MANUFACTURING PMIs
June PMITM data from IHS Markit signalled the joint-fastest improvement in the health of the U.S. manufacturing sector on record. The upturn was supported by further marked expansions in output and new orders, but supply chain disruptions worsened and weighed on production capacity. Vendor performance deteriorated to the greatest extent on record. Input costs meanwhile showed the largest jump on record, feeding through to another record rise in factory selling prices.
Hopes of a sustained period of strong client demand strengthened output expectations, as the degree of confidence reached a seven-month high.
The seasonally adjusted IHS Markit U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) posted 62.1 in June, unchanged on May, but slipping slightly from the earlier released ‘flash’ estimate of 62.6. The marked improvement in operating conditions was the joint-strongest since data collection began in May 2007.
New orders growth remained substantial in June, despite the rate of expansion easing from May’s historic high. The pace of increase was the second-fastest on record, with firms continuing to note marked upturns in demand from both new and existing clients. Some companies also stated that the further relaxation of COVID-19 restrictions encouraged customers to expand their activity. New export orders meanwhile rose solidly in June, albeit at the softest pace for three months.
Output growth, however, was weighed down by ongoing and severe supply-chain disruptions, and reports of labour shortages. Although the rate of growth was among the sharpest since May 2007, firms noted difficulties processing new orders amid material delivery delays and challenges finding suitable candidates for current vacancies.
Suppliers’ delivery times lengthened to the greatest extent on record in June, as component shortages and transportation issues exacerbated supply-chain woes. Subsequently, vendors hiked their charges. Input costs rose at the fastest pace since data collection for the series began in May 2007, as greater global demand for inputs put pressure on material shortages.
Manufacturers were able to partially pass on higher costs to clients, however, as the rate of charge inflation matched May’s historic peak. Firms overwhelmingly linked the uptick in selling prices to greater cost burdens.
Raw material shortages and strong growth in new orders led to a sharp expansion in input buying at the end of the second quarter. Goods producers registered the second-fastest rise in purchasing since August 2014, which in turn drove a solid increase in preproduction inventories. At the same time, stocks of finished goods were utilised to fulfill new orders and fell at the steepest rate for just over a year.
Meanwhile, manufacturing firms indicated a solid rise in employment during June. The rate of job creation was the slowest for six months, however, as companies reported difficulties enticing workers back. Labour shortages exacerbated pressure on capacity, as backlogs of work rose at one of the steepest rates on record.
Finally, goods producers registered the strongest degree of optimism regarding the outlook for output for seven months. Confidence reportedly stemmed from hopes of a sustained period of strong client demand, and more consistent vendor performance going forward.
Growth of the eurozone manufacturing sector hit new heights during June, with the headline PMI® setting a fresh survey record for a fourth successive month. After accounting for seasonal factors, the PMI® improved to 63.4, up from 63.1 in May and firmer than the earlier flash reading. June marked a twelfth successive month that the index has posted above the 50.0 no-change mark that separates growth from contraction.
Once again, all three market groups registered noticeable improvements in operating conditions. In line with recent trends, it was investment goods producers that recorded the strongest growth, followed by intermediate goods which registered its best PMI reading in the survey history. Consumer goods continued to lag, though growth here was still the sharpest since June 2000.
The Netherlands continued to lead the way in terms of outright PMI numbers although, in line with several other nations, saw a slight fall in its headline index from May’s record reading. Austria was the second-best performing and set a respective PMI record high for the country in June.
Elsewhere, Germany saw a marginal strengthening of its PMI, whilst Spain and Greece – despite remaining the weakest-performing overall – saw growth rates hit multi-year highs.
Overall production growth in the eurozone’s manufacturing sector remained elevated during June, edging up slightly since May to a level close to the survey records registered earlier in the year. Output continued to increase at especially strong rates in both Germany and the Netherlands.
Strong growth in production was again closely linked to positive demand developments, with new orders experiencing their third-fastest ever reported increase during June. Growth remains broad-based, with new export orders again increasing sharply over the month.
Manufacturers struggled to meet higher sales in June, as evidenced by a near series record increase in backlogs of work. Moreover, supply-side constraints again placed some restrictions on production, as strong global demand continued to weigh heavily on suppliers. Average lead times deteriorated to the second-greatest degree in the survey history during June (surpassed only by May).
Highlighting the strength of demand for inputs, purchasing activity amongst eurozone manufacturers rose at an unprecedented rate during June, although firms still had to dip into their existing inventories with input stocks declining again. Manufacturers also chose to meet sales directly out of warehouse stock wherever possible to satisfy demand: latest data showed that inventories of finished goods deteriorated to the greatest degree since August 2009.
The combination of limited supply and strong demand for inputs underpinned another survey-record increase in input prices. With market demand for manufactured goods strong, firms were also able to raise their own charges to an unprecedented degree.
The combination of rising production and new order requirements, plus capacity pressures, encouraged firms to take on additional staff. Latest data showed overall employment rising at the strongest rate recorded by the survey to date. Austria and the Netherlands led the way in terms of employment growth.
Finally, confidence about future output edged higher in June reaching a level that was close to April’s survey record. Manufacturers remain optimistic that the continued reopening of economies as the negative effects of the pandemic recede will bolster output and sales in the next year.
The Chinese manufacturing sector expanded at a softer pace in June, with firms recording slower increases in both output and new orders. Companies indicated that the recent uptick in COVID-19 cases and supply chain difficulties weighed on output, while the pandemic dampened demand both at home and abroad. Companies continued to add to their staff numbers, however, as capacity pressures persisted. At the same time, input cost inflation eased notably on the month, which led to a slower rise in prices charged.
The headline seasonally adjusted Purchasing Managers’ Index™ (PMI™) edged down from 52.0 in May to 51.3 in June, to signal a further modest improvement in the health of the sector. The reading was the lowest recorded in three months, however.
The headline Index was partly dampened by a softer increase in production at the end of the second quarter. The latest upturn was the slowest recorded since March 2020 and only slight. Panellists stated that the pandemic and difficulties obtaining inputs had weighed on growth.
Total new business likewise expanded at a slower rate in June. The modest increase was the softest seen for three months. Firms often linked higher sales to an ongoing improvement in underlying market demand. However, there were reports that the recent uptick in COVID-19 cases at home and abroad had dampened overall growth. Notably, new export work was broadly stagnant in June.
In line with the trend for new work, June data signalled a slower increase in purchasing activity, which rose modestly overall. The time taken for items to be delivered to manufacturers continued to lengthen solidly, however. Firms frequently mentioned that a lack of stock at vendors and logistical delays related to the pandemic had hampered supplier performance.
On the employment front, goods producers added to their workforce numbers again in June. Though marginal, the rate of job creation was the second-strongest since January 2013, with a number of companies attributing the upturn to sustained increases in new work and efforts to expand capacity. At the same time, backlogs of work rose for the fourth month in a row, though the rate of accumulation was only slight.
Manufacturers reported an increase in stocks of purchased items for the first time in six months, albeit only marginal. At the same time, inventories of finished goods fell at a solid and accelerated rate as firms increased their usage of current stocks to fulfil new orders.
Inflationary pressures meanwhile eased in June. Though sharp, the rate of input price inflation softened to a seven-month low. Higher cost burdens were overwhelmingly linked to greater raw material prices. At the same time, prices charged by manufacturers rose at the slowest rate since February.
Business confidence towards the year-ahead outlook for output remained strong in June, amid expectations that global economy will continue to recover from the pandemic. That said, the degree of optimism was unchanged from May’s four-month low.
Businesses in the Japanese manufacturing sector signalled a further improvement in operating conditions at the end of the second quarter. That said, the rate of growth eased as expansions in both production and new order inflows slowed to the softest for five months in June as COVID-19 restrictions and supply chain pressures disrupted activity. Ongoing delivery delays placed strain on manufacturers, resulting in an intensification of input price pressures not exceeded since March 2011. Nonetheless, firms remained strongly optimistic that production would rise over the coming 12 months, with the level of positive sentiment the highest on record.
The headline au Jibun Bank Japan Manufacturing Purchasing Managers’ Index™ (PMI) dipped from 53.0 in May to 52.4 in June. This indicated a fifth consecutive monthly improvement in the health of the sector, though the pace of the expansion was the softest since February.
The lower reading of the headline index partly due to a softer rise in output. Production volumes increased at the softest rate in the current five-month sequence in June, and only marginally overall. Firms cited a favourable receipt of orders had boosted production, although growth was hampered by ongoing COVID-19 restrictions and notable raw material shortages.
Similarly, new orders expanded at a slower pace in the latest survey period. The pace of growth eased from May and was the softest since January. Higher sales were commonly linked to an increase in client demand, though supply chain delays had dampened overall growth. Moreover, new export sales increased at the softest pace since March, however the rate of increase remained moderate overall.
At the same time, employment levels continued to increase in June, and at a slightly faster pace than that seen in the previous month. As a result, the rate of job creation was the strongest since January 2020, as firms noted higher capacity requirements as demand continued to rise. In line with the trend in new orders, outstanding business rose further in June. The pace of expansion picked up from the previous au Jibun Bank Japan Manufacturing PMI survey period and was modest overall.
Japanese manufacturers indicated a rise in cost burdens for the thirteenth consecutive month at the end of the second quarter. Moreover, the rate of input price inflation accelerated from May and was the fastest registered since March 2011. Rising input costs were commonly attributed to higher raw material prices. Manufacturers also sought to partially pass through higher cost burdens to clients through prices charged in June, which increased at the fastest pace since March.
Buying activity rose for the fourth time in as many months in June. Growth eased from the previous month though remained solid overall. Manufacturers in Japan noted substantial difficulties in sourcing raw materials due to reports of significant shortages, which also contributed to the strongest deterioration in delivery times since April 2020. Firms opted to increase stocks of raw materials for a second successive month, though this was dampened by a lack of available materials. At the same time, manufacturers drew from existing holdings of finished goods to fulfil orders.
Looking ahead, business confidence regarding output over the year ahead strengthened to the highest since the series began in July 2012. Expectations were underpinned by hopes that an end to the pandemic would stimulate a demand and support a broad market recovery.
U.S. Pending Home Sales Rebound in May
Pending home sales rebounded in May, rising 8.0% m/m (+13.1% y/y) following a 4.4% decline in April. The May level of the index was the highest since January though buyers are still being constrained by rising prices and a near-record low supply of homes for sale.
Sales in the Northeast rose 15.5% m/m (+54.6% y/y) in May, their largest monthly increase since July 2020 and more than reversing their 12.9% m/m decline in April. Sales in the Midwest rose for the second consecutive month following five straight monthly declines. They were up 6.7% m/m (+7.8% y/y) in May on top of a 3.3% m/m rise in April. Sales in the South increased 4.9% m/m (+6.1%) in May, not quite reversing their 5.9% m/m decline in April. Sales in the West jumped 10.9% m/m (+12.5% y/y) in May, their largest monthly gain since August 2020, versus a 2.6% m/m decline in April.
For Many Jobs, Signing Bonuses of $1,000—and Up—Are the New Norm As companies grow more desperate to fill open roles, jobs for truck drivers, warehouse workers and hotel cleaners now come with perks
(…) Nearly 20% of all jobs posted on job search site ZipRecruiter in June offer a signing bonus, up from 2% of jobs advertised on the job search site in March. (…)
Cash signing bonuses are attractive to employers because they are a one-time cost and don’t require raising wages for the long term or paying out greater benefits indefinitely, such as more paid vacation time, said Brad Hershbein, senior economist at the W.E. Upjohn Institute for Employment Research. The bonuses appeal to potential employees, especially new college graduates and lower-wage workers, who may need the cash up front for expenses such as rent payments, he added.
“Businesses are jockeying for workers,” Mr. Hershbein said. “They are basically gambling they can hire workers for a one-time payment. They are going to try that first, and if it’s not enough, then they will have to do persistent wage increases.” (…)
Yesterday Goldman Sachs published a report addressing “The Inflation Risks from Stronger Low-End Wage Growth”
We recently highlighted three key inflation risks that we would take seriously if they emerged, namely, more aggressive increases in wage growth, shelter inflation, and inflation expectations than we have already assumed in our forecasts. These risks, rather than temporary reopening effects on prices, are the ones that would matter beyond this year and will ultimately be most relevant for monetary policy. (…)
But wages for lower-paid workers have risen more sharply, especially in recent months, amidst widespread reports of worker shortages. Our tool for decomposing labor income growth across the wage distribution shows that wages for lower-wage groups have grown 6% since the pandemic began, despite large remaining employment losses and in contrast to tepid wage pressures at the top.
(…) the latest signs of strength at the low end are striking. Production and non-supervisory wages in the leisure and hospitality sector are already up 8.25% this year, research from the Atlanta Fed shows that wage increases have been particularly strong for newly hired workers in low-wage services jobs, and a New York Fed survey reports that workers with usual earnings below $60,000 per year say they would need a wage 26% higher than they required before the pandemic to accept a job (Exhibit 1, right). (…)
Data on claimants in the regular state programs broken down by sector show that a disproportionate share of remaining benefit recipients previously worked in lower-wage sectors. (…) We expect renewed job search by this pool of workers in coming months to throw cold water on the hotter low-paid end of the labor market and dampen current wage pressures there. (…)
But what if the strong wage growth at the low end seen in the last few months persists for longer than we expect?
Academic studies of the impact of minimum wage hikes have found that sectors that use low-wage labor intensively pass roughly all of their labor costs—which are about 30-50% of total costs at restaurants and other businesses that disproportionately employ low-wage workers—on to prices.
These low-wage sectors are particularly interesting because, from a statistical perspective, they are the second clearest contributors to the Phillips curve after shelter (Exhibit 4), where we are already assuming a rapid acceleration. In that sense, price categories like food services are the canary in the coal mine of wage-push inflation and the key cyclical wild card in our inflation forecast.
The inflation impact of stronger low-end wage growth depends on how widespread it is. We use an estimate of the impact on food services inflation as a lower bound, and an estimate based on earnings of all workers in the bottom third from the Occupational Employment Statistics as an upper bound. Based on this approach, we estimate that 1pp of outperformance in low-end wage growth boosts core inflation by 5-15bp, a moderate effect that reflects the lower weight of low-paid workers in total costs.
What GS economists may be missing is the dynamic nature of the labor market. Yesterday, seeing that a restaurant was highlighting dishwasher wages up $2.00 to $15.00 per hour, my wife quickly wondered how long the cook would accept the announced $16.00 hourly rate? Even more so if he/she can get a signing bonus elsewhere…
Variant Perception tackles the other risk: shelter.
The market and media have focused on transitory components like motor fuel and transport commodities (ie used car prices), but owners’ equivalent rent (OER) and rent of primary residence are more critical for the direction of US inflation.
So far housing CPI has been muted, but it typically lags house price growth by about 18 months. Red-hot housing market data has not yet fed through into CPI as a result of measurement issues during Covid and rent controls. The CDC eviction moratorium is now due to end as landlords are asking for much higher rent. Persistent inflation risks are growing in the US.
Source: Bloomberg, Macrobond, Variant Perception
As to the third risk, inflation expectations remain very subdued looking at surveys and data from financial markets. However, consumer and business inflation expectations are rising rapidly. Which are the most important?
- US frictions make the Fed feel the heat Evidence of supply chain strains and capacity bottlenecks in the US economy continue to build. Amidst vigorous, stimulus fuelled demand the corporate sector is gaining clear pricing power, which could make inflation a more pressing issue for the Federal Reserve
(…) manufacturers know that their customer inventory levels are at all-time lows and this implies that companies have the sort of pricing power not experienced for many years. With costs rising across the board they know they can pass these on and there is little their customers can do given their desperate search for inventory.
Manufacturers have full order books, when their customers are desperate for inventory
Macrobond, ING
This is now spreading to the retail sector with inventories having fallen sharply for the third straight month (-1.4% in March, followed by a -1.6% in April and a -0.8% in May). The chart below shows retail trade inventories to sales and underscores the point about supply chain strains and bottlenecks leading to a lack of stock to sell.
Retail inventories to sales (months) show strains are spreading throughout the economy
Given the strong economic momentum and excellent consumer fundamentals we expect the vibrant demand environment to hold for several more quarters, but unless the re-opening frictions ease soon we are going to end up seeing more prolonged and significant price pressures. Such an environment could easily push more Federal Reserve officials in the direction of opting for a 2022 start point for the lift off in interest rates.
BUBBLE PUZZLE
Richard Bernstein (RBA) argues that “Portions of the current market are exhibiting all 5 characteristics” of a financial bubble.
(…) bubbles center on overvalued assets, but valuation alone does not imply a financial bubble. The difference between mere speculation and financial bubbles is speculation resides within the financial markets, but bubbles pervade society. Today, financial speculation is clearly pervading society.
- Characteristic #1: CHECK. The Fed has provided historic levels of liquidity in response to the pandemic, but liquidity has been trapped in the financial markets and fueled speculation.
- Characteristic #2: CHECK. Investors, especially individual investors, are using more leverage to invest.
A recent survey by MagnifyMoney showed 40% of individual investors overall, 80% of Gen Z investors, and 60% of Millennials had borrowed o invest in the stock market. Nearly half of those surveyed borrowed $5,000 or more. [In addition] Investors have gravitated to the embedded leverage within single stock options. [Since 2020] retail brokers placed more single stock options trades than the entire size of the options market two years ago.
- Characteristic #3: CHECK. The market is democratized. The spread of individual investor chatboards, expanded trading platforms, meme stocks, and the like all suggest the current speculative fervor includes everyone.
- Characteristic #4: CHECK. The most speculative of speculative IPOs has substantially increased.
- Characteristic #5: CHECK. Trading volumes are elevated relative to history. Trading volume tends to increase significantly during financial bubbles. Today’s speculative period is fitting that historical norm.
These five characteristics seem to indicate there is a bubble within the equity market, but that does not imply the entire equity market is at risk. Over the last three years, only three of the eleven S&P 500® economic sectors have outperformed the market, and those three sectors (Technology, Communication Services, and Consumer Discretionary) are at the center of the bubble. The remainder of the market has lagged, and the energy sector is actually down more than 15%. The Russell 2000 small cap index’s performance would rank about 8th or 9th in the table, so the broader market has indeed been left behind. (…)
Being on the correct side of that seesaw over the next several years might be more important than having a view on “the market” and the resulting overall equity
allocation.Our portfolios remain focused on the conservative side of the seesaw: Energy, Materials, Financials, Industrials, and smaller capitalization cyclicals. In addition, our non-US weight within our equity portfolios is the highest in RBA’s history because non-US markets have not participated in the bubble to the same degree and seem to present attractive opportunities. (…)
Delta Variant Hobbles Global Efforts to Lift Covid-19 Restrictions The fast-spreading coronavirus variant is proving an obstacle as countries try to revive economies battered by the pandemic, leading to fresh travel restrictions and delaying plans to lift lockdowns.
(…) Delta, which swept through India in May, is estimated to be at least twice as contagious as the original version of the virus. It is now present in 85 countries and is the most common variant in the U.S. Only in South America, where another highly contagious version of the virus is prevalent, does Delta not seem to be making inroads. (…)
In the U.K., where the variant accounts for 97% of recent cases, and other places with high rates of vaccination, concern is tempered by evidence that the shots are reducing hospitalizations and deaths. But in largely unvaccinated parts of the world, including some countries of Africa, hospitals are overwhelmed. In Indonesia, caseloads are at the highest level since the start of the pandemic.
Even where the number of cases is low, Delta is generating concerns, including in Japan, which is preparing to host the Summer Olympics in three weeks. A simulation by government researchers this week estimated that the share of the Delta variant among new cases in the greater Tokyo area was about 30% as of the end of June. Delta is expected to account for half of all Tokyo-area cases by mid-July.
In Australia, the Sydney metro area has been locked down for the first time in a year as the virus spread faster than the authorities could trace and isolate people at risk of injection. Early infections suggest it can spread via fleeting interactions, health officials say, which limits the effectiveness of contact tracing. Just 5.8% of the population has been fully vaccinated, according to Our World in Data.
In China, authorities are building huge quarantine facilities for international travelers in two southern cities to deal with the threat posed by the Delta variant, after relying on hotels up to now. (…)
Delta’s emergence in South Korea has delayed a relaxation of social-distancing measures in the area around Seoul after officials had laid out plans to ease the measures from Thursday, which would have allowed six instead of four people to gather privately and extended closing hours for restaurants and cafes until midnight. (…)
Israel has reimposed an indoor mask requirement, as the number of daily new Covid-19 cases has risen to an average of about 200 in the past week from about 10 a day in early June. As of Monday, children under 18, most of whom haven’t been vaccinated, accounted for more than half of those infected.
In Europe, German authorities are trying to slow the spread of the virus by limiting travel. Passengers arriving from so-called “variant territories”—including the U.K., Portugal, Russia and India among others—must quarantine for 14 days, whether or not they are vaccinated or have tested negative for an infection. (…)
French officials pushed back the lifting of some of the country’s last coronavirus restrictions in a part of the country’s southwest, where the variant has become dominant. (…)
New Covid-19 cases have doubled in hard-hit Mexico in the past month due to the spread of Delta. The variant is now responsible for more than two-thirds of samples tested in Mexico City, authorities said. Cases are still well below what they were early this year, but epidemiologists warn that Mexico could see a third wave of infections in coming weeks and months.
South America, however, has largely been spared infection from the Delta variant, for an unusual reason: It has been coping with its own highly infectious Gamma variant, which is believed to have emerged in the Amazonian city of Manaus.
(…) An analysis of genetic sequencing data as of June 27 showed that the Delta strain, also known as B.1.617.2, now makes up about 40% of positive Covid-19 test samples, according to Helix, a population genomics company that collects and analyzes test samples from several U.S. states. (…)
Helix’s data showed that the Delta strain is now more prevalent than Alpha, or B.117, which had been the most common strain in the U.S. since March. Helix said Alpha has dropped below 20% of positive test samples sequenced. Another variant, called Gamma, or P.1, appears to be plateauing, he said.
“People who are fully vaccinated are protected, including from the variants currently circulating in the country such as the Delta variant,” the CDC said Wednesday in a statement. Nearly 154.9 million people, or 46.7% of the total U.S. population, are fully vaccinated, according to the CDC. (…)
Xi Says China Is on ‘Historic Mission’ in Taiwan
President Xi Jinping struck a defiant tone in a speech marking the Communist Party’s 100-year anniversary, calling China’s quest to gain control of Taiwan a “historic mission” and warning the country’s adversaries to avoid standing in the way of his government.
In a nationwide address from above the portrait of Mao Zedong in Tiananmen Square, Xi hailed the party’s successes, saying China wanted to promote peace in the world and was open to “constructive criticism.” Yet he quickly warned that the country would no longer listen to “sanctimonious preaching” and that “the time when the Chinese nation could be bullied and abused by others was gone forever.”
Xi, 68, called the move to unify China and Taiwan an “unshakable commitment” and vowed “resolute action to utterly defeat any attempt toward ‘Taiwan independence.’” Although the language is similar to what Xi has said before, the comments recommit him to an assertive path as calls grow in the U.S., Japan and elsewhere to boost support the democratic government in Taipei.
“The Chinese people will never allow any foreign forces to bully, coerce and enslave us,” Xi, wearing a gray Mao-style suit, said to rousing applause before a crowd of some 70,000 party faithful, soldiers and foreign observers. “Whoever attempts to do that, will surely break their heads on the steel Great Wall built with the blood and flesh of 1.4 billion of Chinese people.” (…)
Negative views of China remain near record highs across the developed world, according to a Pew Research Center survey released hours earlier. In 14 of the 17 advanced economies polled, at least 70% said they had no confidence in Xi’s ability to do the right thing in world affairs. (…)
“We have never bullied the people of any other country and we never will,” Xi said. (…)
US and Japan conduct war games amid rising China-Taiwan tensions Secret table-top planning and joint exercises in South China Sea continue as concerns grow over Beijing stance
Russia’s Putin Challenges U.S. Leadership, Asserts Military Might The Russian president sought to portray the U.S. as a waning power during an annual event at which he answers questions from ordinary citizens.