Sunday morning, my laptop suddenly died on me. I will be working on a less effective backup and limited resources for about 2 weeks. 
U.S., China Consider Rolling Back Tariffs to Clinch Trade Deal Negotiators are discussing a framework that would remove some existing duties, according to people familiar with the talks, as they work toward an accord to end the trade dispute between the two countries.
(…) “If there’s a deal, [removing] tariffs will be part of it,” a senior administration official said late Monday. (…)
The “phase one” pact would include Chinese purchases of American farm goods, rules to deter currency manipulation and some provisions to protect intellectual property and open up Chinese industries to U.S. firms, officials have said. The phase one deal was widely expected to deter Mr. Trump from imposing brand-new tariffs on Dec. 15 as planned, but negotiators now are working on a framework that would also roll back some existing tariffs, the people said.
China’s foreign ministry sent positive signals about the trade talks on Tuesday, saying the two presidents are in contact and progress is being made on the negotiations.
The Financial Times earlier reported that Trump administration officials were considering cutting tariffs of 15% on about $111 billion in Chinese imports imposed Sept. 1. (…)
Eliminating some of the tariffs could widen the scope of the phase one deal to include more provisions overall. That would allow Mr. Trump to showcase a broader initial deal, since it isn’t clear when any future phases might be negotiated. Rolling back tariffs could also improve rapport if negotiators on both sides want to pursue a phase two and phase three.
Most major structural issues that affect U.S. businesses would likely be left to future negotiations. (…)
Reuters’ account adds nuances suggesting that this is not a done deal just yet:
(…) Another source briefed on the talks said Chinese negotiators want Washington to drop 15% tariffs on about $125 billion worth of Chinese goods that went into effect on Sept. 1. They are also seeking relief from earlier 25% tariffs on about $250 billion of imports from machinery and semiconductors to furniture. (…)
A person familiar with China’s negotiating position said it is continuing to press Washington to “remove all tariffs as soon as possible.” (…)
Taoran Notes, an influential WeChat account run by China’s Economic Daily, said the removal of the additional tariffs already imposed by the United States was China’s “most core concern”. (…)
“Any miscalculation on this issue could well cause further back and forth in the consultations,” it wrote. (…)
COMPOSITE PMIs
USA: Slowest rise in business activity since February 2016
U.S. service providers reported a further slowdown in business
activity growth in October, as new business stagnated and
export demand dropped further. The marginal expansion was the
weakest since early-2016 and resulted in the sharpest decrease
in workforce numbers since December 2009. Nonetheless, firms
noted a slightly more upbeat outlook for the year ahead.
Although input prices rose for the first time since July,
the increase was only marginal and output charges were
subsequently broadly unchanged.The seasonally adjusted final IHS Markit US Services Business
Activity Index registered 50.6 in October, dropping slightly from
50.9 in September and downwardly revised from the flash
figure of 51.0. The rate of increase in business activity was only
marginal overall and the slowest since the current expansion
began in February 2016. Growth was weighed on by lacklustre
client demand and greater hesitancy among customers to place
orders.Concurrently, the New Business Index posted below the 50.0
neutral mark for the first time since data collection began
a decade ago, signalling a marginal drop new order levels.
Companies stated that the postponement of orders placed by
clients and weaker demand underpinned the broad stagnation.
Meanwhile, new export orders fell for the third month running.
The rate of contraction eased slightly from September’s recent
record, but was still the second-fastest fall in the series’ history
(exports data have been collected as a stand-alone series since
September 2014).Subsequently, service providers registered a faster decline in
employment in October as voluntary leavers were not replaced
and firms struggled to fill outstanding vacancies. The rate of
contraction was solid overall and the sharpest for almost a
decade.
At the same time, backlogs of work fell for the third month
running as service providers noted that weaker client demand
allowed firms to process incoming new orders in a more timely
manner.On the price front, higher supplier and wage costs reportedly
drove up input prices at service sector firms in October. The
respective seasonally adjusted index posted above the 50.0
neutral mark for the first time since July to signal an increase in
cost burdens. That said, the rise was only marginal overall.
In response to the rise in cost pressures, service providers
kept selling prices broadly unchanged, following two monthly
decreases. Some firms noted that greater cost burdens were
partially passed on to clients.Finally, service providers were slightly more upbeat regarding
the output outlook for the year ahead in October. The degree
of confidence picked up to reach a four-month high. Anecdotal
evidence attributed stronger positive sentiment to the
development of new service lines and low interest rates. That
said, the level of optimism was well below the long-run series
trend.The IHS Markit Composite PMI Output Index* registered 50.9 in
October, down slightly from 51.0 in September and signalling
only a marginal rise in output across the private sector. The
slowest increase in service sector business activity since
February 2016 dampened overall growth, offsetting signs of
faster growth in manufacturing.
Private sector new business growth fell close to stagnation
during October, as broadly unchanged service sector client
demand outweighed faster new order growth at manufacturers. Meanwhile, export demand weakened as new business from
abroad fell for the third month running.Although private sector firms were a little more upbeat towards
the year ahead outlook for output, the surveyed companies
cut jobs at the sharpest rate since December 2009, despite a
fractional rise in manufacturing workforce numbers.Finally, firms signalled a renewed rise in average selling prices
for goods and services, with input prices rising at a historically
muted pace.
Chris Williamson,
Chief Business Economist at IHS Markit
Although October saw signs of manufacturing pulling
out of its recent soft patch, the far-larger service sector
remained in the doldrums as inflows of new work failed
to grow for the first time since 2009. Taken together, the
manufacturing and service sector surveys consequently
suggest that the US economy got off to a disappointing
start in the fourth quarter, consistent with GDP growing at
an annualized rate of less than 1.5%With inflows of new work drying up, firms are relying
on previously-placed orders to sustain current output
growth, meaning the rate of expansion could weaken
further in coming months if demand doesn’t revive. Hence
we’re seeing jobs being cut at an increased rate among
surveyed companies, with employment falling for a second
successive month and to a degree not seen since 2009.
Such a weakening of the survey’s employment index will
likely feed through to the official jobs numbers as we move
toward the end of the yearThe news was by no means all negative, however, with
firms becoming more optimistic about the year ahead,
buoyed by hopes of an easing of trade tensions and
stimulus from lower interest rates. However, the overall
degree of optimism remains sharply lower than this time
last year as companies remain concerned by ongoing
uncertainty about the outlook.
Hmmm…employment down for second consecutive month not good when the economy is holding by the consumer nails…
Here’s the ISM Non-Manufacturing this morning. Recall that the ISM is tilted towards larger companies and has been more optimistic in the past year:
The NMI® registered 54.7 percent, which is 2.1 percentage points above the September reading of 52.6 percent. This represents continued growth in the non-manufacturing sector, at a faster rate. The Non-Manufacturing Business Activity Index increased to 57 percent, 1.8 percentage points higher than the September reading of 55.2 percent, reflecting growth for the 123rd consecutive month. The New Orders Index registered 55.6 percent; 1.9 percentage points higher than the reading of 53.7 percent in September. The Employment Index increased 3.3 percentage points in October to 53.7 percent from the September reading of 50.4 percent. The Prices Index decreased 3.4 percentage points from the September reading of 60 percent to 56.6 percent, indicating that prices increased in October for the 29th consecutive month. According to the NMI®, 13 non-manufacturing industries reported growth. The non-manufacturing sector had an uptick in growth after reflecting a pullback in September. The respondents continue to be concerned about tariffs, labor resources and the geopolitical climate.
Schwab’s Liz Ann Sonders is also concerned by the large vs small companies trends (there is more from her later):
The BLS data for payrolls is biased up by larger companies. On the other hand, the data released by ADP is broken down by company size. Earlier last week, ADP’s October jobs report showed that companies with less than 20 employees have shed payrolls in five of the past six months. As noted by Bianco Research, this likely means that many of these smallest companies are simply shutting their doors. Conversely, none of the larger companies are showing a similar pullback in payrolls. This is important to keep an eye on since it’s been smaller companies that have been the primary driver of job creation since the 2007-2009 recession. This is also reflected in the Small Business Hiring Plans Index from the National Federation of Independent Business (NFIB); although the latest uptick may be a sign of a trough. (Schwab)
Small Business Hiring Plans Troughing?
Source: Charles Schwab, Bloomberg, Bureau of Labor Statistics, as of 10/31/2019.
China: Services and Composite PMI data
The Caixin China Composite PMI™ data (which covers both manufacturing and services) showed a further modest increase in overall business activity during October. At 52.0, the Composite Output Index edged up from 51.9 in September, to post its best reading since April. Data broken down by sector indicated that the stronger performance was driven by the manufacturing sector, as activity expanded at a slower pace at services companies. Furthermore, manufacturing output increased at the steepest pace since December 2016 in October. Meanwhile, service providers signalled only a marginal upturn in activity, with the seasonally adjusted Chinese Services Business Activity Index easing from 51.3 in September to 51.1 in October. This marked the slowest increase in services activity for eight months, with some firms citing relatively soft overall market conditions.
Manufacturers and services companies in China recorded a further increase in new work at the start of the fourth quarter. While the rate of new order growth at goods producers was the steepest seen since January 2013, the pace of expansion softened across the service sector. Notably, service providers saw a modest upturn in new business that was the least marked since February. Overall, the rate of composite new order growth was solid and unchanged from September’s 19-month high. October data pointed to a broad-based increase in new export work received by Chinese companies, with both manufacturers and services companies registering higher foreign demand. Though only marginal, it marked the first increase in new export orders for manufactured goods since May. Meanwhile, service providers recorded a stronger, but still modest, increase in new work from overseas. At the composite level, new export business rose modestly, to end a two-month sequence of decline. (…)
Outstanding orders continued to rise across both the manufacturing and services sectors in October. At manufacturing firms, backlogs of work expanded at the steepest rate since January 2018. Service providers meanwhile recorded an increase that, though only marginal, was the quickest seen since February 2017. As a result, unfinished workloads at the composite level accumulated at an accelerate pace that was the steepest recorded since March 2011.
Latest data showed that average input costs faced by Chinese firms continued to rise at the start of the fourth quarter. Services companies registered a solid increase in cost burdens, despite the rate of inflation softening since September. In contrast, manufacturers registered only a slight increase in input prices. Although operating expenses rose solidly, prices charged by service providers increased only marginally during October. Factory gate prices meanwhile fell slightly amid reports of competitive market pressures. At the composite level, output charges rose marginally for the second month in a row.
Overall, the level of positive sentiment regarding the one-year business outlook improved at Chinese firms during October. The upturn was led by stronger optimism at manufacturers, where confidence hit a six-month high. Sentiment meanwhile slipped at services companies to the softest since July 2018. Notably, expectations remained historical subdued across both monitored sectors.
Federal Reserve Survey Shows Demand for Business Loans Weakened in Third Quarter Banks attributed weaker loan demand to business investment decline
(…) Nearly a third of the senior bank loan officers surveyed by the Fed in October said demand for business loans was moderately weaker in the third quarter for large- and middle-market firms—those with annual sales of $50 million or more—while about 20% saw lower demand from smaller firms. Most respondents said lending standards for business loans were largely unchanged.
Among respondents who saw weaker demand, 63.6% said that lower business investment was a somewhat important factor, while 22.7% said it was very important.
By contrast, demand strengthened for most categories of consumer loans, including credit cards, auto loans and mortgages. Banks tightened their standards for credit card loans, and a significant share said they were less likely than a year ago to approve new credit-card loans for borrowers with a credit score of 620, citing a more uncertain economic outlook and a growing concern about borrowers’ ability to make payments on their loans. (…)
SENTIMENT WATCH
Public Pension Plans Continue to Shift Into U.S. Stocks As the bull market enters its 11th year, state and local pension plans are piling on risk as they try to make up shortfalls
Public plans had a median 47.3% of their assets in U.S. equities at the end of the third quarter, according to database Wilshire Trust Universe Comparison Service. That is more than they have had since 2007 and up from 44.1% a year earlier. (…)
Retirement systems that manage money for firefighters, police officers, teachers and other public workers are banking on market returns of 7% or more to help cover shortfalls. State and local pension plans have about $4.4 trillion in assets, according to the Federal Reserve, $4.2 trillion less than the value of promised future benefits. (…)
Many plans have also added new kinds of risk since the crisis. Alternative investments such as private equity made up a median 5.6% of public plan portfolios at the end of the third quarter, the most since Wilshire TUCS began collecting the data. Some plans have also shifted money out of more conservative investments such as bonds.
Total equity allocations, including international stocks, have risen as high as 59.4% in the past decade, according to the data, and stood at 57.4% of assets as of the end of the third quarter. (…)
CEOs vs. consumers
I wrote about that last week (TIME TO GET SCARED?) but Liz Ann Sonders adds some good meat to the discussion.
(…) there is presently a stark difference between CEO confidence and consumer confidence, as seen in the charts below. The first chart of CEO confidence shows the lowest reading since the Global Financial Crisis; and as you can see in the accompanying table, continued weak CEO confidence augurs poorly for corporate profits—which in turn feeds into capital spending and employment.
Source: Charles Schwab, FactSet, Copyright 2019 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/, The Conference Board. CEO Confidence of 9/30/2019.
One factor to consider though, as it relates to consumer confidence, is the widening difference between how consumers assess their “present situation” vs. their “future expectations.” The chart below shows the spread between the two. It widened out again with the October CCI release—consumers’ confidence about their present situation is rising, but confidence about the future is declining. We don’t yet know whether we are nearing a maximum negative spread; but as you can see in the chart, prior troughs have been recession warnings historically.
Consumers Much More Confident About “Today” Relative to “Tomorrow”
Source: Charles Schwab, Bloomberg, The Conference Board, as of 10/31/2019.
(…) although nonresidential business investment (capex) is less than 15% of U.S. GDP, it can be a significant factor in terms of economic weakness. The chart below shows the relationship between business investment and consumption during every negative GDP quarter in the post-WWII period. In nearly half of those occurrences, business investment declined enough that even with consumption remaining positive, the economy still contracted.
Business Investment vs. Personal Consumption in Negative GDP Quarters
Source: Charles Schwab, Bloomberg, Bureau of Economic Analysis, as of 9/30/2019. Negative quarters for real GDP only shown. All components represent annualized quarter/quarter percentage change.
EARNINGS WATCH
Actual earnings growth for the 360 companies having reported so far is +0.2% on revenue growth of +3.4%. The beat rate is 76%, the surprise factor +4.7% and the blended growth rate –0.6% (+1.7% ex-Energy), down from +0.3% on July 1
By comparison, after 355 reports during Q2, the beat rate was 74%, the surprise factor +6.1% and the blended growth rate +2.5%, up from +0.3% on July 1. Actual earnings growth for the 355 companies having reported was +5.9% on revenue growth of +3.6%.
Trailing EPS are now $163.63, still down from $163.69 at the same time in Q2 and 0.5% lower than the $164.43 and $164.31 at the end of August.and September respectively.
Q4 estimates are coming down to almost zero, weighed down by the consumer sensitive companies and Industrials:
At 3075. the Rule of 20 P/E is 21.2, highest since September 2018.
Collaborate or Isolate? The U.S. Tech World Is Watching China’s Advances in A.I.—Warily
A U.S. government commission on artificial intelligence said in a new report released Monday that the government needs to fund more artificial intelligence research and train an A.I.-ready workforce in the interests of national security. (…)
The National Security Commission on Artificial Intelligence (NSCAI), which is chaired by former Google chief executive Eric Schmidt and includes the CEOs of Amazon Web Services and Oracle, raised concerns about A.I. development in China, where the government invests more in A.I. than the U.S. and aims to make the country a world leader in the field by 2030. (…)
The NSCAI report said the U.S. and China should work together to set standards for responsible A.I. use. It also expressed concerns about Chinese access to American military and technological information, but acknowledged that American academics and industry professionals say visa and export controls targeting China and Chinese academics would harm the U.S. economy. (…)
“In terms of A.I. research, it’s all open and global. Everybody publishes their paper, a lot of source codes are public, a lot of research is publicly available,” Pascale Fung, director of the Centre for A.I. Research at the Hong Kong University of Science and Technology says, adding that U.S. visa restrictions on Chinese students and scientists have a much larger effect on research than trade embargoes.
“Science has no borders, that’s what we really believe in.” Fung says. (…)
Ray Yang of Marathon Venture Partners, a China-based venture capital firm that focuses on healthcare-sector applications of A.I., robotics, and big data has noticed a trend among tech-focused venture capital firms in China—they are starting to look to Europe instead of the U.S. for new investment opportunities, “surely because of the situation right now.”
