on hiring decisions among goods producers, with the rate of job creation softening to the least marked since August 2016. Expectations of production growth over the coming year remained solemn and among the weakest in the survey history in June. Manufacturing firms often raised concerns surrounding tariffs and the softer trend in new orders.

Meanwhile, cost burdens faced by manufacturers continued to rise at a historically muted rate in June. Higher input prices were attributed to the ongoing effects of tariffs on raw material purchases. However, some firms stated that hikes in costs were less marked compared to earlier in the year.

Subsequently, output charges increased at only a modest rate. Some firms partly passed on costs to clients, whereas others highlighted the importance of discounting efforts in order to attract and retain clients.

In line with muted demand conditions, firms continued to deplete their stocks. Notably, pre-production inventories fell at the quickest rate since the start of 2014 as input buying rose only fractionally.

Chris Williamson, Chief Business Economist at IHS Markit:

US manufacturers reported business conditions to have remained the toughest for nearly a decade in June. The past two months have seen the lowest readings since the height of the global financial crisis in 2009.

The survey provides accurate advance indicators of comparable official data, and paints a worrying picture of marked declines in both output and jobs. The June survey sub-index readings are consistent with manufacturing output contracting at a quarterly rate of 0.7% and factory payrolls falling by 18,000.

A major development in recent months has been the deteriorating performance of larger companies, where the last two months have seen the lowest PMI readings for a decade. After inventories rose sharply earlier in the year, large companies have moved to destocking in May and June amid a sharp slowing in new order inflows.

Although business optimism about the future lifted slightly higher, it remained close to survey lows to indicate persistent low morale. Worries centred on signs of slowing demand both at home and internationally, weaker sales, and geopolitical uncertainty.

Tariffs meanwhile continued to push up prices, but weak demand often limited the ability of firms to pass higher prices onto customers, suggesting overall inflationary pressures have weakened compared to earlier in the year.

China: Modest fall in new work drags production into contraction in June

June data highlighted a challenging month for Chinese manufacturers, with trade tensions reportedly causing renewed declines in total sales, export orders and production. Companies responded by reducing headcounts further and making fewer purchases of raw materials and semi-finished items. At the same time, selling prices were raised following another increase in input costs, though rates of inflation were negligible. Business sentiment was broadly neutral at the end of the second quarter, with firms mainly concerned about the US-China trade dispute.

Falling from 50.2 in May to 49.4 in June, the headline seasonally adjusted Purchasing Managers’ Index™ (PMI™) was below the critical 50.0 threshold for the first time in four months. The latest figure was, however, indicative of only a marginal deterioration in operating conditions.

Amid reports of trade tensions, total new business and international sales declined at the end of the second quarter. The former contracted for the second time in 2019 so far, albeit moderately. Concurrently, the fall in exports followed from a renewed increase in May.

The subindex for new orders slid into contractionary territory, pointing to notably shrinking domestic demand. The gauge for new export orders returned to contractionary territory, but was better than the levels seen from last April to last December. Front-loading by exporters was likely to support this gauge as the China-U.S. trade relationship was under great uncertainty.

Goods producers lowered output in June, thereby ending a four-month sequence of expansion. That said, the pace of contraction was only slight. Sub-sector data indicated that consumer goods bucked the trend and was the only category to record production growth in June.

As has been the case since April, Chinese manufacturers shed jobs during June. The pace of contraction was broadly similar to those seen in the remainder of the second quarter. Anecdotal evidence suggested that voluntary leavers had not been replaced.

Ongoing job shedding added pressure on the capacity of manufacturers’ operations, with outstanding business up again in June. The rate of backlog accumulation was slight, however, and broadly similar to those seen earlier in the second quarter.

Amid reports of a lack of new work and lower production needs, quantities of purchases decreased in June. The fall reversed the upturn noted in the prior survey period, but was only slight.

Despite reaching a seven-month high in June, the rate of input cost inflation remained mild in the context of historical survey data. Similarly, there was a slight rise in factory gate charges, following no change in May. (…)

Overall sentiment towards the 12-month outlook for production among Chinese manufacturers was broadly neutral in June. Some companies expected the launch of new products and expansion plans to boost output in the year ahead, while others were concerned about the US-China trade tensions.

Japan: Softer manufacturing conditions continue in June

June data indicated that overall business conditions deteriorated for the second month running in the Japanese manufacturing sector. Survey respondents noted that US-China trade frictions and subdued global automotive sector trends had contributed to weaker manufacturing performance.

Subdued export demand resulted in the sharpest drop in new work from abroad since January. An associated decline in pressure on business capacity led to more cautious staff hiring in June, with employment growth easing to its weakest for just over two-and-a-half years.

The headline Jibun Bank Japan Manufacturing Purchasing Managers’ Index™ (PMI)® registered 49.3 in June, down from 49.8 in May and below the crucial 50.0 no-change threshold for the second consecutive month. The latest reading signalled a marginal deterioration in manufacturing sector business conditions and was the lowest since March.

(…)  Latest data indicated the sharpest fall in output since March. Moreover, production volumes have now fallen for six months in a row, which is the longest period of decline since 2012-13. Goods producers in Japan signalled a modest drop in new orders during June, which survey respondents often linked to weaker overseas demand conditions. Reflecting this, export sales decreased for the seventh successive month and at one of the fastest rates since mid-2016. Manufacturers widely reported that lower sales to clients in China had acted as a brake on new export orders.

Softer demand led to a lack of pressure on business capacity in June, which was highlighted by a sharp and accelerated reduction in backlogs of work across the manufacturing sector. The latest fall in unfinished work was the largest since January 2013. (… )

Input buying fell at the steepest pace for four months in June. Goods producers noted that weaker demand and efforts to streamline inventories had dampened their purchasing activity. The latest decline in pre-production inventories was the greatest since January. In contrast, stocks of finished goods were accumulated for the first time in four months, which survey respondents linked to lower-than-expected sales.

Weaker demand for manufacturing inputs across both domestic and international markets resulted in slower cost inflation in June. The overall rate of input price inflation was the least marked for two-and-a-half years.

However, operating margins remained under pressure, as signalled by a reduction in average prices charged by manufacturers for the first time since December 2016.

Eurozone manufacturing sector remains in contraction during June

Manufacturing operating conditions in the euro area deteriorated for a fifth successive month during June. After accounting for seasonal factors, the IHS Markit Eurozone Manufacturing PMI® remained below the crucial 50.0 no-change mark, falling to a three-month low of 47.6, from 47.7 in May. Moreover, the PMI was slightly weaker than the earlier flash reading of 47.8. (…)

Operating conditions for consumer goods companies improved to the greatest degree since January. In contrast, intermediate and investment goods producers recorded marked contractions. For intermediate goods, the deterioration was the sharpest recorded since April 2013.

Operating conditions were generally weak across the single currency area, according to the latest country data. Germany remained the weakest-performing nation, despite its respective PMI improving to a four-month high. Austria, Spain, Ireland and Italy all recorded PMI readings below the 50.0 no-change mark, whilst growth in the Netherlands was only marginal. France bucked the overall trend somewhat, registering its highest PMI for nine months, though growth here was only modest. (…)

June marked the ninth month in succession that a fall in new work has been registered, although the latest reduction was the weakest since January. Export orders meanwhile also fell at a marked pace and maintained the sequence of contraction that began last October.

Another fall in overall new work continued to weigh on production volumes, which were down modestly in June and for a fifth successive month. Firms again made notable inroads into their backlogs, which were cut for a tenth month in a row. Companies also added to their inventories of finished goods (albeit marginally) for the first time since March.

Ongoing weakness in output and new order trends weighed on employment and purchasing decisions in June. Job cuts were registered for a second month in succession, with Germany, Italy and Spain all registering reductions in employment. On the purchasing front, buying activity continued to fall, in line with the trend seen since last December. Signalling a preference to utilise existing inventory wherever possible, firms cut purchasing activity to the greatest degree since April 2013.

With demand for inputs waning, average delivery times improved at the strongest rate in a decade. June marked the fourth successive month that a shortening of lead times has been registered and this helped contribute to a first fall in input prices for three years. Metals prices were reported to be lower, whilst a reduction in the cost of crude oil and its derivatives also contributed to lower overall prices.

Nonetheless, manufacturers continued to raise their own charges, though competitive pressures meant inflation was marginal and the weakest in the current 33-month sequence of rising charges.

Finally, business confidence remained historically subdued despite improving slightly to a four-month high in June. Austrian and German manufacturers were the least confident of an improvement in output from present levels in the next 12 months.

The disappointing survey rounds off a second quarter in which the average PMI reading was the lowest since the opening months of 2013, consistent with the official measure of output falling at a quarterly rate of approximately 0.7% and acting as a major drag on GDP. (…)

The survey’s forward-looking indicators remained worryingly subdued in June, adding to concerns about the economy in the second half of the year.

“BACK ON TRACK” …TO NOWHERE?

They agreed to keep talking without any specifics or deadline. China gained time, some Huawei relief. Trump lost time but intends to submit a shopping list to China. The closer this gets to November 2020, the less leverage Trump will have.

The world keeps losing as companies understand they must protect themselves against politics and quickly undo their efficient supply chains and diversify suppliers even if it means higher operating costs.

Nearly half of CEOs say profitability will remain the same or worsen over the next year. Just 54% expected increased profits in the year ahead, down from last year’s 62%. (Vistage CEO survey)

Trump Allows U.S. Sales to Huawei as Trade Talks Resume President Trump and his Chinese counterpart agreed to a cease-fire in their trade battle, as Mr. Trump said he would allow American firms to sell high-tech equipment to Huawei and China would start buying U.S. farm products.

Under the cease-fire, the U.S. agreed to put off additional tariffs on Chinese goods indefinitely. In response, China will start buying large amounts of American farm products, Mr. Trump said. (…)

“We’re going to work with China on where we left off to see if we can make a deal,” he said at a news conference. “I’m not rushed,” he said, calling the talks “intricate.”

Mr. Trump said he was leaving the Huawei issue until the end of negotiations, but for now, the Chinese telecommunications giant looks to gain a significant reprieve. (…) The National Security Council has been examining ways of narrowing the restrictions on Huawei so they focus on sales of U.S. technology used in “chokepoints,” where Huawei technology could control wireless networks, people familiar with the discussions said.

(…) Mr. Trump adopted a benign description of U.S.-China relations that echoed Mr. Xi, saying the countries are “strategic partners.” (…)

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  U.S., China Face Hurdles in Renewed Negotiations With factions in both countries opposing concessions, Huawei emerges as key battleground

(…) Simply relaunching the talks, which had been on hold since hitting an impasse two months ago, took a lot of negotiating. In return for getting China back to the bargaining table, Mr. Trump agreed to hold off on new tariffs on $300 billion in Chinese imports, and China agreed to buy more U.S. farm goods.

But a U.S. concession on Chinese telecommunications giant Huawei Technologies Co.emerged as a key bargaining chip, one that illustrates the difficult decisions ahead. (…)

In their accounts of the weekend, Chinese state media didn’t mention the Huawei concession or the farm purchases, usually a sign that the government wants to manage potential domestic fallout. For some critics, the deal hardly counted as a win. (…)

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  A China-U.S. Trade Truce Could Enshrine a Global Economic Shift

• E.U. Signs Trade Deal With Vietnam The deal underscores the European Union’s commitment to free trade in the face of rising trade tensions and protectionism around the world.

• Trump Punches Huawei and Global Tech Firms Get a Bloody Nose With a global procurement budget of $70 billion, Huawei is key to a network of interconnected suppliers across the world.

• Apple Picks China for Production of New Mac Pro Apple is shifting abroad production of what had been its only major device assembled in the U.S., even as trade tensions escalate between the U.S. and China.

(…) Mr. Trump (…) said during the 2016 campaign, “We’re going to get Apple to start building their damn computers and things in this country, instead of in other countries.” (…) After saying it would build the Mac Pro in the United States, Apple encountered a range of problems in trying to do so at the Texas plant. Among other issues, Apple struggled to find companies that could produce some of the parts needed for the computers. (…)

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  In January 2019, the NYT revealed A Tiny Screw Shows Why iPhones Won’t Be ‘Assembled in U.S.A.’

(…) But when Apple began making the $3,000 computer in Austin, Tex., it struggled to find enough screws, according to three people who worked on the project and spoke on the condition of anonymity because of confidentiality agreements.

In China, Apple relied on factories that can produce vast quantities of custom screws on short notice. In Texas, where they say everything is bigger, it turned out the screw suppliers were not.

Tests of new versions of the computer were hamstrung because a 20-employee machine shop that Apple’s manufacturing contractor was relying on could produce at most 1,000 screws a day.

The screw shortage was one of several problems that postponed sales of the computer for months, the people who worked on the project said. (…) Apple has found that no country — and certainly not the United States — can match China’s combination of scale, skills, infrastructure and cost. (…)

“The skill here is just incredible,” Mr. Cook said at a conference in China in late 2017. Making Apple products requires state-of-the-art machines and lots of people who know how to run them, he said.

“In the U.S., you could have a meeting of tooling engineers and I’m not sure we could fill the room,” he said. “In China, you could fill multiple football fields.” (…)

The minimum wage in Zhengzhou, China, home of the world’s biggest iPhone factory, is roughly $2.10 an hour, including benefits. Apple said the starting pay for workers assembling its products there was about $3.15 an hour. (…)

Another frustration with manufacturing in Texas: American workers won’t work around the clock. Chinese factories have shifts working at all hours, if necessary, and workers are sometimes even roused from their sleep to meet production goals. That was not an option in Texas. (…)

• Walmart to invest $1.2 billion in China over the next 10 years to upgrade logistics

Walmart plans to invest 8 billion yuan ($1.2 billion) in China over the next 10 years to upgrade logistics, the U.S. retail giant said in a statement on its verified social media account Monday.

Japan Curbs Exports to South Korea, Hitting Global Chip Makers Japan tightened controls on exports to South Korea, hitting the supply chain for Korean-made technology products and heightening tensions between the two U.S. allies.

By restricting access to Japanese materials, Tokyo’s crackdown could make it harder for South Korean companies like Samsung Electronics Co. to make semiconductors and other components that get packed into electronics such as smartphones used around the world. The move follows frequent clashes between the governments of Prime Minister Shinzo Abe and President Moon Jae-in over World War II history.

Mr. Abe took a page from President Trump’s playbook by hitting a perceived rival nation not just with political or diplomatic actions but also with economic punishment against the rival’s core industry. (…)

Some analysts said Japan might be shooting itself in the foot because its companies would lose business in South Korea. Also, any disruption in the supply chain could boomerang back on Japanese companies that use Korean semiconductors or displays in their products.

“The sanction does no good for Japanese companies because the Japanese and South Korean manufacturing sectors are so tied to each other. The only winner from this would be China,” said Atsushi Osanai, a professor at Waseda Business School in Tokyo. (…)

Expect more action from that Trump playbook. The new WTO moto: “In nobody we shall trust”.

Apartment Demand Hits Five-Year High Demand for rental apartments reached a five-year high this spring, spurred by new household formation and lagging home sales.

The number of new apartment move-ins in the second quarter of 2019 increased 11% over the same period last year, according to a national report scheduled to be released Monday by real-estate analytics firm RealPage . The demand surge drove the national occupancy rate to 95.8%, compared with 95.4% at the end of the second quarter of 2018, the report said. (…)

Monthly rental prices nationwide shot up 3% from the second quarter of 2018 to the same period this year. Many small metros saw bigger increases. Rents rose 7.4% in Wilmington, N.C., and 6.4% in Huntsville, Ala., according to the report. (…)

EARNINGS WATCH

Well, the Q2 earnings season has already started with 20 companies with May quarter ends having reported, 12 of which are in consumer sectors and 6 in Tech.. The beat rate is 85% and the surprise factor is +6.3%, even though their actual earnings were down 11.2% on a 2.8% revenue growth.

There have been a total of 4,732 estimate revisions in June and 61% were down, including 64% of the 1,992 S&P 500 revisions.

TECHNICALS WATCH

“Lowry Analysis focuses on the forces of Supply and Demand underlying the market’s price action. At present, these forces currently provide little indication of a market in the process of forming a major top. (…) Measures of market breadth also provide little indication of an approaching major market top.” But Lowry’s still watches small caps…

If you have not read the U.S. PMI report above, you missed this:

A major development in recent months has been the deteriorating performance of larger companies, where the last two months have seen the lowest PMI readings for a decade. After inventories rose sharply earlier in the year, large companies have moved to destocking in May and June amid a sharp slowing in new order inflows.

Hmmm…

13/34–Week EMA Trend Chart (CMG Wealth)

Fed Clears Big Banks to Boost Payouts to Investors

All 18 banks reviewed passed round two of the Federal Reserve’s stress tests, an annual exercise designed to gauge banks’ ability to withstand a recession. It was only the second time since the Fed began administering the exams that no bank failed.

A few banks in regulatory hot water were cleared, opening the door for a wave of dividends and stock buybacks that could boost bank stocks left behind in the market rally. This year’s scenario was among the toughest yet, but a recent Fed overhaul of the test made it easier for banks to pass.

Banks have gotten better at taking the test, now in its ninth year, amassing enough capital and know-how to maximize shareholder payouts without failing, Fed officials said. The 18 banks, a group that includes giant U.S. lenders JPMorgan Chase & Co. and Bank of AmericaCorp. , are expected, in aggregate, to increase their payouts to more than 100% of expected earnings. (…)

Goldman Sachs:

2019 CCAR results came in above market and our expectations, with total capital returns in aggregate increasing 17%, and median dividends increasing 14% for the CCAR banks. Nine of the 11 banks exceeded 100% payouts and payout ratios grew 22pp to 125%. The positive surprise was skewed towards buybacks, which underscores the fact that management teams continue to see good value in equity despite the market’s concerns around the path for negative interest rate revisions. In our view, the biggest relative winners vs. Visible Alpha consensus expectations into the test are JPM, BAC and all three trust banks.

RBC:

Overall a very impressive showing for U.S. banks: We expected U.S. banks to announce robust
capital plans following the strength of DFAST results last week. As evidenced by the enormous capital plans announced by JPM, BAC, C, and WFC (which amount to a combined total of over $130 billion), the industry is extremely well capitalized. Given recent negativity around the current interest rate environment, we view Thursday’s news as a helpful confirmation of the health of the banking industry.