U.S. SERVICES PMI: Sharp upturn in business activity amid stronger client demand
January PMITM data signalled a sharper expansion in business activity across the U.S. service sector. Excluding November’s recent high, the latest upturn was the fastest since March 2015, amid a stronger rise in new business. Foreign client demand also picked up, as new export orders returned to growth. Despite a notable improvement in business confidence, the rate of job creation eased as pressure on capacity dwindled and concerns regarding the short-term outlook remained.
Meanwhile, cost burdens soared once again, with the rate of input price inflation the fastest since the survey began in 2009. Firms largely passed on higher costs to clients through a marked rise in charges.
The seasonally adjusted final IHS Markit US Services PMI Business Activity Index registered 58.3 in January, up from 54.8 in December and [much] higher than the earlier released ‘flash’ estimate of 57.5. The rate of growth was the second-sharpest in almost six years, with firms linking the upturn to stronger client demand and an increase in new business.
January data indicated a strong rise in new orders. Excluding November’s recent high, the pace of expansion was the fastest since February 2019 as sales growth regained momentum. The increase was often attributed to greater demand from new and existing clients.
At the same time, foreign customer demand picked up, as new business from abroad returned to expansion. Although only marginal, the rate of growth was the fastest for three months.
Service providers registered another marked increase in input prices at the start of 2021. The rise in cost burdens was the sharpest since data collection began, and the rate of increase has now accelerated for three successive months. Higher input prices were reportedly linked to greater fuel, transportation and supplier costs, especially for PPE.
In line with strong client demand and a spike in input prices, service providers recorded a steep increase in selling prices during January. The rate of charge inflation was the second-quickest on record, only slower than the peak seen in November 2020.
Despite a faster rise in new business, a number of firms reported sufficient capacity to process incoming new work in January. As a result, companies increased workforce numbers only marginally, and at the slowest pace since July 2020.
Reflecting less pressure on capacity, backlogs of work rose fractionally during January. The increase in outstanding business was the softest in the current seven-month sequence of expansion.
Finally, service providers signalled a stronger and robust degree of confidence in the outlook for output over the coming year in January. Optimism was the second-highest since May 2015, with firms linking positive sentiment to hopes of a successful vaccine roll-out and an end to the pandemic during 2021. Many companies also noted that they expect client demand to pick up further once restrictions are lifted.
The IHS Markit Composite PMI Output Index* posted 58.7 in January, up from 55.3 in December, to signal the quickest rise in private sector business activity since March 2015. Sharper rises in manufacturing and service sector activity supported overall growth.
New business growth also accelerated, largely driven by a robust increase in client demand at manufacturing firms. The rate of expansion in private sector new orders was the second-fastest since September 2018. At the same time, firms signalled a renewed rise in new export orders.
Deteriorating vendor performance and supplier prices hikes led to the steepest rise in cost burdens since data collection began in October 2009. As a result, private sector output charges increased significantly at the start of 2021.
Rising costs have fed through to higher prices charged for goods and services, which rose in January at a rate not seen since at least 2009. Inflation therefore looks likely to be pushed higher in the near-term. However, some of these price pressures reflect short -term supply constraints, which should ease in coming months as the recovery builds and more capacity comes online.
Business confidence improved in January, amid stronger output expectations at service providers. Manufacturers were slightly less upbeat, but still anticipate higher output in one year’s time.
Finally, a softer rise in employment at service providers offset a quicker increase in job creation at manufacturers, as pressure on service sector capacity waned.
The ISM from ING:
The January reading of the ISM services index confounded expectations of a dip to post a 23-month high of 58.7 (consensus 56.7). New orders rose to 61.8 from 58.6 while business activity held at a robust 59.9 where anything above 50 equates to expansion. The main negative was a 10 point drop in new export orders, but this index is not seasonally adjusted and could be related to the Chinese New Year as well as the effective lockdowns in Europe.
Meanwhile employment jumped to 55.2 from 48.7. With both the manufacturing and services ISM services reporting such strong employment jumps it bodes well for job creation in the months ahead. This follows on from the today’s ADP private payrolls number, which also came in above expectations posting a 174,000 gain versus a consensus forecast of a 70,000 rise.
(…) decent activity, rising prices, rising jobs and a vaccination program gaining momentum will increase doubts that the Fed will continue with QE on its current scale for another 12M and that it will be more than 3 years before the Fed hikes rates from zero.
The U.S.-Europe PMI split
Data: Investing.com; Chart: Michelle McGhee/Axios
Biden Signals Openness to Sending $1,400 Payments to Smaller Group President Biden indicated he was open to sending $1,400 payments to a smaller group of Americans in the next round of coronavirus relief legislation and changing the overall price tag of his $1.9 trillion plan, according to people familiar with the call.
(…) Mr. Biden also said he was flexible on the overall cost of the package, which Democrats have started advancing through Congress through a process that will allow them to pass it along party lines, according to the people familiar with the call. He said Democrats could make “compromises” on several programs in the proposal, one of the people said. (…)
In meetings with Democrats, Mr. Biden has said the GOP [$618B] plan is too small to deal with the effects of the pandemic. (…)
BTW: “If it’s $1.9 trillion, so be it,” Mr. Manchin said on MSNBC. “If it’s a little smaller than that and we find a targeted need, then that’s what we’re going to do.” (WSJ)
The Short March Back to Inflation Like today, policy makers of the 1960s had bigger worries than prices. Then a spike crushed the economy.
This is by Michael D. Bordo and Mickey D. Levy in the WSJ. Mr. Bordo is a distinguished professor of economics at Rutgers University and a visiting fellow at Stanford’s Hoover Institution. Mr. Levy is senior economist at Berenberg Capital Markets. Both are members of the Shadow Open Market Committee.
(…) Sounding the alarm about inflation is out of vogue. Skeptics point out that high deficit spending, zero interest rates and unprecedented quantitative easing didn’t spur inflation in the decade after the 2008-09 financial crisis. That experience has left a strong impression on makers of monetary and fiscal policy.
But the government response to the pandemic is dwarfing the actions that followed the financial crisis. Fiscal initiatives since last March have already authorized deficit spending equal to 17% of gross domestic product. Generous government transfers to individuals and businesses have supported household incomes and will stimulate aggregate demand for years to come. President Biden now proposes additional deficit spending equal to roughly 9% of GDP. These total deficit increases are magnitudes larger than President Obama’s American Recovery and Reinvestment Act of 2009. (…)
This is from the Committee for a Responsible Federal Budget:
(…) The output gap measures the difference between expected economic activity as measured by Gross Domestic Product (GDP) under current law and possible economic output if the economy were operating at full potential — with full employment of workers and capital — and the pandemic were not stifling its performance.
The Congressional Budget Office (CBO) projected on Monday that the nation’s output gap – the difference between actual economic activity and potential output in a normal economy – would be $380 billion for the rest of 2021. This gap will total roughly $300 billion in the last three quarters of 2021 and nearly $700 billion through 2023, the period over which most future relief would take place. Assuming CBO’s estimates are correct, President Biden’s $1.9 trillion American Rescue Plan would likely be enough to close the output gap two to three times over. This overshoot could be beneficial, but could also pose risks to the economy and the fiscal outlook
The theoretical effect of the American Rescue Plan on the economy depends on the economic multiplier associated with the new programs, but in almost any circumstance it would substantially overshoot the output gap as estimated by CBO. With a multiplier of 0.5x, for example, the plan would close 135 percent of the output gap.1 With a 1.5x multiplier, it would close the output gap 4 times over. (…)
The output gap could differ from CBO’s projections. Many forecasts and experts suggest the economy will grow faster this year than CBO estimates. A one percentage point increase in Gross Domestic Product (GDP) growth would reduce the output gap to less than $200 billion, in which case the American Rescue Plan would be large enough to close eight to ten times the output gap based on the Edelberg and Sheiner numbers. On the other hand, many have argued that CBO is underestimating full employment and potential GDP. If potential GDP were 1 percent larger than CBO’s estimate, the output gap would total $1.3 trillion through 2023 and the America Rescue Plan would close 115 to 145 percent of the output gap. (…)
While the economy can operate above its long-term potential for periods of time, it cannot do so indefinitely or sustainably. It is therefore important to understand what might happen if policymakers spend substantially more than what is necessary to close the output gap.
One possibility is that the excess funds are economically ineffective, adding to the debt without improving the economy. Thought of another way, overfilling the fiscal gap could substantially reduce economic multipliers.5 Based on estimates from CBO, adding nearly $2 trillion to the debt would shrink the size of the economy by about 0.3 percent ($100 billion) by the end of the decade while increasing annual debt service payments by roughly $40 billion in that year (and more in future years).6 These costs are probably a worthwhile consequence of addressing an economic crisis and restoring the economy to full employment but harder to justify for spending that has little or no economic impact.
A second possibility is that excess funds could lead to higher inflation, with producers responding to higher demand by increasing prices once it is no longer possible to easily increase production. In some ways, higher inflation could be helpful – it could erode outstanding household and business debt (including pandemic-related debt), lower real interest rates set by the Federal Reserve,7 and help the Fed to reset expectations toward its new flexible inflation targeting regime. On the other hand, higher inflation could also diminish the effectiveness of the fiscal stimulus, erode the value of savings (including the over $2 trillion of personal savings accumulated because of the pandemic), increase the cost of living for many households who could not easily afford it, or, in the worst case, lead to persistently high inflation and all the consequences that come with it.
A third possibility is that excessive stimulus could cause misallocations in the economy. Higher demand amidst a pandemic could lead to increased consumption and production of goods and services that are of less value in normal times. To the extent that firms and households make long-term investments in response to near-term demand, this could cause modest macroeconomic damage in the long term as well as diminishing welfare gains in the near term.
A fourth possibility is that excessive stimulus could temporarily boost economic activity far above its sustainable potential, leading to an economic cliff or crash as the stimulus fades. In their estimates, Edelberg and Sheiner explicitly assume what they describe as a “soft landing” for the economy; even in this scenario, there appears to be virtually no economic growth in 2022, which suggests unemployment would rise over that period.8 The authors warn of the possibility of a sharper and more painful contraction (a “hard landing”) when stimulus funds run out. (…)
While recent data suggest further fiscal support is needed, the package currently under discussion would likely be an overshoot.
Fathom Consulting says that “there is no sign of rising inflation in core prices across the developed world as yet. In fact, core inflation has fallen in most countries thanks to the steepest global recession of all time.”
Interesting, however, to see how U.S. and U.K. inflation have held up against steeply dropping core CPIs elsewhere. Fathom Consulting adds:
The expectation of higher inflation arises in part because of the vaccines, which mean that (in our central case anyway) demand will recover in full and probably go further than that, given the massive amount of policy stimulus, monetary and fiscal, that remains in place, and given the increase in household savings and corporate profits in aggregate that has occurred through the recession (yet another instance to add to the litany of unprecedented events over the course of the last year).
The vaccines mean that these savings and profits can be safely spent. The policy stimulus means the encouragement to spend is still there. The second half of 2021 should (vaccines permitting) see very strong growth indeed. And the economic impact is far less pronounced in the second wave than the first, even though the medical implications are as bad in some countries.
The experience of New Zealand, where the disease has for now been all but eradicated, is salutary: GDP has recovered extremely rapidly and is now above where it would have been had the pandemic not struck. Should the vaccines work effectively, something similar will be coming for the rest of us too.
And now this:
Data: FactSet; Chart: Axios Visuals
One-Third of U.S. Homeowners Are Equity-Rich Over Higher Values
By the end of last year, more than 30% of U.S. homeowners were considered equity-rich — meaning their property was worth twice as much as the underlying mortgage, a report showed.
Helped by low interest rates, the count of equity-rich properties in the fourth quarter of last year rose to 17.8 million of the 59 million mortgaged homes in the U.S., according to the ATTOM Data Solutions fourth-quarter 2020 U.S. Home Equity & Underwater Report released Thursday. That’s up from 26.7% in the fourth quarter of 2019. (…)
The rise in values is also helping to reduce the number of seriously underwater properties. These types of homes — defined as having a combined balance of loans secured by the property at least 25% more than its market value — have fallen by a full percentage point over the past year. They now account for 5.4% of mortgaged U.S. properties. (…)
EARNINGS WATCH
We now have 223 reports in, an 83% beat rate and a +18.5% surprise factor. Q4’20 earnings are now seen UP 0.9% YoY from -10.3% expected on Jan. 1. Ex-Energy earnings are seen UP 4.7%. Revenues are also expected UP 0.7% (vs -1.4%).
Q1’21 earnings are now expected to jump 20.5% (was +16.0%).
Trailing EPS are now $141.30. 2021e: $172.77. 2022e: $199.61.
Earnings Season Selling
Bespoke monitors every single earnings report (my emphasis).
Using our Earnings Explorer, we found that 417 companies had reported earnings since the current reporting period began on January 11th. As shown in the snapshot from the tool below, 84% of these companies beat bottom-line analyst EPS estimates, while 77% beat top-line sales estimates. In terms of guidance, 14% of companies have raised forward guidance while just 2% have lowered guidance.
What has been notable about this earnings season is the price action that stocks are seeing after they report their quarterly numbers. On average, stocks that have reported have gained 0.41% at their first open of trading after their earnings release. This means stocks are initially reacting positively to the earnings news. From the open to the close of trading after the initial gap higher, though, stocks that have reported have averaged a decline of 1.67%. Combining the opening gap and the open to close move, the average full one-day change for stocks reporting earnings stands at -1.28% this season. That’s a pretty bad number that’s indicative of a “sell the news” reaction.
COVID-19
U.S. Hits Pandemic Milestone With More Vaccinated Than Cases
The biggest vaccination campaign in history is underway. More than 108 million doses have been administered across 67 countries, according to data collected by Bloomberg. The latest rate was roughly 4.25 million doses a day. In the U.S., more Americans have now received at least one dose than have tested positive for the virus since the pandemic began. So far, 35 million doses have been given, according to a state-by-state tally. In the last week, an average of 1.34 million doses per day were administered. (…) At this rate, it will take 11 months to cover 75% of the population with a two-dose vaccine. [Immunizing 80% of the US population by late this year, will need vaccinations to rise to about 3mn doses a day.] (Bloomberg)
U.K. Has Passed Peak of Covid Surge, With 10 Million Vaccinated
Swiss medical regulator rejects Oxford/AstraZeneca Covid vaccine
I DON’T KNOW WHERE I WENT WRONG!
U.K. Revokes Chinese TV License Citing Communist Party Link
China Executes Former Head of Asset Management Firm in Bribery Case
(…) Lai asked for or collected 1.8 billion yuan ($260 million) over a decade, the court said. It said one bribe exceeded 600 million yuan ($93 million). He was also convicted of embezzling more than 25 million yuan ($4 million) and starting a second family while still married to his first wife. (…)
The most important decision is how you feel about risk. When people want my advice, I ask them what’s more important: keeping what you have safe, or making a lot more. Of course, they say «both». But you can’t do both, you have to choose. In American football, you have an offense team and a defense team, and they change places. But that’s not investing. Investing is more like European football, where every player has to play both offense and defense. You don’t get to change players very often. So you have to come up with a portfolio which embodies offense and defense in the right balance.
