China Manufacturing PMI: Operating conditions stabilise in September
Latest PMI data indicated that business conditions across China’s manufacturing sector stabilised in September, after a slight deterioration in August. The improved headline index reading was supported by a renewed upturn in total sales and a softer reduction in output. At the same time, purchasing activity also returned to growth, while confidence towards the year ahead also strengthened. Supply chain delays persisted, however, amid sustained reports of material shortages. This in turn drove sharper increases in both input costs and output prices.
The headline seasonally adjusted Purchasing Managers’ Index™ (PMI™) rose from 49.2 in August to 50.0 in September. This indicated that business conditions stabilised at the end of the third quarter, after a slight deterioration in the previous month. Nonetheless, the latest reading was the second-lowest seen for the past 17 months.
The higher headline index figure was partly driven by a renewed upturn in overall sales during September. Though only slight, it was the first time new work had increased for three months. Underlying data suggested this was largely driven by firmer domestic demand, as export sales continued to decline. A number of companies commented on improved customer numbers.
Although production fell for the second month in a row in September, the rate of decline eased to only a marginal pace. Firms indicated that relatively subdued demand and material shortages had weighed on production.
Domestic demand varied based on different types of goods. The demand for intermediate goods and investment goods was relatively high, while the demand for consumer goods was weak, reflecting consumers’ lack of purchasing power.
Efforts to improve efficiency contributed to a slight drop in employment in September. Rising workloads placed further pressure on capacity, however, as highlighted by a solid rise in backlogs of work. Notably, the rate of accumulation was the quickest since March 2020, with firms mentioning that material shortages and shipping delays had limited their ability to process and complete orders.
Manufacturers indicated a further lengthening of delivery times for inputs during September. The rate at which lead times increased was only modest, however. The deterioration in vendor performance was often linked to limited stock availability, transportation delays due to the pandemic and stretched capacity at suppliers.
In line with the trend for new work, buying activity returned to growth in September. Meanwhile, firms maintained a relatively cautious approach to their inventories of inputs, which declined marginally. In contrast, stocks of finished goods rose slightly, which was partly driven by difficulties shipping items to clients due to pandemic-related disruption.
Inflationary pressures picked up in September, with average input costs rising sharply overall. Moreover, the rate of inflation was the quickest seen for four months, amid reports of greater energy and raw material costs. This in turn led to a solid increase in prices charged.
Companies generally anticipate output to increase over the next year, with the level of positive sentiment improving to its highest since June. Optimism was underpinned by forecasts of an end to the pandemic, planned company expansions, rising customer demand and new product launches.
Next is China’s official PMI, more focused on larger enterprises:
- China’s Manufacturing Weakens, as Power Cuts Threaten More Damage The contraction ended an 18-month expansion that powered the country’s recovery from the pandemic.
China’s manufacturing purchasing managers index fell to 49.6 in September, the National Bureau of Statistics in Beijing said Thursday. That marks the gauge’s first drop below the 50 mark that separates an expansion of activity from contraction since February 2020, when the metropolis of Wuhan and surrounding Hubei province were shut down to contain the fast-spreading virus. (…)
Zhao Qinghe, an economist with China’s statistics bureau, said Thursday that the official PMI’s decline below the 50 threshold in September was mainly because of weak sentiment among companies in high energy-consuming industries, such as the oil, coal, rubber and plastic industries. (…)
Below the headline PMI figure, subindexes measuring production, total new orders, new export orders and hiring all slid further below the 50 line in September as both supply and demand in China’s manufacturing sector slowed, the statistics bureau said.
It seems to be more than weak sentiment:
-
Blackouts Hit Chinese Cities and Factories as China Reduces Coal Consumption Several cities across China have experienced power cuts in recent days amid a coal shortage and a push to meet strict emissions targets. The outages have slowed down factories, prompting supply chain concerns ahead of Christmas.
Both total new orders and export orders are falling as Bloomberg shows:
Bloomberg also notes, in reference to the top line above:
Real-estate investment could fall by 2% to 3% year-on-year in the second half of the year, according to a baseline estimate by UBS Group AG. In the worst-case scenario, property investment could plunge by 10%, dragging down China’s economic growth by 1 to 2 percentage points in the next few months, according to UBS economists led by Wang Tao.
- Evergrande misses second offshore bond payment China Evergrande Group (3333.HK) missed paying bond interest due on Wednesday, two bondholders said, its second unpaid offshore debt obligation in a week, although the cash-strapped company on Thursday made a partial payment to some of its onshore investors.
- Evergrande Pays Back Some Cash Owed to Wealth Product Investors
The distressed developer paid the first 10% installment of wealth management products due September on Thursday, in line with a repayment plan announced earlier, according to a statement on its website. Payments have been deposited into investors’ accounts, it said.
The cash installment plan is one of three repayment options offered by Evergrande earlier this month to assuage angry buyers of the high-yield products. The other choices are for investors to receive heavily discounted properties or offset payables remaining on residential units they have already purchased, Bloomberg reported earlier.
For the cash option, investors can choose to get back 10% of their principal and interest every quarter, with full repayment in two-and-a-half years.
Powell Says Supply-Chain Bottlenecks Could Lead to Somewhat Longer Interval of High Inflation Central-bank chairman says he expects prices to come down on their own
Federal Reserve Chairman Jerome Powell said that a recent spell of higher inflation might last longer than central bank officials had anticipated, but he repeated his expectation that the price surge should eventually fade during a panel discussion on Wednesday. (…)
“The current inflation spike is really a consequence of supply constraints meeting very strong demand. And that is all associated with the reopening of the economy, which is a process that will have a beginning, middle and an end,” Mr. Powell said during a moderated discussion hosted by the European Central Bank. “It’s very difficult to say how big the effects will be in the meantime or how long they last.”
Mr. Powell said the Fed sees a current surge in prices due primarily to supply-chain bottlenecks continuing into next year before fading. He said the Fed doesn’t expect the current inflation spike to “lead to a new inflation regime, in which inflation remains high year after year.” (…)
“Managing through that process over the next couple of years is…going to be very challenging because we have this hypothesis that inflation is going to be transitory. We think that’s right,” he said. “But we are concerned about underlying inflation expectations remaining stable, as they have so far.”
The Fed would consider raising interest rates if it saw evidence that the surge in prices was leading households and businesses to anticipate that higher prices would be entrenched, fueling more persistent inflation. “We do not see evidence of that now,” he said. (…)
Hmmm…Mr. Witynski sees some evidence of that now:
- Dollar Tree to Sell More Items Above $1 as Costs Rise The retailer plans to sell products at $1.25 and $1.50 or other prices slightly above $1 in some of its stores, as supply-chain snarls, a tight labor market and inflation push costs higher.
(…) “We recognize the need to make adjustments in the current economic environment,” Mr. Witynski said, including “the pressure all of us are seeing on wages, freight and on our suppliers and cost increases.” (…)
In August, the company reduced its profit outlook for the full year, saying that rising supply-chain and freight costs would eat into earnings. The company now estimates earnings per share of $5.40 to $5.60, down from a range of $5.80 to $6.05 the company forecast in May.
Early in the year, the company assumed that ocean carriers supplying the company with products would fulfill around 85% of their contractual commitments, Mr. Witynski said on an August call with analysts. Now the company expects about 60% of commitments to be fulfilled and at higher rates, he said. (…)
During the same panel discussion referred to above, ECB’s Christine Lagarde
echoed Powell’s message, arguing the current bout of inflation “is largely attributable to the reopening of the economy,” and adding that “we certainly have no reason to believe that these price increases that we are seeing now will not be largely transitory going forward.
“Certainly” may be a slip, contrasting with Powell’s newly cautious “might” and “should”. Good discussion, however, as all central bankers agree that rising prices result from strong demand meeting limited supply. They are all working hard trying to maintain demand, hoping rising supply will bail us all out.
Meanwhile, Bloomberg informs us that
A majority of investors harbor fears of persistently high inflation, with a 20% pullback in stocks seen as more likely than a 20% rally, according to a Citigroup Inc. survey of clients. Close to 60% of respondents are gearing up for “sticky” inflation and only 23% see it as a “transitory” phenomenon.
Citigroup clients expected 10-year Treasury yields to break 2% in 2022, with rates already climbing 20 basis points this month to around 1.5%. That’s come as U.S. inflation expectations have jumped on a spike in energy prices.
The U.S. “spike” in energy prices is natural gas prices at $5.94/mcf from $2.55 pre-pandemic and gasoline prices at $3.08/g from $2.50. We’re no longer talking about transitory used car prices.
- European Gas, Power Prices Jump Again to Records Supply shortage will only get worse just as the winter season starts on Friday.
(…) Stockpiles of everything from gas to coal and water for electricity production are in short supply and there are few signs the situation will improve anytime soon as demand continues to roar back from a pandemic-driven lull. (…)
The scale of supply constraints have caught the market off guard, just as countries are about to start drawing down on the gas in storage. European stocks are at the lowest in more than a decade for this time of year.
- China’s Coal Shortage Means Higher Prices for the World Industry participants expect the coal supply shortfall this winter to remain severe because coal inventories are too low.
Since 1996, the New York Fed has calculated an underlying rate of inflation, on two separate bases. One includes all the price data kept by the Bureau of Labor Statistics for calculating the consumer price index, or CPI. The other includes more macroeconomic measures that tend to be linked to inflation. The idea is to use statistical techniques to identify an underlying rate. A full explanation by the Fed can be found here.
Earlier this year, both measures suggested there was little or nothing to worry about. Now, both are their highest since the New York Fed embarked on the exercise in 1995:
A Zillow Group Inc. index based on the mean of listed rents rose 11.5% in August from a year earlier, with some cities in Florida, Georgia and Washington state seeing increases of more than 25%. (…)
Since the start of the pandemic, the median rent for a two-bedroom apartment has soared 13.1% to $1,663, Zumper data show. (…)
The Dallas Federal Reserve predicts that the official rent index from the Bureau of Labor Statistics will increase to 6.9% by year-end 2023, which would be the highest in more than 30 years. (…)
With all these hopefully transitory price jumps on essentials, our central bankers could find themselves well short on their demand forecasts. That might solve the supply issues…”might”.
U.S. Pending Home Sales Rebound in August
Pending home sales strengthened 8.1% (-8.3% y/y) during August after falling 2.0% in July, revised from -1.8%. The Realtors Association reported that purchases improved as home supply picked up and price strength moderated.
The August sales rise was largest in the Midwest where sales rose 10.4% (-5.9% y/y) to the highest level in nine months. In the South, sales rose 8.6% (-6.3% y/y) to the highest level since January. Pending home sales in the West improved 7.2% (-9.2% y/y) and have rebounded 16.6% from a February low. In the Northeast, pending home sales improved 4.6% (-15.8% y/y) but have been moving sideways since January.
