Month: September 2022

U.S. Job Market Cooled in August but Remains Solid The tight labor market loosened some as employers hired fewer workers, more people sought work and wages rose at a slower pace. The jobless rate ticked up to 3.7%. Still, job growth remained well above the prepandemic trend.

Employers added 315,000 jobs last month, down from the prior month’s revised 526,000 jobs, the Labor Department said on Friday, with new jobs spread across the economy. (…)

The jobless rate rose to 3.7% in August from a half-century low of 3.5% the prior month. The increase in the unemployment rate reflected more workers entering the labor force. The share of adults working or seeking a job rose to 62.4% in August from 62.1% in July, as participation among women ages 25 to 54 jumped to the highest level since 2000.

The rise in labor-force participation—along with other signs such as lower average weekly hours worked—suggested employers are finding it easier to hire. That could help ease wage pressures in the coming months. The Federal Reserve is closely watching the health of the labor market and wages trends, an important factor in the outlook for inflation.

Average hourly earnings rose 5.2% in August from a year earlier, in line with the previous month and down from a recent peak of 5.6% in March. Wages rose 0.3% in August from a month earlier, down from July’s increase. (…)

All Friday morning, equities rose, agreeing with Axios’ summary: “This is the jobs report the Fed wanted”.

(…) Good is bad (a booming economy means the Federal Reserve will tighten the screws more). Bad is bad (nobody wants a recession). So what would “actually good” numbers look like? They would look an awful lot like the August employment situation report that came out this morning.

The new data threads the macroeconomic needle, showing continued robustness in the labor market and a softening of inflationary pressures. It thus amounts to a signal that a soft economic landing may be possible after all, and that the Fed may not need to act quite as aggressively to contain prices as the central bank’s recent communication would imply.

It’s not just one data point out of the 40-page report that supports this “Goldilocks” interpretation. It’s many of them.

• The 315,000 jobs added to employers’ payrolls, plus revisions that subtracted 107,000 from the previous two months, show job growth adjusting toward a more sustainable, moderate rate. It has averaged 378,000 in the last three months, versus 539,000 in Q1.
• The unemployment rate rose two ticks, to 3.7%, for good reasons. The number of people in the labor force rose by a whopping 786,000, but not all of those net new workers immediately found jobs. That’s good news for anyone who thinks the job market has been too tight.
• Average hourly earnings rose a moderate 0.3%, hardly a rate that will alarm those who fear an upward spiral of wages and prices.

This balanced labor report follows benign price readings for July. The first major August inflation reading is Consumer Price Index, due out Sept. 13. If it also points to a softening inflation trend, the Fed’s next decision looks more interesting.

• At its meeting concluding Sept. 21, Fed officials have indicated they will likely raise interest rates by either half a percentage point or 0.75 points.
• It seemed as if the higher number were more likely, especially following chair Jerome Powell’s tough-talking Jackson Hole speech last week.
• But in light of the new jobs numbers, that looks like more of an open question, especially if August’s CPI points to moderating inflation.

Goldilocks faded in the afternoon as several pundits, including Larry Summers, commented differently, some talking about continued inflation risks, others about continued recession risks. We could well get both at the same time before the latter defeats the former.

This chart illustrates the deceleration, but not the collapse, in private monthly payrolls income growth. Total man-hours rose 2.3% annualized in the last 3 and 6 months, a marked deceleration from the 5-6% average pace in the 6 months previous. Growth in hourly earnings has been stable at 4.8% annualized in the last 9 months.

In effect, labor demand is slowing and wage trends have stabilized around below 5%. Axios was right, the Fed must be happy about that softly slowing combination.

The Job Cuts Report for August, which will impact employment in coming months, notes that

• August marks the fourth time this year that cuts were higher in 2022 than in the corresponding month a year earlier;
• So far this year, employers announced plans to cut 179,506 jobs, down 27% from the 247,326 cuts announced in the first eight months of 2021. It is the lowest recorded January-August total since Challenger began tracking monthly job cut announcements in 1993.

The report concludes with “Employment data continue to point to a strong labor market. Job openings are high, layoffs are low, and workers seem to have slowed their resignations. If a recession is imminent, it’s not yet reflected in the labor data,” said Andrew Challenger, Senior Vice President of Challenger, Gray & Christmas, Inc.

If inflation does the same, the soft landing scenario would gain credibility.

Goldman Sachs’ inflation forecast:

• We continue to believe that the peak for core PCE inflation is behind us, as the surge in goods inflation caused by shortages and rising commodity prices has likely peaked and should moderate by year-end. We forecast core PCE inflation of 4.2% in December 2022 (vs. 4.5% previously), 2.6% in December 2023, and 2.3% in December 2024 based on our bottom-up inflation model.

• Unlike core PCE inflation, we expect year-on-year core CPI inflation to reaccelerate to just below the March peak over the next couple of months (GS forecast of 6.3% for Sept. vs. 6.4% for Mar.) before falling back to 5.7% in December. We expect core CPI inflation to fall more sharply next year (2.7% in December 2023), reflecting a negative swing in health insurance prices and shrinking contributions from across nearly every category but especially from normalizing auto prices, which have a larger weight in CPI.

The August CPI will be released Sept. 13. Given trends in oil/gasoline prices, overstocked retailers and the strong dollar, if services inflation comes anywhere near July’s 0.3% (after +0.8% on average in the previous 3 months), we might get another month of subdued core inflation (0.3% in July).

With Goldilocks still lurking, investors need to remember that equities are strongly correlated with profits and that subdued consumer inflation will hurt profits until corporate costs also decelerate.

Morgan Stanley’s Mike Wilson points out that ex-Energy earnings are 10% lower than expected earlier this year:

Equity investors should be laser focused on this risk, not the Fed, particularly as we enter the seasonally weakest time of the year for earnings revisions, and inflation further eats into margins and demand. Morgan Stanley’s leading earnings model sees a steep fall in EPS growth over the next several months.

(MS via The Market Ear)

Corporate profits are under pressure from unit labor costs and general corporate costs inflation, all rising in the 9% range after years of very subdued cost pressures.

A swift decline in consumer inflation would likely hurt profits initially, even more so if accompanied by lower sales volumes. So far, margins have not been hit much with top line growth at 10.6% in Q1 and 8.4% in Q2, but slower inflation will necessarily also slow revenue growth.

We got 7 corporate pre-announcements last week, 5 negative and 2 in-line. But we have 25 fewer pre-announcements than at the same time after Q1’22, suggesting that many companies are unsure how the quarter or the year-end will look like. Compared with one year ago, the trend is much more downbeat.

Analysts are getting nervous. EPS growth estimates have been cut from 11.1% to 5.1% for Q3 and from 10.6% to 6.3% in Q4. Ex-Energy, Q3 and Q4 EPS are expected down 2.1% and 1.5% respectively.

The decline in the bottom-up EPS estimate recorded during the first two months of the third quarter was larger than the 5-year average (1.9%) and the 10-year average (2.7%) per Factset numbers.

Trailing EPS are now $220.44. Full year 2022: $225.37. 12-m FW: $232.57. Full year 2023: $243.61.

At 3924, the S&P 500 is selling at 17.8x trailing and 16.9x forward EPS.

The Rule of 20 P/E is 23.7. If analysts are right, trailing EPS will be $223 after Q3. The R20 P/E is 23.5 on that basis. A 15% decline in the index would bring it to the 20 fair value.

This is with inflation at 5.9%. At 4% inflation, fair value would be 3580 after Q3.

Reminders:

• Bob Farrell’s rule #8: Bear markets have three stages – sharp down, reflexive rebound, and a drawn-out fundamental downtrend.
• Seasonality: Topdown Charts’ Callum Thomas:

Historically, on average, September has been the worst month of the year for the S&P500 (returns were -0.5% on average, and positive only 47% of the time).

So there are a few things to comment on around this. First of all, 47% is pretty close to 50/50 — albeit it does stand in contrast to some of the other months which were in the 60-70%+ range.

Second, September *did not* have the worst drawdown, OR the smallest upside, and it did not have the greatest dispersion of results either.

But one thing I will note, when I look at seasonality across different asset classes and markets (also looking at the seasonality of asset class relative performance), it is this Aug-Oct period of the year which is generally the worst for risk assets.

Typically we see defensive assets outperform this time of the year (e.g. gold, bonds, defensive equities), while risk assets lose ground (VIX, credit spreads go up, and equities go down).

Seasonality is interesting because it definitely is a thing – statistically, and it is often influenced by physical seasons, actual fundamentals and real life patterns of activity.

But it shouldn’t be the first thing you look at. I always say, put together your core thesis first, and then look at secondary/third-tier factors like this to round out the case or build conviction.

Of course in this instance, I would say that negative seasonality does gel with the generally weak backdrop, so I wouldn’t be inclined to go against it in the current backdrop, and would at the margin travel a little more cautiously.

The 200-day average has been dropping for 90 straight days

While most short- to medium-term time frames suggest somewhat flat returns, the six-month window looks troubling, especially the win rate and z-score. Signals since 1969 show a consistent pattern of negative returns across all time frames, with the 2-week window showing a loss in all nine instances.

It’s not unprecedented to see a 200-day average signal coincide with a tightening cycle from the FOMC. However, most of the time, we see a neutral or easy Fed. While the previous instances occurred during multi-year bear markets, the drawdown difference between the two is notable.

• Copper seasonality

The annual seasonal chart below reveals that copper is about to enter a period of general price weakness. For 2022, this weak period extends from the close on 2022-08-29 through the close on 2022-09-27. Historically, this stretch showed a gain during 11 years but a loss during 22 years.

U.S. Factory Orders Unexpectedly Fall in July for the First Time Since September

Factory orders decreased by 1.0% in July, below consensus expectations for a small increase, while growth in June was revised down 0.2pp to +1.8%. Growth in core capital goods orders (-0.1pp to +0.3%), core capital goods shipments (-0.2pp to +0.5%), durable goods orders (-0.1pp to -0.1%) and durable goods orders ex-transportation (-0.1pp to +0.2%) were all revised down in July. Manufacturing inventories increased (+0.1%).

A Slowing China Helps Rein In Inflation Around the World China is a key factor in falling costs for energy and commodities, but domestic factors are still keeping U.S. inflation high

Global inflation eased in July, to 0.3% on a monthly basis, down from an average of 0.7% a month in the first half of the year, according to analysis by Nora Szentivanyi, a global economist at JP Morgan, and colleagues. The figures omit Turkey, where inflation is unusually high.

“Weaker global demand in the face of diminished purchasing power through the past year is now driving disinflation through two main channels,” said Ms. Szentivanyi—first, by weighing on some commodity prices, and, second, by easing global supply-chain constraints.

She and her colleagues estimate falling commodity prices and easing goods price pressures will lower global inflation to a 5% annualized rate in the second half of 2022, from 9.7% in the second quarter. (…)

While wide-scale Covid-19 lockdowns drove much of spring’s decline, China’s property collapse is now dragging heavily on growth.

Slumping investment by developers, in particular, has quashed demand for industrial and energy commodities. The volume of gasoline imports fell 36% in July from a year earlier, while that of steel dropped 25%, according to Chinese government data.

China in 2021 consumed 72% of the world’s iron-ore imports, 55% of refined copper and more than 15% of oil globally. Any slowing of its resource-hungry economy tends to put downward pressure on commodity prices everywhere, said Edward Gardner, commodities economist at Capital Economics. (…)

The country’s producer-price index—a broad measure of pipeline inflation pressures—fell 1.3% in July from a month earlier. (…) Prices for U.S. imports from China increased 2.8% from a year ago in July, down from a 4.9% pace in March. (…)

To be sure, many other forces are still pushing the other way on U.S. inflation: service prices are rising, in particular for housing, and tight labor markets have pushed wage growth to its highest in at least 20 years. (…)

FED UP? MAYBE NOT!

Hubert Marleau at Palos Wealth Management:

The upcoming Federal Reserve interest rate decision scheduled for September 21 will probably be the last bump. I expect a 0.75% increase. It will likely be followed in months to come with a narrative shift, but will enter a long period of inertia that may last as long as a year. That is about the amount of time needed to bring demand and supply into alignment.

I rest my case on six reasons: the strength of the dollar, the application of quantitative tightening, the crushing weight of energy and food, the cooling of the job market, the easing of supply constraints and the fall of industrial prices.

The bond market is already predicting that the annual rate of inflation will be 2.1% by next September mainly because monetary growth is collapsing. Monetary models, which track and correlate changes in the money supply with N-GDP, are suggesting, with a 6-to-12 month lag, that the inflation rate could fall precipitously from here to more acceptable levels.

Goldman’s Jan Hatzius is more reserved:

Increased signs of adjustment on growth, labor markets, and inflation suggest that we are moving closer to a slowdown in the Fed’s aggressive rate hike campaign. Admittedly, the risk to our forecast of a 50bp hike in September followed by 25bp moves in November and December remains on the upside because recent Fed communication suggests that the burden of proof is on the side of disinflation.

Any material signs of slippage (e.g. in the August CPI report released on September 13) would thus probably lead us to lift our near-term funds rate forecast somewhat further. However, we think it would be unwise to chase the post-Jackson Hole increase in the market-implied funds rate at current levels.

FUNDS (OUT)FLOWS

• Investment-grade corporate bond funds: -$4.6 billion over the week ended Aug. 31 following a record 18 week stretch of net withdrawals through early last month.
• Leveraged loan funds: -$1.1 billion
• High-yield: -$5 billion, the second largest of the year, bringing the two-week tally to $9.5 billion. 
• Municipal bonds: -$3.4 billion over the week ended Sept. 1.
• Domestic equity funds: -$10.19 billion over the final seven days of August, the largest sum since the mid-June nadir in the S&P 500.
• Global equity funds: -$9.4 billion, the fourth-largest sum so far this year.
• Ark Innovation ETF (ARKK): -$803 million in August, the first such net cash withdrawal since January and equivalent to 10% of the fund’s assets. ARKK had net inflows of $1 billion over the first seven months of the year. ARKK records a 58% year-to-date decline and a 74% downdraft from its February 2021 peak.
• 2,119 c-suiters sold shares in their own company last month per the Washington Service. That’s the largest swath of sellers in a month since November of last year, as the Nasdaq 100 logged its high-water mark. Following the corporate crowd has proven wise in the past. As the virus panic climaxed in March 2020, the Washington Service’s ratio of insider buys to insider sells reached 1.75:1, the strongest relative showing since another memorable month, March 2009. (Via ADG)

Nord Stream Pipeline Closure Lands Blow Against Europe Power prices surged, European currencies hit multidecade lows and governments scrambled to contain the economic hit after Russia cut its main natural-gas pipeline to Europe.

• “At current forward prices, we estimate that energy bills will peak early next year at c.€500/month for a typical European family, implying a c.200% increase vs. 2021. For Europe as a whole, this implies a c.€2 tn surge in bills, or c.15% of GDP” (Goldman Sachs)
• OPEC+’s Warning Shot Oil producer cartel cuts output targets just days after U.S.-led agreement to establish buyer’s alliance seeking price-setting power over Russian crude. The Organization of the Petroleum Exporting Countries and Moscow-led allies decided on Monday to reduce its output by 100,000 barrels a day starting in October. (…) The Group of Seven Western countries on Friday announced a plan to introduce a price cap on Russian oil. If successfully implemented, the agreement could create a buyers’ alliance with some power over global crude prices.
• Brussels pushes for EU-wide caps on gas price Emergency proposals come in response to Russia ‘using energy as weapon’ and aim to soften soaring energy costs
• Macron Backs EU-Wide Windfall Tax on Energy Company Profits

Pound Falls to Lowest Level Since 1985

Japanese yen hits 24-year low against dollar

China’s Central Bank Moves to Slow Yuan Depreciation

GDP GROWTH

Population, particularly working age population is very, very slow:

• Immigration isn’t helping

The decline in nonimmigrant visa issuance is so huge that it seems likely that the number of such visa holders working in the U.S. is actually now declining, on an absolute level, as old visas expire. In other words, far from ameliorating the labor shortage, visa issuance levels are exacerbating it. (Axios)

Note: H1B includes H1B1s. Data: U.S. Department of State; Chart: Erin Davis/Axios Visuals

• Productivity is slower:

• Will the slowdown accelerate?

COMPOSITE PMIs Eurozone business activity falls for second month running Latest PMI® data suggested that the eurozone private sector moved further into contractionary territory during August as the service sector joined manufacturing in seeing output fall during the month. The decline was particularly marked in the euro area’s largest economy, Germany. Weakness in activity generally reflected falling demand, with new orders also down at a faster pace midway through the third quarter. Employment continued to rise, but the rate of job creation softened amid lower workloads and muted business confidence. While remaining elevated, rates of inflation of both input costs and output prices continued to soften, providing some respite for firms. The seasonally adjusted S&P Global Eurozone PMI Composite Output Index posted below the 50.0 no-change mark for the second month running in August, dipping to 48.9 from 49.9 in July. Although still only modest, the rate of contraction signalled in the latest survey period was more pronounced than that seen at the start of the third quarter. The overall reduction in output reflected declining activity across both the manufacturing and services sectors in August, as services activity moved into contraction for the first time since March 2021. That said, the reduction in output at service providers was only marginal and much weaker than that seen for manufacturers, where production declined solidly again. Manufacturing output has now fallen in three consecutive months. Falling activity was largely a function of a worsening demand environment, with steep inflationary pressures and associated cost of living concerns leading clients to hold off on buying decisions. National PMI data indicated that Germany was the key driver of the overall decline in eurozone business activity, seeing output contract at a solid pace that was the steepest since the initial wave of the COVID-19 pandemic. The only other country to see activity decrease at the composite level was Italy, where output dropped for the second month running, albeit marginally in August. Although output continued to increase in France, Spain and Ireland, rates of expansion were only modest and slowed to the weakest in 17, seven and 18 months respectively. New business across the euro area declined for the second month running in August, and at a sharper pace that was the most marked since November 2020. As was the case with output, both sectors posted reductions in new orders, with manufacturers seeing the steeper contraction. International demand also remained under pressure, with new export orders* decreasing for the sixth month running. In fact, the drop in new business from abroad was faster than that seen for total new orders. Despite falls in activity and new business, companies across the eurozone expanded their workforce numbers again midway through the third quarter, largely reflective of continued efforts to rebuild capacity following the pandemic. Higher employment was seen across each of the monitored countries. That said, the overall rate of job creation softened for the third month running amid a weakening demand environment, with the latest rise in staffing levels the slowest since March 2021. A combination of higher employment and lower new orders meant that companies were able to keep on top of workloads, and backlogs of work decreased for the second month running as a result. The rate of input cost inflation continued to ease from the series record posted in March, reaching the slowest in almost a year in August. That said, input prices continued to rise at a pace unprecedented prior to the current spike in inflation since the series began in 1998. Similarly, output prices increased at a softer pace, but one that was among the sharpest on record. Similar price trends were seen across the two monitored sectors. Business expectations remained historically muted, despite a slight improvement in sentiment since July. A renewed positive outlook in manufacturing compared with services confidence ticking down to the lowest since October 2020. The S&P Global Eurozone PMI Services Business Activity Index dropped below the 50.0 no-change mark in August, bringing to an end a 16-month sequence of rising service sector output. At 49.8, the index was down from 51.2 in July and signalled a marginal decline in activity midway through the third quarter. The renewed contraction in business activity reflected further signs of demand weakness as new orders decreased for the second month running. The rate of decline in new business was modest, but quickened to the fastest since February 2021. The weakening demand environment also dented confidence among firms regarding the year-ahead outlook for activity. Optimism dropped for the fourth successive month in August and was the lowest since October 2020. Service providers in the eurozone continued to expand their staffing levels, thereby extending the current sequence of job creation to 19 months. That said, jobs growth waned further in August and was the weakest since May 2021. Inflationary pressures continued to soften, but remained elevated. Both input costs and output prices increased at rates unseen prior to the pandemic, but at the slowest rates in six months.

China: Service sector growth remains strong in August

Chinese services companies signalled a further marked increase in business activity in August as the sector continued to recover from the recent wave of COVID-19. The upturn was supported by a solid rise in overall sales, as companies reported higher customer numbers as market conditions continued to normalise. International demand remained subdued, however, with foreign sales falling again in August. Prices data showed that input costs rose at the quickest rate in four months, but charges set by services companies rose only slightly.

Business confidence strengthened to a nine-month high in August, with many firms anticipating a further recovery in demand and activity levels in the months ahead.

(…) Higher business activity was generally linked to improvements in customer demand and numbers, as disruption due to the pandemic and impact of restrictions continued to recede.

Total new business also expanded at a strong, albeit slightly softer, pace during August. The rate of new order growth was the second-steepest since October 2021 and broadly in line with the series average. There was evidence that the upturn continued to be led by firmer domestic demand, as companies registered a further drop in export sales. Moreover, the reduction in foreign demand was the quickest seen for three months, with a number of firms mentioning that the pandemic continued to weigh on international orders. (…)

PMI drops to lowest since July 2020 amid further loss of new orders

The US manufacturing sector experienced relatively muted operating conditions in August, according to latest PMI^TM data from S&P Global. Output contracted for a second straight month as new orders fell for a third month in a row amid weak client demand, in turn linked to the impact of inflation and economic uncertainty on customer spending. Although employment rose further, it did so at the slowest pace since January, with backlogs of work rising only marginally. Output expectations strengthened from July’s recent low, but stayed below the series trend.

Supply chain disruptions meanwhile remained historically marked, but the extent to which lead times lengthened was the least severe since October 2020. As a result, pressure on costs moderated, with input prices increasing at the slowest pace since the start of 2021. In an effort to drive sales and pass on some of the moderation in cost burdens, selling prices rose at the weakest rate for a year-and-a-half.

The seasonally adjusted S&P Global US Manufacturing Purchasing Managers’ Index™ (PMI™) posted 51.5 in August, broadly in line with the earlier released ‘flash’ estimate of 51.3, but down from 52.2 in July. The headline index reading was the lowest since July 2020, with latest data indicating subdued overall health conditions across the US manufacturing sector.

Contributing to weak operating conditions was a third successive monthly fall in new orders in August. Manufacturers registered a modest decline in new sales, often linking this to muted client demand following greater economic uncertainty and hikes in prices. The rate of decrease was broadly in line with those seen in June and July. External demand remained weak, as new export orders fell at the second-sharpest pace in 27 months.

In line with weak demand conditions, goods producers indicated a back-to-back decline in production. The pace of contraction quickened from July to the fastest since June 2020. Some companies also noted that ongoing supply chain disruption hampered output amid raw material delivery delays.

On the price front, average cost burdens increased at a further marked rate in August. Hikes in transportation, fuel and metals prices reportedly drove inflation. That said, a number of firms noted reduced costs for some materials, which contributed to the softest overall rise in operating expenses since January 2021.

In response to softer increases in costs, firms raised their selling prices at a weaker rate in August. The pace of charge inflation was the slowest in 18 months, as some companies passed through savings to their customers in an effort to remain competitive.

Vendor performance deteriorated again, but at the slowest rate since October 2020. Nonetheless, transportation and logistics issues remained evident.

Input buying was broadly unchanged on the month in August. Weak client demand and deliveries of materials led to a quicker rise in pre-production inventories. Stocks of finished goods meanwhile fell, as orders were shipped in a timely manner and stock building was not prioritised.

Meanwhile, employment rose at the second-slowest rate in over two years. Backlogs of work also grew at a subdued pace, as weak new order inflows led some firms to delay replacing leavers despite some reports of ongoing challenges finding suitable candidates.

Lastly, output expectations picked up in August, with the degree of confidence in the year-ahead outlook reaching a three-month high. Despite hopes of an uptick in demand, the level of optimism was weaker than the series average.

The ISM is more upbeat:

For a second straight month, the Manufacturing PMI^® figure is the lowest since June 2020, when it registered 52.4 percent. The New Orders Index registered 51.3 percent, 3.3 percentage points higher than the 48 percent recorded in July. The Production Index reading of 50.4 percent is a 3.1-percentage point decrease compared to July’s figure of 53.5 percent. The Prices Index registered 52.5 percent, down 7.5 percentage points compared to the July figure of 60 percent; this is the index’s lowest reading since June 2020 (51.3 percent). The Backlog of Orders Index registered 53 percent, 1.7 percentage points above the July reading of 51.3 percent.

After three straight months of contraction, the Employment Index expanded at 54.2 percent, 4.3 percentage points higher than the 49.9 percent recorded in July. The Supplier Deliveries Index reading of 55.1 percent is 0.1 percentage point lower than the July figure of 55.2 percent.

(…) companies continued to hire at strong rates in August, with few indications of layoffs, hiring freezes or head-count reductions through attrition. Panelists reported lower rates of quits, a positive trend. (…)

WHAT RESPONDENTS ARE SAYING

• “Demand from customers is still strong, but much of that is because there is still fear of not getting product due to constraints. They are stocking up. There will be a reckoning in the market when the music stops, and everyone’s inventories are bloated.” [Computer & Electronic Products]
• “Sales in target business softening month-over-month, down 12 percent by revenue. Inventory days are increasing.” [Chemical Products]
• “Strong sales continue. The impact of the chip shortage is slowing, and the decreasing COVID-19 resurgence in Asia is now affecting production more than chips.” [Transportation Equipment]
• “Supply in most groups is slowly increasing, but demand appears to be outpacing — causing pricing to either stabilize or increase.” [Petroleum & Coal Products]
• “Inventories are far too high, and we are on pins and needles to see how quickly and at what magnitude our busy season begins. We will start seeing that in the next few weeks.” [Food, Beverage & Tobacco Products]
• “Continue to struggle with electronic component shortages. Several smaller machine shops are (manufacturing) the pacing item for our production due to lack of direct labor machinists.” [Machinery]
• “Overall, I have seen much improvement in the availability of raw materials. However, trucking issues continued, and production capacity within some industries remains tight. I have growing concerns that as cement and mineral companies run ‘all out’ to meet demand, we will see more downtime due to maintenance (issues).” [Nonmetallic Mineral Products]
• “Demand is softening; however, we are continuing to produce to replenish inventory.” [Primary Metals]
• “Orders are still strong through the end of the year, but there is a feeling that customers may start pulling back on orders, either cancelling them or pushing them into 2023.” [Plastics & Rubber Products]
• “Business conditions are good, and demand is strong. Securing enough raw material supply to keep up is still a challenge.” [Miscellaneous Manufacturing]

You may have noticed that, in spite of the ISM’s more upbeat report vs S&P Global’s, I have highlighted the more negative comments from ISM respondents. That is because I put more weight on S&P Global surveys which have proven more accurate in the past decade.

“The ISM is only surveying large companies while the S&P Global survey covers small, medium and large companies in the correct proportions, as defined by the official data. The S&P Global survey is also the only survey to incorporate a national weighting system for its survey responses based on company size and sector contribution to total manufacturing output, ensuring each company’s response contributes appropriately to the survey index each month.”

That said, the ISM reach remains deep and wide. The WSJ, like all other media and sell-side reports I have seen, only mentions the ISM survey:

• August ISM: Good News Is Bad News Again

Stocks extended their drop after the Institute for Supply Management reported some good news. Business activity continued to expand in August, while the prices that companies reported paying dropped more than expected.

Why is the market trading lower?

“Good news is being traded as bad insofar as it provides Powell further cover to continue aggressively tightening policy,” writes Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets.

Joseph Brusuelas, chief economist at RSM US, agrees, saying the data “does not read like one where the economy is either in or soon will be falling into recession.” Given the strength of the economy, the Fed has a case to keep up aggressive policy tightening, Mr. Brusuelas writes.

Nobody mentioned S&P Global’s PMI which was pretty economy bearish:

• New orders fell for a third month in a row amid weak client demand
• External demand remained weak, as new export orders fell at the second-sharpest pace in 27 months.
• Employment rose at the second-slowest rate in over two years

Hopefully, the Fed looks at both surveys…

…Although, yesterday, the Atlanta Fed boosted its Q3 GDPNow estimate from 1.6% to 2.6% “after this morning’s construction spending release from the US Census Bureau and this morning’s Manufacturing ISM Report On Business from the Institute for Supply Management.” July construction spending fell 0.4% MoM after -0.5% in June. All of the boost in the GDPNow estimate, and then some, came from the “strong” ISM number…

A similar situation occurred in late 2018-early 2019 when IHS Markit PMI, now S&P Global, was alone in accurately predicting the decline in output registered by the official data in the first quarter of 2019.

This ING chart also suggests that the recent ISM numbers are likely optimistic:

US and Chinese manufacturing purchasing managers’ indices

Other world PMI surveys are all from S&P Global and consistent with the U.S. PMI.

Yesterday, we saw that China, the Eurozone and the UK all reported very weak manufacturing survey data, all with very weak new orders.

Now Canada is joining the list:

Canada: Manufacturing conditions deteriorate for first time in over two years

August data revealed the first downturn in operating conditions across the Canadian manufacturing sector since the COVID-19 pandemic began in the first half of 2020. The deterioration in performance reflected sharp and accelerated contractions in output and new orders and the first fall in employment in over two years. At the same time, renewed declines were recorded in buying activity, backlogs and pre-production inventories. Subsequently, optimism towards output in the year ahead moderated with concerns over the macroeconomy weighing slightly on sentiment.

There were, however, positive signs on the price front where output and input price inflation eased to 18- and 19-month lows, respectively. Nevertheless, rates of inflation in both cases were above trend.

The seasonally adjusted S&P Global Canada Manufacturing Purchasing Managers’ Index^® (PMI^®) registered at 48.7 in August, down from 52.5 in July,thus indicating a deterioration in manufacturing performance. The latest fall was only modest but ended a 25-month sequence of growth.

 

A key reason for the latest decline was a marked and accelerated fall in new orders. Firms indicated that client hesitancy, growing uncertainty and a general lull in domestic demand conditions were behind the latest reduction in new orders.

Similarly, international demand for Canadian manufactured goods weakened in August. In fact, exports fell sharply and at the quickest rate since June 2020.

Meanwhile, manufacturing production declined for the second month in succession. The rate of decline was sharp and the quickest since June 2020 amid weak inflows of new work. Firms also indicated that supply-chain difficulties persisted to impact production. (…)

Turing to prices, average cost burdens rose once again in Canada’s private sector, with 35% of panellists reported higher costs in August compared to July while only 7% saw them fall. Higher transportation and material costs were overwhelmingly mentioned by panellists.

Output charges also continued to rise midway through the quarter. The rate of increase was marked compared to the historical average with panellists blaming sustained increases in cost burdens.
That said, input cost and output charge inflation eased to 19-and 18- month lows, respectively. (…)

• Bank of Canada expected to push interest rates into restrictive territory

(…) That should happen on Sept. 7, with money markets leaning toward a hike of 75 basis points, which would take the policy rate to 3.25%. That would be the fourth oversized rate increase this year, capping 300 basis points of tightening since March.

Some economists predict the Canadian central bank may signal a pause after its anticipated hike next week, especially after the release on Wednesday of GDP data that suggested the economy may be cooling faster than expected. (…)

U.S. Light Vehicle Sales Ease During August

The Autodata Corporation reported that light vehicle sales during August fell 1.0% (+1.4% y/y) to 13.37 million units (SAAR) from 13.50 million in July. Sales remained roughly one-quarter below the April 2021 peak. Vehicle sales comprise about four percent of real consumer expenditures.

Sales of light trucks led last month’s overall decline, falling 2.2% (+3.8% y/y) to 10.44 million units following a 2.8% July gain. (…)

Auto sales rose 3.5% during August (-6.4% y/y) to 2.93 million units, a four-month high, after holding steady in July. (…)

Imports’ total share of the U.S. vehicle market rose to 24.8% in last month, the highest level in six months. (…)

Wards Auto estimates sales of 13.18M in August per CalculatedRisk.

America Could Face Its Own Gas Crisis, or Worsen Europe’s Summer heat is still lingering in the U.S., but a peek at domestic natural-gas prices is a chilling reminder

U.S. natural gas inventories inched up by 61 billion cubic feet in the week ended Aug. 26, according to data released Thursday morning by the Energy Information Administration. That leaves stockpiles 11.3% lower than their five-year average—a gap that has widened throughout the so-called injection season, when natural-gas inventory builds up ahead of winter. (…)

There are still two months left in the seven-month injection season, but natural-gas prices are already at levels last seen in 2008, a year when the U.S. was producing 43% less of the fuel than it did in 2021. U.S. natural gas benchmark Henry Hub futures briefly touched $10 per million British thermal units last week. Prices edged up slightly after the EIA’s storage report on Thursday morning to roughly $9.17 per MMBtu. The sticker shock is far worse in Europe, where front-month natural-gas futures are trading at the equivalent of roughly $70 per MMBtu as Russia chokes off supplies. (…)

And then there is the potential for resource nationalism that could compound Europe’s woes. Last year, an industry group representing manufacturers urged the Energy Department to require a reduction in LNG exports to allow the U.S. to fill up more natural gas in storage. Although the DOE hasn’t commented on LNG exports thus far, Energy Secretary Jennifer Granholm did send a letter to oil refiners urging them to focus on building U.S. inventories.

Even the best friendships can be chilled when the mercury drops.

BTW: U.S. oil demand keeps falling, not a sign of a strong economy, but supply is declining just as rapidly:

  

(Princeton Energy Advisors)

World Food Prices Extend Drop as Supply Uptick Offers Relief

FYI:

• At the close of [August], a portfolio comprised of 60% stocks and 40% bonds, as measured by the S&P 500 and Bloomberg U.S. Aggregate Index, respectively, is nursing a 13.9% year-to-date loss, notes Compound Capital Advisors founder Charlie Bilello.  That’s by far the worst such showing on record going back to 1976, exceeding the 9.5% and 6.1% losses incurred by that 60/40 strategy over the first eight months of 2002 and 2008, respectively. (ADG)

• Chinese firms have defaulted on $37.3 billion of offshore debt so far in 2022, data from Bloomberg show, exceeding the combined total of the past four full years. (ADG)
• Apple overtakes Android to pass 50% share of smartphones used in US
• Supreme Court approval craters

Just 28% of Democrats and Democratic-leaning independents view the court favorably — down 18 points from January, and nearly 40 points since 2020. Positive views of the court among Republicans and Republican leaners ticked up since the beginning of the year — 73%, up eight points from 65%. (Axios)