Month: October 2022

Flash U.S. PMI: Challenging demand conditions and inflation concerns weigh on US private sector in October

S&P Global’s September PMI survey showed a “renewed rise in
client demand” and “new orders returned to growth”. The October flash PMI reverses all that and then some:

Private sector firms in the US recorded a further downturn in output at the start of the fourth quarter, according to latest ‘flash’ PMI™ data from S&P Global. The fall in business activity was solid and stronger than that seen in September, as service providers signalled a quicker decline. Manufacturers, on the other hand, saw output rise for the second month running, albeit only marginally.

The headline Flash US PMI Composite Output Index registered 47.3 in October, down from 49.5 in September. With the exception of the initial pandemic period, the rate of decrease was the second-fastest since 2009.

New orders returned to contraction territory in October. The decrease in new business was only marginal, but was broad based as manufacturers and service providers alike recorded weaker client demand. Goods producers drove the decline, with companies highlighting the impact of inflation and stockbuilding earlier in the year on customer demand, as clients utilised current holdings of inputs and semi-finished items. A reduction in foreign customer demand was also indicated as a strong dollar and challenging economic conditions in key export markets reportedly weighed on new export orders. New business from abroad fell sharply and at the quickest pace since May 2020.

On the price front, input cost inflation picked up at the start of the fourth quarter, following a four-month period of softer price rises. The increase in cost burdens remained historically elevated, despite being the second-slowest since January 2021. Interest rates, material shortages and greater wage bills were linked to the uptick.

In an effort to drive new sales and remain competitive, firms reportedly offered concessions to customers following the decrease in some costs such as transportation. The rate of output charge inflation eased to the softest since December 2020, but was still quicker than the long-run series average.

In line with weaker client demand, private sector firms scaled back their hiring activity, leaving employment broadly unchanged on the month. The seasonally adjusted Employment Index posted below the 50.0 neutral mark for the first time since June 2020, largely driven by a fall in service sector staffing numbers. Meanwhile, manufacturers registered a slower pace of job creation.

A reduction in pressure on capacity was reflected in a fall in backlogs of work across the private sector. The service sector indicated a renewed fall in the level of outstanding business. Manufacturers, meanwhile, saw work-in-hand contract for the first time in over two years. Lower new order inflows allowed firms to begin working through incomplete business.

Firms’ optimism about the outlook meanwhile deteriorated markedly in October. The resulting degree of confidence was among the lowest in the survey history and the weakest for just over two years. Although hopeful of a boost to customer demand after inflation peaks, companies remain concerned regarding price pressures and the cost of living, as well as the worsening broader economic outlook amid interest rate hikes and weak customer sentiment

The S&P Global Flash US Services Business Activity Index posted at 46.6 in October, down from 49.3 in September, to indicate a solid decline in service sector output. The latest data signalled an acceleration in the decline in business activity to the second-fastest fall in almost two-and-a-half years. Firms linked the decrease to weak client demand and the impact of inflation and higher interest rates.

At the same time, new business fell for the second time in the last three months, albeit only marginally overall. Weighing on total new sales was a drop in foreign client demand. New export orders declined at a solid pace due to inflationary pressure in key export markets.

The rate of input price inflation at service providers quickened in October. Although the second-slowest since the start of 2021, the latest uptick reversed the recent trend of easing price pressures. Companies partially passed on higher cost burdens to their customers, as the pace of charge inflation picked up slightly.

A return to decline in the level of outstanding business led to service sector firms reducing their workforce numbers during October. Companies noted the non-replacement of voluntary leavers, alongside some reports of lay-offs. The decrease in employment was the first since June 2020.

Meanwhile, service sector business confidence fell to the weakest level since September 2020, as higher operating costs and client hesitancy weighed on optimism.

The S&P Global Flash US Manufacturing PMI registered 49.9 at the start of the final quarter of 2022, down from 52.0 in September. The latest data signalled broadly unchanged operating conditions on the month.

Output across the manufacturing sector increased for the second month running in October, as firms noted easing supply chain pressures and the delivery of some key inputs. The rise in production was slight, but the quickest for five months. Vendor performance continued to deteriorate, but to the smallest extent since July 2020 as firms noted less marked extensions to input delivery times.

At the same time, new orders fell back into contraction territory following a marginal expansion in September. The decrease in client demand was solid and the sharpest since May 2020. Alongside domestic inflationary pressures, total new orders were dampened by challenging economic conditions in key export destinations and dollar strength, as new export orders fell steeply.

Cost inflationary pressures at manufacturers softened in October, with the pace of increase easing to the slowest in almost two years. Although still marked in the context of the series history, the rate of inflation reportedly eased following reductions in the price of some key materials including plastics and chemicals. Softer hikes in cost burdens were reflected in a slower rise in output charges. Manufacturers noted the weakest increase in selling prices since the end of 2020 in an effort to boost demand.

Weak demand and easing supply chain delays allowed firms to work through their backlogs during October. Work-in-hand fell solidly. Goods producers moderated the overall rate of job creation in response to the drop in order book backlogs, largely via the non-replacement of voluntary leavers.

Less marked delays in input deliveries in part reflected weaker demand for materials as firms scaled back purchasing and utilised their current inventories. Input buying fell steeply and at the fastest pace since May 2020.

Finally, output expectations regarding the year-ahead outlook at manufacturing firms slipped to the lowest in almost two-and-a-half years. Muted customer demand and inflation concerns reportedly dampened confidence.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence:

“The US economic downturn gathered significant momentum in October, while confidence in the outlook also deteriorated sharply. The decline was led by a downward lurch in services activity, fuelled by the rising cost of living and tightening financial conditions. While output in manufacturing remains more resilient for now, October saw a steep drop in demand for goods, meaning current output is only being maintained by firms eating into backlogs of previously placed orders. Clearly this is unsustainable absent of a revival in demand, and it’s no surprise to see firms cutting back sharply on their input buying to prepare for lower output in coming months.

“One upside of this drop in input buying has been a further alleviation of supply constraints, which alongside the stronger dollar have helped cool price pressures in the manufacturing sector.

“Although price pressures picked up slightly in the service sector due to high food, energy and staff costs, as well as rising borrowing costs, increased competitive forces meant average prices charged for services grew at only a fractionally faster rate. Combined with the easing of price pressures in the goods-producing sector, this adds to evidence that consumer price inflation should cool in coming months.

“The surveys therefore present a picture of the economy at increased risk of contracting in the fourth quarter at the same time that inflationary pressures remain stubbornly high. However, there are clearly signs that weakening demand is helping to moderate the overall rate of inflation, which should continue to fall in the coming months, especially if interest rates continue to rise.”

Last Thursday, I noted several recent anecdotes suggesting that the economy has suddenly hit a wall in the past month or so. This latest survey adds credibility to that:

• The fall in business activity was solid and stronger than that seen in September, as service providers signalled a quicker and solid decline.
• The rate of decrease was the second-fastest since 2009.
• Manufacturers and service providers alike recorded weaker client demand. Manufacturers seem to have lost pricing power.
• Employment was broadly unchanged on the month, including a fall in service sector staffing numbers with the first mentions of “some reports of lay-offs”.
• Firms’ optimism about the outlook meanwhile deteriorated markedly in October.

Goldman Sachs points out that the weakness in manufacturing is global as new manufacturing orders “declined sharply in major DMs (-6.2pt in the UK, -4.3pt in the US, and -3.5pt in the Euro area)”.

S&P Global, Haver, Goldman Sachs Global Investment Research

To me, however, the “solid decline” noted in services along with the “fall in service sector staffing numbers” are particularly significant. Demand for services is weak when it is supposed to more than offset waning demand for goods. This is negatively impacting labor demand to the point where we are now hearing about lay-offs in what is supposed to be a very tight market.

On October 14, I noted that total hourly wages rose only 0.3% MoM in each of August and September, a 3.6% annualized rate indicative of restraint on the part of business leaders. Yesterday we learned that “firms’ optimism about the outlook deteriorated markedly in October”. We can now bet that restraint will continue if not increase.

This chart shows the QoQ changes in wages of service-providing employees using end-of-quarter data. The blue bars are for all employees and the red bars for non-management employees, those where shortages were the most acute.

The deceleration is obvious, down to the 4% annualized range in Q3, trending towards pre-pandemic levels in the 3.5% range. A recent Goldman Sachs analysis sees similar trends in retail and food-services…

As a result of the significant improvement in labor market balance in both these industries, wage growth has cooled considerably. The six-month annualized pace of wage increases for retail workers has slowed to around 2% from a peak pace of nearly 7% peak, while wage growth for accommodation and food service workers remains very high but has slowed to 7½% from a peak pace of nearly 18%. In addition, wage growth for production and nonsupervisory workers—which is likely more sensitive to the balance between labor market demand and supply—has cooled by an even larger amount in both industries.

…while noting that

(…) progress in other industries is lagging.
For example, we have seen much less progress and the labor market remains extremely imbalanced in the wholesale trade, professional and business services, and health care and social assistance industries, which combined account for almost 40% of private-sector employment. And for all industries outside of retail trade the jobs-workers gap is higher today—and in most cases much higher—than it was prior to the pandemic. (…)

Although the three-month annualized pace of wage growth has generally dropped considerably from its post-pandemic peak, in almost all instances it remains much higher than it was prior to the pandemic, with wage growth remaining notably firm for workers in the information, arts & entertainment, and finance industries.

Based on the October flash PMI, these high growth sectors should also ease off in coming months.

Eventually, sooner than later in my view, the pace of charge inflation, which “picked up slightly” in October will also slow down.

This Friday, we get September data on consumer spending, PCE inflation, and the important Employment Cost Index for Q3, all critical data to feed next week’s FOMC.

• Chicago Fed National Activity Index Remains Positive in September

The Federal Reserve Bank of Chicago reported that the Chicago Fed National Activity Index (CFNAI) held steady m/m at 0.10 in September. The August reading of 0.10 was revised from 0.00, and July was unrevised at 0.29. The Q2 average remained in negative territory.

The index’s three-month moving average improved to 0.17 in September after 0.04 in August. The figure was down from a recent high of 0.48 in December, 2021. During the last 10 years, there has been 79% correlation between the change in the Chicago Fed Index and quarterly growth in real GDP. (…)

The diffusion index, which measures the breadth of movement in the component series, rose to 0.35 during September from 0.16 in August. These readings compare to a low of -0.12 in June. Forty-eight of the components contributed positively to the September index while 37 contributed negatively.

The CFNAI is a weighted average of 85 monthly indicators of national economic activity. It is constructed to have an average value of zero and a standard deviation of one. Since economic activity moves toward trend growth rate over time, a positive index reading corresponds to growth above trend and a negative index reading corresponds to growth below trend. The CFNAI was constructed using data available as of October 20, 2022. September data for 51 of the 85 indicators had been published at that time. For all missing data, estimates were used in constructing the index.

A Better Quarter for GDP, a Worse Quarter for the Economy In the first half of the year, a contraction in gross domestic product belied rising demand. But the third-quarter GDP report will probably paint too rosy a picture.

Economists polled by The Wall Street Journal estimate that the Commerce Department’s GDP report on Thursday will show the economy grew at an inflation-adjusted 2.3% annual rate in the third quarter from the prior quarter, after contracting in both the first and second quarters. (…)

The 1.6% annualized contraction in GDP in the first quarter was driven by a rising trade deficit and reduced government spending. The second quarter’s 0.6% decline came about largely because of a swing in inventories and, again, lower government spending. Meanwhile, final sales to private domestic purchasers, which better reflects underlying demand in the economy, rose at a 2.1% annual rate in the first quarter, and a 0.5% rate in the second. It is this dynamic that helps underscore why, despite many people’s belief that two consecutive quarters of GDP contraction represent a recession, the National Bureau of Economic Research, which has been calling U.S. recessions since before GDP was a thing, wasn’t about to pronounce a downturn.

Conversely, in the third quarter it looks as if GDP has received a massive boost from trade—data for July and August show the trade deficit narrowed, which effectively means that more demand was met by domestic production. A widely followed tracking estimate from the Federal Reserve Bank of Atlanta puts third-quarter GDP growth at 2.9%, with a 2.2 percentage-point contribution coming from trade. But it shows the growth rate for final sales to private domestic purchasers slowing to just 0.2%. And another widely followed tracking estimate, from S&P Global, forecasts the underlying demand measure contracting at a 0.4% rate. (…)

Renters Hit Breaking Point in a Sudden Reversal for Landlords Affordability pressures and inflation are holding back tenants, forcing landlords to ease off big increases.

(…) It’s a dramatic reversal from just months ago, when people were fighting over a limited supply of apartments, getting on waiting lists or paying multiple application fees to land one home. Now, particularly in pandemic boom markets such as Las Vegas and Phoenix, the application piles have thinned out and listings are lingering longer. Measures of US household formation have turned negative. (…)

Rents nationally increased 7.5% in September from a year earlier, above pre-pandemic levels, but down from a peak jump of nearly 18% at the start of the year, when vacancies also were lower, according to Apartment List. Preliminary October data show a dropoff that’s faster than the typical seasonal decline and would be the steepest in month-over-month data dating back to 2017, said Igor Popov, the listing platform’s chief economist. (…)

These indicators lag the actual market. It might be six or nine months before the more recent slowdown is reflected in the CPI, said Mark Zandi, chief economist for Moody’s Analytics. (…)

Household formation is freezing up, sending apartment demand negative for the first time for any third quarter in at least 30 years, according to RealPage data dating back to 1992. Tenants are leaving rentals at normal rates. The problem for landlords is that a lot fewer are moving in, Parsons said. (…)

The slowdown is widespread, with rents falling month-over-month in September in 69 of the top 100 US cities. But it varies widely by geography, and many markets are still quite heated. Rents in the New York, San Diego, Miami and Orlando, Florida, areas, all jumped by at least 12% last month from a year earlier, according to Apartment List data, still gangbusters relative to pre-Covid levels.

It’s normal for rents to dip in the months leading into the winter holidays. But if demand doesn’t return by next spring, problems for landlords will worsen, Popov said. There’s a near-record amount of newly-built apartments under construction and heading for completion, adding to the rental inventory. (…)

The tanker is turning (The Market Ear)

MS Rates guru Matt Hornbach:

“…if global growth weakness continues to weigh on commodity prices, headline PCE inflation may annualized even lower, given tough comparisons to prices last year. So the tanker is turning, we think, and investors should start preparing for pink skies.

…Our core view is that the Fed will not deliver more hikes than priced in, and both inflation and economic data optics will allow them to do so…We think the environment remains conducive to consolidation of Treasury yields, as we head into an FOMC meeting where Powell could reinforce the recent Fedspeak, which seems to be cautioning against infinitely extrapolating higher terminal rates.”

Yellen Flags Potential for Buybacks of Treasury Securities

Treasury Secretary Janet Yellen flagged the potential for buybacks of certain US government securities, after her department quizzed market participants on the potential for the maneuver to improve liquidity in the market.

“It’s something a number of” other governments “have done from time to time,” Yellen said in answering reporters’ questions after an event in New York Monday. “I don’t think it would be a main intervention tool we would use — but it’s conceivable that something could be done there.” (…)

How Cold War II Could Turn Into World War III History shows that nothing causes fiscal and monetary instability quite like multiple big, long conflicts.

Very long but must-read article by Niall Ferguson. My favorite parts:

(…) The events of this year have reminded us of what is at stake in cases of great-power conflict. The war in Ukraine qualifies because Russia is still clearly a great enough power that it would probably have achieved its annexationist aims by now had it not been for large-scale financial, military and technological assistance to Ukraine from the US, the European Union and other associated states. This is a big war, measured by both casualties and costs. (…)

Regrettably, major policy errors were committed in the second plague year of 2021. (…) Those who saw a better analogy with the Fed’s “great mistake” of the late 1960s have been vindicated by the persistence of inflation. (…)

Most accounts of the Great Inflation of the 1970s tend to underestimate the role that war played. (…)

I recently heard it said that the 2020s are not likely to be as inflationary as the 1970s because labor is less organized, so the risk of a wage-price spiral is lower. But I would draw your attention to a number of important differences that make our contemporary circumstances more worrisome than the situation in the 1970s.

Monetary growth rates were significantly higher between the second quarter of 2020 and that of 2021 than at any point in the 1970s. Year over year, they remained in double digits even after velocity, the rate at which money changes hands, had recovered.

Productivity growth is lower today in nearly all OECD countries than it was 50 years ago. Demographic trends are worse today, with a significantly higher ratio of dependents to the working-age population. Fiscal positions are worse today, with much larger amounts of government debt and projected deficits relative to GDP, not least in the US.

Financial markets are more complex today and therefore more fragile. There were no such things as liability-driven investments for pension funds in the 1970s. The onset of Covid in March 2020 exposed fragility in the US Treasury market not dissimilar to what we saw in the UK gilts market at the end of last month.

Then we had pollution; now we have climate change. Our political stability looks even worse than it seemed at the time of Watergate. (…)

The war in Ukraine is lasting much longer than the [Yom Kippur] war of 1973 (approaching eight months compared with 19 days). So far, there is no sign of détente in Cold War II — quite the opposite, in fact — so there is a non-trivial risk that we could soon witness a confrontation between the US and China over Taiwan.

Finally, although media attention currently focuses on the women’s protests sweeping Iranian cities, they coincide with the failure of the attempt to revive the Iran nuclear deal. The Tehran regime will likely speed up its effort to acquire a nuclear weapon, increasing the probability of war in the region, as no Israeli government will countenance a nuclear-armed Iran.

We may get lucky. We may get away with just re-running the 1970s (…).

Yet there is a much worse scenario, in which we get something closer to the 1940s, with regional conflicts coalescing into something like World War III — albeit with smaller armies, many unmanned weapons systems, and far more powerful and accurate bombs.

What makes me worry more about this scenario is the Biden-Harris administration’s new National Security Strategy, belatedly published last week. “We do not seek conflict or a new Cold War,” write the authors, presumably led by National Security Adviser Jake Sullivan. They then proceed to delineate an unmistakable cold war strategy. As they say, “the post-Cold War era is definitively over and a competition is underway between the major powers to shape what comes next.” In other words, Cold War II has begun, in all but name.

Strip away the woke stuff about “climate change … the greatest and potentially existential [problem] for all nations” and “the needs of the most marginalized, including the LGBTQI+ community,” and you are left with a significant amount of President Donald Trump’s NSS from five years ago, which was all about “great power competition.” In fact, the word “competition” appears 44 times in the new NSS, compared with just 25 in the 2017 edition. (…)

Given that China is clearly the administration’s higher priority, it is not immediately apparent what purpose is served by a protracted war in Eastern Europe. But a recent speech by Sullivan provided the answer. (…)

And here’s the key point. Sanctions on Russia, Sullivan declared, have “demonstrated that technology export controls can be more than just a preventative tool … they can be a new strategic asset in the U.S. and allied toolkit.” In other words, the US-led economic war against Russia is like a demo for China’s benefit: This is what we can do to you, too. (…)

The aim is to impair Beijing’s ability to deploy artificial intelligence by driving up the cost of computing in China, whether for companies or the government. (…)

As Edward Luce noted in the Financial Times, “The new restrictions are not confined to the export of high-end US semiconductor chips. They extend to any advanced chips made with US equipment. This incorporates almost every non-Chinese high-end exporter, whether based in Taiwan, South Korea or the Netherlands. The ban also extends to ‘US persons,’ which includes green card holders as well as US citizens.”

The most extraordinary thing about these measures is how little comment they have elicited in the media. Trump did nothing so radical.  As Luce put it: “A superpower declared war on a great power and nobody noticed.” (…)

• Biden Team Works on Setting Up Xi Meeting as Chinese Leader Tightens Grip Possible meeting when world leaders gather at a Group of 20 meeting in Bali next month
• Researchers Find Possible Replacement for Rare Earth in Magnets New way of making tetrataenite could help produce magnets

Scientists may have discovered a method for making magnets used in wind turbines and electric cars without the rare-earth metals that are almost exclusively produced in China.

A team from the University of Cambridge and colleagues from Austria found a new way to make tetrataenite, a possible replacement for rare-earth magnets, according to a research paper from the university. If the manufacturing process is proven to be commercially feasible, it could loosen China’s dominance of the rare-earth market where it accounts for over 80% of global supply.

US President Joe Biden earlier this year backed efforts to boost output of the critical materials, while the European Union’s foreign service this month said the bloc should diversify supply chains, including for rare-earth metals, away from China. In 2019, the Asian nation warned it could cut exports to hit back in its trade war with Washington. (…)

COVID-19: HERE WE GO AGAIN!

From Katelyn Jetelina: “Here we go again. Pandemic fatigue coupled with the most contagious Omicron subvariants yet, BQ.1.1 and XBB, are driving yet another viral surge across the globe. Pair this with waning immunity and suboptimal booster uptake among the vulnerable, and the U.S. may see what’s happening in Germany right now.”

FLASH PMIs

Eurozone economic contraction intensifies in October

The seasonally adjusted S&P Global Eurozone PMI® Composite Output Index fell from 48.1 in September to 47.1 in October, according to the preliminary ‘flash’ reading based on approximately 85% of usual survey responses. The PMI has now registered below the neutral 50.0 level, indicating falling business activity levels, for four consecutive months. The rate of decline has accelerated over this period to reach the fastest since November 2020. Excluding pandemic lockdown months, the latest reading was the lowest since April 2013.

Manufacturing led the downturn, with factory output declining for a fifth month running and slumping at a rate not seen prior to the pandemic since July 2012. Service sector output also fell, down for a third consecutive month, contracting to a degree not witnessed outside of pandemic lockdowns since May 2013.

Any growth was confined to technology, industrial services and pharmaceuticals & biotech firms. Some of the steepest downturns were seen in the chemical & plastics and basic resource sectors, often reflecting high energy dependencies.

Within the euro area, the steepest decline continued to be recorded in Germany, where the composite PMI sank to 44.1, its lowest since May 2020 and, excluding the pandemic, its weakest since June 2009. Germany’s manufacturing and service sectors both reported steep and accelerated rates of contraction.

Output meanwhile stalled in France, the composite PMI registering 50.0 from 51.2 in September, representing the first month in which output has failed to grow since March 2021. A modest expansion of service sector output offset a marked (albeit moderating) decline in manufacturing.

Elsewhere across the region, output fell for the second successive month, dropping at the fastest rate since January 2021, and excluding the pandemic since June 2013. A modest decline in service sector output was accompanied by a steeper fall in factory production.

New orders placed for goods and services meanwhile fell for a fourth straight month, the rate of loss accelerating to a pace not seen since December 2012 barring pandemic lockdown months, to indicate a steepening downturn in demand. Excluding the pandemic, the drop in manufacturing orders was the sharpest since April 2009, while the decline in new business inflows into service sector companies was the steepest since June 2013.

The drop in new orders meant companies continued to rely on existing backlogs of work to help maintain business activity levels, causing backlogs of orders to fall for a fourth month in a row, led by a particularly sharp decline in manufacturing. The backlogs decline was most marked in Germany, whereas France reported rising outstanding business.

While employment growth ticked up slightly in October, the latest gain was the third-lowest seen over the past year-and-a-half, reflecting job cutting at some firms amid signs of surplus capacity relative to sales and a broader reticence to hire amid uncertainty regarding the outlook.

Business expectations for the year ahead remained subdued, running at the second-lowest since the early pandemic lockdowns. Confidence was especially low in manufacturing, and particularly in Germany, reflecting concerns over energy as well as the rising cost of living and global growth slowdowns. While sentiment picked up slightly in the service sector from the previous month, it remained weaker than at any other time since early-2020 and far below levels seen earlier in the year, linked principally to concerns over the rising cost of living and tightening financial conditions.

Although factory output was again subdued in many cases by component shortages and concerns over energy, October saw the overall incidence of supply chain delays ease to the lowest for just over two years. Companies reported fewer component shortages and improved shipping, albeit often linked to suppliers being less busy due to weaker demand. Input buying by manufacturers fell at one of the steepest rates seen since the global financial crisis, reflecting lower production requirements and increasingly broad-based deliberate inventory reduction policies amid weaker than expected sales.

Although easing raw material supply constraints helped alleviate some inflationary pressures, rising energy costs and upward wage pressures ensured the overall rate of input cost inflation remained highly elevated, easing only slightly from September’s three-month high (and even increasing slightly in services).

Higher costs fed through to a stubbornly high rate of increase of prices charged for goods and services, which dipped only marginally compared to September to register the sixth-largest monthly increase since comparable data were first available in late-2002. Rates of selling price inflation cooled only marginally in both manufacturing and services, in both cases remaining far higher than anything ever seen prior to the pandemic.

Japan: Faster rise in business activity, but inflationary pressures remain elevated

Latest flash PMI data has pointed to a further improvement in Japan’s private sector economy in October. The recent easing in international border restrictions and the launching of the Nationwide Travel Discount Programme earlier this month boosted activity levels and order book volumes. The manufacturing sector, however, continued to struggle in the face of weak demand conditions and severe cost pressures. In fact, the rate of output price inflation rose to a fresh survey peak in October as firms continued to share increasing cost burdens with their clients. With inflationary pressures remaining elevated across the private sector, business confidence dipped to a six-month low. (…)

For the fourth month running both output and new orders declined, albeit at softer paces than in September. Meanwhile, cost pressures across the manufacturing sector remained elevated, while the rate of output price inflation accelerated to a fresh survey peak. Despite this, overall business sentiment ticked higher amid hopes for of a sustained COVID-19 recovery.

  

China’s Economy Grew 3.9% in the Third Quarter Result topped the 3.5% economic growth expected by economists

(…) Monday’s figure also put overall growth for the first nine months of 2022 at 3.0%, well below the official full-year target of about 5.5% set in March. (…)\

Industrial production grew by 6.3% in September from a year earlier, accelerating from a 4.2% increase in August, as policy stimulus measures kicked in and a power shortage caused by extreme weather during the summer eased.

Growth in fixed-asset investment, including for infrastructure projects, remained steady, expanding by 5.9% during the first nine months of the year compared with a year earlier, slightly faster than 5.8% gains in the first eight months of 2022.

China’s property slump, which was triggered in part by Mr. Xi’s attempts to tamp down on speculation in the sector, showed little sign of reversing in September, as property investment, new construction starts and home prices fell more.

The prolonged slide in Chinese new-home prices accelerated last month. Prices fell at their steepest level in more than seven years in September, even after officials rolled out more policies to boost the embattled sector and support home buyer demand.

  

(bloom.bg/3eYxwHv)

Average new-home prices in 70 major cities in September fell 2.3% from a year earlier, after falling 2.1% in August, according to Wall Street Journal calculations based on data released Monday by China’s statistics bureau. (…)

It’s not only new homes per GS:

The share of cities that experienced sequentially higher property prices fell further in both the primary and secondary markets in September

Source: NBS, Goldman Sachs Global Investment Research

Retail sales, a gauge of consumer spending, rose by a weaker-than-expected 2.5% from a year earlier in September, down from a 5.4% increase in August.

China’s headline measure of joblessness, the urban surveyed unemployment rate, edged up to 5.5% in September from 5.3% for the previous month, the statistics bureau said. Joblessness among people aged between 16 to 24 remained elevated at 17.9%. (…)

Shipments out of China rose 5.7% from a year earlier in September, down from a 7.1% increase in August, China’s General Administration of Customs said Monday, after also having delayed its data release by more than a week.

China’s imports increased by an anemic 0.3% in September from a year earlier, on par with August’s figure, partly because of the real-estate downturn, which dampened China’s appetite for raw materials. (…)

(ZeroHedge)

Fed Rate Slowdown Talk Offers Respite for Markets Signs that the Federal Reserve might soon slow the pace of its interest-rate increases helped calm Treasury yields at the end of last week, offering some hope to investors that a more-stable bond market could ease pressure on stocks.

• James Bullard said the strong US labor market gives the central bank more room to raise interest rates—another 75-basis-point hike is all but a lock—so it can get inflation back to the 2% target “relatively quickly.”
• Colleague Mary Daly said policymakers should start planning for a reduction in the size of rate increases while reiterating that rates as high as 5% next year were still “a fairly good indication of where things are looking.”

Most in NABE Survey Say US Already in Recession or May Be Soon

A National Association for Business Economics survey showed over half of the respondents view a recession as more probable than not, while another 11% indicated the economy is already in one. The survey of 55 NABE members conducted Oct. 3-10 also indicated slower demand, an easing in labor market tightness and a slight moderation in price pressures. (…)

Some 33% reported higher employment at their firms over the past three months, down from 38% in the July survey. Hiring plans also eased, with only 22% of respondents expecting to increase headcount over the next three months. That’s down from 50% at the start of the year.

While nearly two-thirds of respondents said wages rose at their firms over the past three months, wage cost expectations for the coming months dropped significantly and now match the lowest reading since April 2021.

As for inflation, an index of materials costs fell 24 percentage points from a record reading in the previous survey. The outlook for costs also declined, and a smaller share of those surveyed expect an increase in the prices their firms charge in the coming months.

Whirling winds at Whirlpool

• Net sales decline of (12.8)%, or (9.7)% excluding currency, impacted by lower volume as a result of slowing demand, partially offset by favorable product price/mix
• Continued demand weakness across key countries; revenue decline, excluding currency and Russia, of ~8.0 percent
• N.A. EBIT margin of 9.8 percent, compared to 17.7 percent in the same prior-year period, impacted by aggressive inventory reduction
• Expect full-year 2022 revenues of approximately $20.1 billion (down ~9 percent)
• Reduced earnings per diluted share from $22.00 to $24.00 to ~$19.00 on an ongoing basis

On the call, management said they are right-sizing production and inventories, reducing fixed and variable costs, and focusing on cash generation and deleveraging. Production is reduced to levels seen in the 2Q20 covid shutdowns, and will be maintained through 4Q and into early 2023 given the low visibility.

WHR is obviously directly impacted by the housing recession but it also reflects deteriorating consumer demand and the impact that mitigating measures are having on the economy.

• Rate surge hits car affordability

The average monthly payment on a new vehicle hit a high of $703 during the quarter.

• The amount that buyers financed for a new vehicle reached an all-time high of $41,347, compared to $38,315 last year.
• Rates are pricier for used car loans — the average is 9.2%, according to data from Edmunds.
• 14% of borrowers in Q3 committed to paying $1,000 or more a month on their car loan — compared to 8.3% in 2021.

Restaurants’ Post-Covid Boom Is Winding Down The rising cost of eating out is crimping customer traffic

A September survey from research firm Datassential Inc. found half of consumers had recently cut back on restaurant meals due to high inflation. It was the No. 1 expenditure respondents opted to trim, followed by apparel and travel. About 30% of those surveyed said they plan to dine out less or stop visiting restaurants entirely in the coming months. (…)

While the Commerce Department reported the total value of September retail sales at restaurants and bars rose by 0.5% from the prior month, the data isn’t adjusted for price changes. After adjusting for menu increases, the National Restaurant Association found sales declined, marking the third such drop in four months. (…)

Olive Garden owner Darden Restaurants Inc. sales missed Wall Street’s expectations in the quarter ended Aug. 28. The company, which has raised its prices, blamed inflation for lower spending, especially among those who earn less than $50,000 a year. 

September saw a higher number of consumers who slashed spending versus August, according to Cowen. Dining out and social events were the top expenditures being cut or expected to be cut. This outpaced other categories such as travel or groceries, according to the financial-service company’s monthly survey of 2,500 US consumers. (…)

LABOR MARKET WATCH

Job Seeker Interest in Holiday Jobs Up 33% from 2021 Employer demand appears to cool as searches increase.

Job seeker interest in holiday work is heating up after two lukewarm years. As of September 30, holiday-related seasonal job searches on Indeed as a share of total job searches (see Methodology) reached its highest level since 2019. In contrast, employer demand for holiday workers — measured by seasonal job postings on Indeed — has cooled from last year. Such job ads were down 8.2%, but still 5.2% above pre-pandemic levels. Retail sector jobs continued to lead the pack, accounting for 56.5% of seasonal postings in September.

The combination of warming job seeker interest and cooling employer demand suggests workers may have fewer advantages in the hunt for seasonal jobs this year. Meanwhile, employers may benefit from a larger pool of potential applicants competing for fewer positions than a year ago.

Since many seasonal jobs are in-person, the increase may partly reflect an easing of job seeker worries about COVID-19. Additionally, inflation and the rising cost of living may be prompting people to look for seasonal employment to supplement household income. Still, there’s no indication US workers are taking multiple jobs at elevated rates this year. In September 2022, only 4.9% of total employment came from multiple job holders, lower than 5.3% in 2019. Multiple job-holding rates tend to tick up slightly in holiday months, but the current trend remains below pre-pandemic averages. (…)

Not only are employers advertising fewer openings on Indeed, but they’re also showing less urgency to fill those jobs. In September 2021, around 10% of holiday-related job ads used words that expressed an urgent need to hire, such as “hiring urgently,” “urgent hire,” or “immediate start.” Fast forward a year and the intensity has faded, with a little over 6% of seasonal job postings communicating hiring urgency this September. This drop is significant, but hiring intensity and urgency are still elevated compared with pre-COVID trends.

The number of job postings offering hiring incentives such as signing bonuses or cash tells a similar story. As of September 30, only 0.7% of seasonal job postings advertised hiring incentives — a 2.6 percentage point decrease from the 3.3% spike in September 2021. This pullback, along with fewer job postings and less urgency, suggests softening employer demand and reduced intensity in the hunt for seasonal workers.

This scatter graph from CalculatedRisk compares October retail hiring with the real increase (inflation adjusted) for retail sales (Q4 over previous Q4) between 2005 and 2021. “The dot in the upper right – with real Retail sales up almost 10% YoY is for 2020 – when retail sales soared due to the pandemic spending on goods (service spending was soft).”

• Re the JOLTS job openings: “Half of our listings are a little bit of ‘fishing listings,’ ” Foreman said. “What I mean by ‘fishing listings’ is we don’t really need to fill the position, but if we come across a résumé that really looks special, we would fill the position.” (WaPo)

Canada Retail Sales Fell in September After Short-Lived Rebound Receipts for retailers dropped 0.5% last month, according to an advance estimate released Friday by Statistics Canada. That erases much of a 0.7% jump in August, according to the agency, and brings sales down near July levels, a very weak month that saw receipts fall by 2.2% — the biggest drop in more than a year.

EARNINGS WATCH

From Refinitiv/IBES:

Through Oct. 21, 99 companies in the S&P 500 Index have reported earnings for Q3 2022. Of these companies, 74.7% reported earnings above analyst expectations and 22.2% reported earnings below analyst expectations. In a typical quarter (since 1994), 66% of companies beat estimates and 20% miss estimates. Over the past four quarters, 78% of companies beat the estimates and 18% missed estimates.

In aggregate, companies are reporting earnings that are 5.4% above estimates, which compares to a long-term (since 1994) average surprise factor of 4.1% and the average surprise factor over the prior four quarters of 7.0%.

Of these companies, 67.7% reported revenue above analyst expectations and 32.3% reported revenue below analyst expectations. In a typical quarter (since 2002), 62% of companies beat estimates and 38% miss estimates. Over the past four quarters, 74% of companies beat the estimates and 26% missed estimates.

In aggregate, companies are reporting revenues that are 1.4% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.2% and the average surprise factor over the prior four quarters of 2.7%.

The estimated earnings growth rate for the S&P 500 for 22Q3 is 3.1% [+3.6% one week ago]. [Note that Factset is at +1.5%] If the energy sector is excluded, the growth rate declines to -3.5% [-3.1%].

The estimated revenue growth rate for the S&P 500 for 22Q3 is 9.9% [10.1%]. If the energy sector is excluded, the growth rate declines to 6.8% [6.5%].

The estimated earnings growth rate for the S&P 500 for 22Q4 is 4.4% [5.0%]. If the energy sector is excluded, the growth rate declines to 0.4% [0.8%].

In spite of the beats, estimates are being reduced. Analyst are reducing nearly 2 estimates out of 3. For Q3, 7 of the 11 sectors have seen their Q3 EPS growth rates decreased since Oct. 1, from +4.5% in aggregate to +3.1%. For Q4, 9 of 11 have been reduced, from +5.8% to 4.4%.

Trailing EPS are now $221.54. Full year 2022: $222.14e. 12-m fw: $232.61e. Full year 2023: $238.78e.

• The Philly Fed’s manufacturing index points to a crash in corporate earnings.

Source: @MikaelSarwe via The Daily Shot

As of Friday’s close:

• The S&P 500 median trailing P/E is now 17.6 (17.3 last week, 17.7 four weeks ago). On forward: 15.9 (15.1 and 15.7).
• The 6 largest stocks by weight (24.2% of the index) have an average P/E of 43.5 (41.6 and 47.0). On forward: 28.9 (26.8 last week).
• 39.0% of the companies have a P/E below 15.0 (41.0% last week). On forward: 43.4% (48.4%).
• 17.6% (19.4% last week) are below 10x. On forward: 19.2% (21.0%).

CEO CONFIDENCE AND EQUITY MARKETS

A reader sent me a note on my posting last week of the Conference Board CEO Confidence Index: “at this level of past CEO bearishness it has proved to be an excellent long term buying entry point for the S&P index.”

I had posted the chart in the context of assessing recession probabilities but Gerry raised a potentially more practical application: is it a dependable market timing tool?

No, … and yes…

• No: In the 3 instances when the Index reached 40, the S&P 500 kept dropping: equities bottomed in 09/02, 38% lower than in Q4/00. They bottomed at 666 in 03/09, significantly lower than at any point in 2007 or 2008. In 2019, equities flattened after Q1 along with profits but the pandemic changed everything thereafter.
• Yes: in the sense that pessimistic CEOs likely reflect a deteriorating profit outlook. Quarterly profits peaked in Q4’00 and declined 31% in 2001. Profits peaked in June 2007 before collapsing during the next 18 months. They flattened between Q2’12 and Q2’13 and again in 2019.

To the extent that equities react to profits, poor CEO confidence warn us of a more difficult profit cycle ahead which can negatively impact equities, sometimes quite significantly.

The recent CB CEO survey was conducted in the last 2 weeks of September. Some details:

• 81% said economic conditions were worse than 6 months ago.
• 74% expected conditions to worsen. Just 5% of CEOs said conditions would improve.
• 52% said conditions in their own industries were worse, up from 48%.
• 54% expect conditions to worsen, up from 48%. Just 19% expected conditions to improve.
• 44% expect to expand their workforce over the next 12 months, down from 50% in Q3.

Duke University’s Fuqua School of Business and the Federal Reserve Banks of Richmond and Atlanta published their latest CFO survey on September 28, 2022.

CFOs said their optimism about the overall economy rose modestly from its recent low. Optimism about their own firms, though well below levels from a year ago, remained steady alongside some improvement in expectations for revenue, employment and cost growth.

CFOs said inflation was the most pressing concern facing their firms. Firms revised unit cost growth during 2022 down to 8.9 percent from 10.2 percent in the prior survey. These costs remain at elevated levels, and nearly all firms reported experiencing larger-than-normal cost increases.

“The share of firms with abnormally large increases in the majority of their costs doubled since the second quarter of last year, from 26 percent to more than 52 percent,” said Atlanta Fed economist Brent Meyer. “More than 80 percent of firms expect cost pressures to persist into next year, and around a third expect these pressures to last longer than a year.

Compared to the last survey, fewer respondents said they planned to invest in structures or equipment over the next six months, with most saying they had ample capacity. In addition, the share of CFOs noting unfavorable financing conditions doubled to 15 percent, and the share citing a need to preserve cash increased 10 percentage points to 38 percent.

CFOs said they anticipate continuing to hire at a moderate pace, despite concerns about labor quality and availability.

Note that CFOs are currently much more optimistic about their own company than CEOs. Note also that that was also the case in 2007 and early 2008…

Morgan Stanley’s Wilson Sticks to Bullish Call Amid Client Doubt

One of Wall Street’s most vocal bears is doubling down on his short-term bullish call on equities a week after his initial view was met with skepticism by clients.

Morgan Stanley’s Michael Wilson sees stocks grinding higher as markets transition to expectations of falling inflation and lower interest rates, he said in a note Monday.

(…) Wilson said a pullback in bond yields should provide fuel for the next leg of the tactical rally, “until we get full capitulation on 2023 earnings estimates, something we think may take a few more months.”

“While some may argue a recession is inevitable over the next 6-to-12 months, the market will not price it, in our view, until it is definitive (!!),” Morgan Stanley’s Wilson said.

The strategist, who correctly predicted this year’s slump, sees the S&P 500 Index bouncing as much as 15% if it breaches its 200-week moving average of 3,605 points, about 4% below Friday’s close. A similar view is held by Stifel Nicolaus & Co. strategists, who said in a separate note they see the benchmark rallying to 4,300 points in the next 6 months as inflation cools and recession is pushed back to the third quarter of next year. (…)

Not all strategists are so sanguine. Those at Goldman Sachs Group Inc. say share prices “do not reflect the risk of a US recession that many investors expect during the coming year,” they wrote in a separate note, favoring reasonably valued defensive sectors.

Equity fund flows

The strength of the US dollar continues to grab the financial headlines not least for how it may impact emerging economies. The equity flow data from EPFR offers some fresh perspective on this. Measured on a cumulative basis, and with respect to the start of 2020, European equity markets have seen a major exodus of investment capital, with geopolitical instability clearly a key reason for this.

Chiming though with the dollar’s strength, US equity markets have, in contrast, been a major beneficiary of capital inflows. Somewhat surprisingly (at least to this observer) emerging equity markets too saw relatively solid net inflows of capital during 2021, possibly because trade growth for many of these economies was quite firm at that time. But, this trend has now started to reverse over the past 6 months, in tandem with the strength of the dollar.

(Haver Analytics)

Never have so many lost so much More superlatives via Goldman’s flow guru Scott Rubner.

GS

Four years into the trade war, are the US and China decoupling? US imports of some Chinese products have tanked. Others are higher than ever. How Trump’s selective trade war continues to matter.

(…) On the one hand, US imports of certain products from China—including semiconductors, some IT hardware, and consumer electronics—have fallen dramatically. Even clothing, footwear, and furniture imports are down.

But on the other, imports from China of laptops and computer monitors, phones, video game consoles, and toys are higher than ever. Demand for these products surged in response to the COVID-19 pandemic. Stuck at home, Americans switched their spending away from services and toward many of these goods manufactured in China. (…)

So far, the decoupling that is—and is not—occurring is partly the result of President Donald Trump’s trade war, the selective way it was waged, and the continuation of many of those policies under the Biden administration. A more recent motivating factor that may be spurring decoupling is the desire for increased diversification of imports to make supply chains for certain goods more resilient. Other drivers include human rights, democracy, and geopolitical concerns.

But the data also show something else. Even if policymakers foresee long-run benefits in disentangling the two economies, their choices come with immediate costs. These costs include product shortages, as supply chains struggle to adjust, as well as inflation, as companies find it expensive to establish new suppliers. Firms and ultimately consumers need to prepare to pay the price for the new policy-induced reality. (…)

Today, US imports from China (red line) remain well below the pre-trade war trend (dashed line), as defined (conservatively) by US imports from the world, and have only recently returned to pre-trade war levels of June 2018.[2] China is now the source of only 18 percent of total US goods imports, down from 22 percent at the onset of the trade war.

In comparison, current US imports from the rest of the world are 38 percent higher than pre-trade war levels and are even above trend (blue line). With a few exceptions, these imports were not hit with new US tariffs.[3] They have also recovered strongly following the onset of the pandemic. (…)

Imports of products never hit with trade war tariffs are now 50 percent higher than immediately prior to the trade war. (US imports from the rest of the world of those same products are also up but by only 38 percent.) Products not facing tariffs made up roughly 33 percent of total US imports from China before the trade war and have grown to 47 percent today. (…)

US tariffs are not the only “cause” of the United States importing less from China. Some labor-intensive production closely associated with much of the clothing and footwear industry was likely relocating anyway, following a trend that was visible even before the trade war. China was losing competitiveness in this industry, relative to other emerging economies, as local wages have increased. (For other products, Vietnam may be rising as a source at the expense of other higher-income countries, such as South Korea.) (…)