Month: November 2022

USA: Service sector output decline gathers pace amid renewed drop in new business

Service sector firms in the US registered a sharper contraction in business activity at the start of the fourth quarter, according to the latest PMI™ data. The fall in output quickened amid a renewed decrease in new orders and weaker client demand. The impact of inflation and dollar strength also dampened foreign demand conditions further.

Companies saw a solid fall in backlogs of work amid a reduction in new business, which in turn drove cost cutting efforts and the near-stagnation of employment at service providers. Weak demand conditions also weighed on business expectations which slumped to the lowest for over two years.

Amid reports of some input costs falling and in an effort to drive new orders, the rate of charge inflation eased to the slowest since December 2020.

The seasonally adjusted final S&P Global US Services PMI Business Activity Index registered 47.8 in October, down from 49.3 in September but higher than the earlier released ‘flash’ estimate of 46.6. The latest data signalled a modest contraction in business activity across the service sector. The decrease in output was commonly linked to lower new orders, with panellists attributing weak client demand to the impact of inflation and interest rates on increased client hesitancy and more frequent order postponements.

New business fell back into contraction during October, thereby signalling the third decline in new orders over the last five months. The drop in client demand was only marginal, but was often attributed to postponements or delays in order placement as customers were impacted by higher interest rates and inflation.

With regard to exports, service sector firms recorded a fifth successive decline in new business from abroad. The rate of contraction accelerated to the second-fastest since May 2020 amid weak global demand conditions.

In line with lower new orders and reduced business S&P Global US Services PMI™ requirements, service providers indicated broadly unchanged employment levels at the start of the fourth quarter. A near-stagnation in workforce numbers brought to an end a 27-month sequence of expansion in staffing levels. Although some firms noted efforts to fill previously held vacancies, others stated that voluntary leavers were not replaced.

Despite little change in employment, lower new business inflows and sufficient capacity allowed firms to work through their backlogs during October. The level of outstanding business fell for the fourth time in five months, and at a solid pace.

Meanwhile, cost pressures softened slightly in October. The rate of input price inflation was faster than the series trend, but eased to the slowest since January 2021. Hikes in fuel, supplier and wage costs were linked to the further uptick in expenses, but reports of lower prices for some inputs were behind the slower rise.

In turn, and in an effort to drive new orders, service providers recorded a softer increase in output charges. Although firms continued to note the pass-through of higher costs to clients, some mentioned concessions made to customers. The pace of charge inflation eased for the sixth month running to the slowest since December 2020.

Business confidence across the service sector weakened in October. The outlook for output over the coming year was dampened by concerns regarding inflation and greater customer hesitancy.The degree of optimism remained below the series average and was the lowest since September 2020.

The S&P Global US Composite PMI Output Index posted 48.2 in October, down from 49.5 in September. The fall in business activity was driven by a sharper decline in service sector output, but only modest overall as manufacturing output rose marginally.

Driving the decrease in activity was a renewed drop in new business during October. The fall in client demand was broad based, as manufacturers and service providers noted contractions. Dollar strength and inflation weighed on new export orders which fell further.

Rates of input cost and output charge inflation eased across the private sector in October. Reports of reductions in some material costs which were passed through to customers via concessions were cited as factors behind softer inflationary pressures.

Weaker output expectations for the year ahead, alongside a solid fall in backlogs of work, led to a subdued increase in private sector employment. Although manufacturers saw a marginal uptick in workforce numbers, service providers kept staffing levels broadly unchanged.

• The ISM services index decreased by 2.3pt to 54.4 in October, below expectations for a more moderate decline. The underlying composition was weak, as the business activity (-3.4pt to 55.7), new orders (-4.1pt to 56.5), and employment (-3.9pt to 49.1) components all fell. Unlike in Tuesday’s ISM manufacturing report, price pressures rebounded sequentially in the ISM services report: the supplier deliveries component increased by 2.3pt to 56.2 (nsa) and the prices paid component increased by 2.0pt to 70.7 (sa). The new export orders index dropped by 17.4pt to 47.7 (nsa), the largest decline on record. (GS)
• Financials category signals sharpest fall in business activity since April 2020

Four out of seven US sectors monitored by S&P Global PMI data recorded lower business activity during October. Financials again posted by far the steepest reduction in activity (index at 35.2), with the downturn accelerating to its fastest since April 2020. Financials has been the worst performing category in each month since June.

Consumer Services (index at 47.5) was the second-weakest performing sector in October. Business activity has now fallen for four months in a row, although the latest reduction was the least marked since July. Survey respondents typically commented on falling consumer spending on non-essential services due to intense cost-of-living pressures.

Producers of Consumer Goods also returned to contraction territory in October, although the rate of decline was only fractional and much softer than seen for Consumer Services.

October data indicated a sustained reduction in output across the Basic Materials category, driven by softer demand for manufacturing inputs. The latest fall in production volumes was the steepest since June 2020.

Marginal rates of output expansion were recorded in the Industrials and Healthcare sectors during October, with the latter signalling an increase in activity for the first time since April.

Finally, the Technology sector was the fastest-growing area monitored by the survey during October. Business activity expanded at the quickest pace since May, which continued the turnaround from the downturn seen in August.

Pre-Twitter announcement:

• Stripe to Cut 14% of Jobs
• Alphabet said last week that its hires in the fourth quarter would be less than half those of the third quarter.
• Meta said it would hold its headcount flat at current levels through 2023.
• Apple has paused hiring for many jobs outside R&D. (Bloomberg)
• Lyft, the ride-hailing company, is laying off 13% of its staff.
• Chime, a fintech that relies heavily on spending by millennials, told CNBC that it planned to cut 12% of its 1,300-person workforce.
• Opendoor slashed 18% of its headcount.
• Layoffs Hit Tech as Amazon, Lyft Warn of Downturn The outlook for tech industry jobs worsened with ride-hailing company Lyft and payments company Stripe both announcing major layoffs and Amazon saying it will freeze corporate hiring for months.

The outlook for tech industry jobs worsened on Thursday, with ride-hailing company Lyft Inc. LYFT -2.00%decrease; red down pointing triangle and payments company Stripe Inc. both announcing major layoffs and Amazon.com Inc. AMZN -3.06%decrease; red down pointing triangle saying it will freeze corporate hiring for months. (…)

“We’re facing an unusual macroeconomic environment, and want to balance our hiring and investments with being thoughtful about this economy,” Beth Galetti, senior vice president of people experience and technology at Amazon, said in a memo to employees this week. The memo notified them of Amazon’s plan to pause hiring across its corporate workforce, which includes employees in high-profile teams such as Prime Video and grocery. (…)

“Negative productivity can be hidden when everything is going great,” said Mark Stoeckle, chief executive of investment firm Adams Funds. “It is easier to protect your margins when revenues are going up, but when they are stopping or going up slower, then you have to look at where you are spending your money.” (…)

Brian Olsavsky, Amazon’s chief financial officer, last week said company executives have seen signs that consumers are tightening their budgets and that inflation remains high. (…)

U.S. Productivity Rebounded in Q3 But Still Subpar

Nonfarm business sector productivity edged up 0.3% q/q saar (-1.4% y/y) following quarterly declines of 4.1% (not revised) and 5.9% (revised up from -7.4%) in Q2 and Q1, respectively. The Action Economics Forecast Survey had expected a 0.5% quarterly gain. This is the third consecutive decline from a year ago, the first time this has occurred since 1982.

The modest rebound in productivity reflected a 2.8% q/q saar increase in nonfarm business output in Q3 (+1.9% y/y) after a 1.2% decline in Q2. Hours worked rose 2.4% q/q (+3.4% y/y) in Q3 after a 2.9% rise in Q2.

Hourly compensation growth slowed to 3.8% q/q saar (+4.7% y/y) in Q3 from 4.5% in Q2. A historically tight labor market (with openings still well in excess of the number unemployed) continues to put upward pressure on wages. A 3.6% increase has been expected in the Action Economics survey. Despite the elevated growth in compensation, it has failed to keep up with the acceleration in inflation with real compensation per hour falling 1.7% q/q in Q3, though this was an improvement from a 5.5% q/q decline in Q2.

With the slight rebound in productivity and the slowdown in compensation growth, unit labor costs (labor cost per unit of output) also slowed. Unit labor costs increased 3.5% q/q in Q3, down from an 8.9% quarterly surge in Q2. However, the 6.1% y/y increase was still the third highest in the past 40 years, though down markedly from 7.6% on Q2. The Action Economics survey had expected a 4.1% q/q saar gain.

In the manufacturing sector, output per hour fell 1.3% q/q saar in Q3 after having risen 2.9% in Q2 as a 1.9% q/q increase in output was exceeded by a 3.3% rise in hours worked. Hourly compensation increased 2.4%, leading to a 3.8% rise in manufacturing unit labor costs.

Through October 29, the Chase Card Spending Tracker points to a -0.7% MoM decline in (nominal $) Control Sales.

Central banks tightening from all sides (BlacRock)

Rate hikes have consumed the market’s attention this year. And rightly so. Central banks are taking a “whatever it takes” approach to pushing inflation back down to their targets, in our view. (…) Most major central banks aren’t fully acknowledging that hiking enough to tame inflation will cause recessions, as we see it.

There’s another specter looming over markets: balance sheet reductions, or quantitative tightening (QT). Balance sheets have already started to dip this year. Central banks selling or ceasing to buy government bonds could increase the risk of financial dislocations from yield spikes sparking risk asset selloffs.

Bond yields have already jumped markedly this year. U.S., euro area and UK 10-year bond yields have each surged nearly 250 basis points since the start of the year. That’s primarily because markets are expecting higher policy rates. And investors aren’t yet demanding significantly higher compensation, or term premium, for the risk of holding long -term bonds, as we’ve said before.

QT could push up term premium, boosting the structural increase we see ahead as markets price in inflation risk and rate volatility in this new regime.

The process, timing and effects of QT will play out differently across central banks. The Fed trims its balance sheet by letting bonds run off, or reach their maturity date without replacing them, rather than selling them. That process started in June. It’s unclear how long it will continue for, but the trimming of the $9 trillion balance sheet increases the risk of overtightening policy as the Fed keeps up aggressive rate hikes.

A $2.2 trillion drop in the balance sheet over three years would hit bond markets the same as a roughly 30-basis-point hike in a normal scenario – and an 80-basis-point hike in times of crisis, Atlanta Fed research shows.

The U.S. Treasury is looking at potential disruptions to trading liquidity, asking primary bond dealers if it should buy back some less-traded bonds to reduce volatility as liquidity, or the ability to trade, has deteriorated.

Kicking off its QT, the ECB said that in November it would start incentivizing banks to hand back the emergency cash they borrowed and no longer need. Bond runoffs may be in store for next year. QT could widen the differences between the yields for member countries’ bonds. That’s particularly a concern for Italy, given its current account deficit and heavy debt load. The ECB’s anti-fragmentation tool and continued reinvestment of maturing bonds during its pandemic program may stave off some widening of peripheral yield spreads.

This week, the Bank of England (BoE) will become the first major central bank to sell bonds as part of QT, temporarily delayed during the turmoil of the long-term gilt selloff that prompted renewed purchases. The UK episode shows how financial dislocations can cause a delay or pause in QT programs. That may feed perceptions of financial dominance – that central banks have no choice but to keep buying bonds due to market strains.

Our bottom line: We think further, if slower, rate hikes are coming along with QT. QT may add to market strains and reasons why investors start demanding term premium, driving long-term bond yields higher, so we stay underweight DM bonds.

Within an underweight to Treasuries, we prefer short-dated bonds given better returns and less duration risk. We stay underweight DM stocks whose valuations don’t reflect the recession we expect to hit corporate earnings.

• Bank of England Raises Rates, Sees Long Recession The 0.75 percentage point hike is the largest since 1989, as the bank fights a surge in inflation from rising energy prices and projects a prolonged recession.

BofA Says Rush to Cash Is Now at Fastest Pace Since Pandemic

The asset class had inflows of $62.1 billion in the week through Nov. 2, according to a note from the bank citing EPFR Global data. That’s contributed to $194 billion of inflows into cash since the start of October — the fastest start to a quarter the pandemic roiled markets in the second quarter of 2020. (…)

Among other asset classes, global equity funds saw $6.3 billion of inflows in the week, while nearly $4 billion was pulled from bonds, according to the EPFR data. (…)

Bank of America’s custom bull-and-bear indicator remained at its “extreme bearish” level for a seventh consecutive week, the longest period since the global financial crisis in 2008-2009. The maximum bearish level is often regarded as a contrarian buy signal. (…)

FYI, 2Yr Treasuries are yielding 4.74% this morning, up from 3.2% 3 months ago. Last 6 months: Core CPI: +6.5% annualized but Core PCE inflation: +4.5% annualized.

The Investors Intelligence and the AAII charts on bulls and bears courtesy of Ed Yardeni:

And this also important chart from the ever useful and generous Ed Yardeni. Note that the 200dma is falling…

Fed Signals Smaller Rises but Ultimately Higher Rates Chairman Jerome Powell says too soon to talk about pausing rate increases

The increase approved Wednesday, the Fed’s fourth consecutive 0.75-point rate rise, lifts the central bank’s benchmark federal-funds to a range between 3.75% and 4%. After the decision, Chairman Jerome Powell said officials would contemplate a smaller hike at their next meeting in December. But he cautioned that they might raise borrowing costs next year more than they have projected.

“The question of when to moderate the pace of increases is now much less important than the question of how high to raise rates and how long to keep monetary policy restrictive,” he said at a news conference Wednesday.

Mr. Powell also warned that reducing the size of rate increases didn’t mean the Fed thought it was close to pivoting away from raising rates.

“It is very premature to be thinking about pausing,” said Mr. Powell. “We think we have a ways to go.” (…)

At their September policy meeting, most Fed officials projected that they would need to raise the benchmark rate to around 4.6% early next year. Officials didn’t release new rate projections Wednesday. Mr. Powell said that if they had, they would have been higher given recent strength in the labor market and high inflation readings. A higher path for interest rates suggests a greater risk of a recession, he said.

“The inflation picture has become more and more challenging over the course of this year, without question,” he said. “To the extent rates have to go higher and stay higher for longer, it becomes harder to see the path” that avoids a recession. (…)

While Mr. Powell said he didn’t think the Fed had raised interest rates too much, he repeated his view that it would be appropriate for the central bank to err on the side of overdoing it rather than underdoing it because he saw a bigger cost for the economy in allowing inflation to become entrenched. (…)

His comments opened the door to slowing rate rises as soon as December, though he said no decisions had been reached. He also said the Fed was not close to stopping rate rises and holding rates steady for a while. “We think there is some ground to cover before we meet that test,” Mr. Powell said. (…)

“I don’t think wages are the principal story of why prices are going up. I also don’t think that we see a wage-price spiral,” said Mr. Powell. “But…once you see it, you’re in trouble. So we don’t want to see it.”

Investors initially thought they had correctly anticipated the pivot. The official statement released at 14:00 was almost identical to the previous one but with some seemingly dovish additions such as “the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”

Mr. Powell’s 14:30 presser started softly, until, at 14:51, he answered a question with “Let me say this”, then went on to say that “it is very premature to think or discuss pausing” and made sure that the message was clear:

• inflation is not slowing as much as expected;
• consumer spending has not been impacted as much as expected by higher interest rates;
• the “very, very strong” labor market plus accumulated savings may require “more patience” before we see inflation recede to the 2% goal. “We will stick with this”.

Near the end of the presser, he said the official statement was important but added that “I control the messaging, that’s my job.”

His key message was this:

“The question of when to moderate the pace of increases is now much less important than the question of how high to raise rates and how long to keep monetary policy restrictive”.

MAXED OUT?

Consumers spend from disposable income and savings (more or less credit). American consumers tend borrow more when their income growth falls below what is deemed necessary for their desired standards of living. Post pandemic, income growth (blue) has slowed to a crawl while spending (black) is growing 3-4 times faster than in 2019 as consumer loans (red, ex-housing related) jumped 19% from their pandemic low and now represent 9.6% of disposable income, a historically high level, particularly considering where interest rates currently stand (back to 2001 on credit cards).

Debt servicing was still very low in Q2 (last data point below) but the recent jump in borrowing costs, applied to very high debt balances will boost debt servicing costs considerably in Q3 and through 2023.

• Qualcomm Sees Smartphone Slump Worsening The company issued a weaker outlook that adds to signs of stress for the semiconductor industry. Its stock fell 7% in after-hours trading.

Eurozone manufacturing output falls at sharpest pace since initial COVID-19 wave as demand for goods plummets

The eurozone manufacturing sector slid further into contraction territory at the start of the fourth quarter as output and new orders fell at rates rarely surpassed across the 25 years of PMI data collection. Export demand also sank sharply as geopolitical uncertainty, high inflation and weaker economic conditions around the world weighed on foreign client spending.

With output requirements rapidly diminishing, eurozone manufacturers reduced their purchases of inputs to the quickest extent since May 2020. A further easing of supply-chain pressures was also recorded as more capacity was freed up at suppliers.

Meanwhile, having accelerated slightly in September, price pressures subsided at the start of the fourth quarter. Nevertheless, output charge and input cost inflation rates remained historically elevated.

The S&P Global Eurozone Manufacturing PMI® recorded in sub-50.0 territory for a fourth month in a row in October, signalling a sustained downturn in manufacturing sector conditions. At 46.4, the headline index fell from 48.4 in September to its lowest level since May 2020.

Of the monitored eurozone constituents, only Ireland saw an improvement during October. The remaining countries registered deeper manufacturing downturns, with the majority recording the fastest deterioration since the initial COVID-19 shock during the first half of 2020. Spain was the worst-performing nation during October, closely followed by Germany.

(…) According to panel comments, falling client demand was a key factor driving lower production volumes. The level of incoming new orders slumped during the latest survey period, reflecting shrinking demand from clients in markets across the eurozone and other parts of the globe. In over 25 years of data collection, the rate of decline seen in new orders during October has only been surpassed during periods of intense economic turbulence such as the global financial crisis period between 2008 and 2009 and the COVID-19 pandemic.

Euro area manufacturers were also faced with another steep increase in their operating costs during October. Energy prices were a major factor that drove expenses higher, according to anecdotal evidence. That said, the rate of input cost inflation eased and was the second-weakest since the start of 2021. (…)

Indeed, lower pressure on suppliers was partly a result of falling input demand. Buying activity fell at the quickest pace since May 2020 during October. Nevertheless, pre-production stocks rose as some companies accumulated safety-stock buffers to protect against price and supply risks.

Meanwhile, October survey data pointed to the fastest reduction in backlogs of work across the eurozone manufacturing sector since May 2020. A deficit of new work relative to output helped companies clear their pending orders. Nonetheless, employment growth was sustained and edged up fractionally.

Looking ahead, eurozone manufacturers continue to expect falling output volumes over the next 12 months. Excluding the months at the start of the pandemic, the Future Output Index registered its lowest reading since the series began in 2012 during October. High inflation, geopolitical uncertainty and worsening economic conditions globally underpinned the pessimistic outlook.

• BOE Set to Deliver Biggest Rate Rise in 33 Years

China Services PMI: October sees sustained slowdown in services activity

October saw a sustained slowdown in activity across the Chinese service sector, as ongoing efforts to stop the spread of COVID-19 disrupted business operations and weighed on demand. Positively, there was arise in services employment for the first time in 2022, with firms showing slightly more optimism towards the outlook.

On the inflation front, October data showed a slight pick-up in the rate of increase in prices charged by service providers to an eight-month high.This was despite a softening of cost pressures across the sector.

(…) At 48.4, down from 49.3, the latest reading was the lowest since May. That said, the rate of decline remained modest and far softer than seen during the much larger outbreak of COVID-19 in the spring.

Containment measures associated with the latest spate of infections acted to suppress demand during October.This was highlighted by a second successive monthly reduction in inflows of new business at Chinese services firms. The rate of decline eased and was only marginal, however. The slower fall in overall inflows of new work came despite a renewed downturn in new business from abroad.

Efforts to expand staffing capacity and enhance sales capabilities contributed to a rise in employment across the Chinese service sector in October. Although only modest, the increase in workforce numbers was nevertheless the most marked since May 2021 and ended a run of job losses stretching back to the start of the year. (…)

Turning to prices, October’s survey data pointed to a slightly faster rise in average fees charged by services companies in China. The rate of inflation was the quickest since February and above the series long-run average. Where output prices increased, this often reflected the pass-through of higher costs to customers, anecdotal evidence showed. Alongside a rise in oil-related prices, firms reported higher wage bills leading to an increase in operating expenses. That said, the overall rate of cost inflation was the second-slowest in the past 14 months.

Looking ahead, October saw a slight uptick in firms’ expectations for activity over the coming year. However, coming off a six-month low in September, the degree of optimism remained relatively subdued, amid ongoing concerns about the pandemic’s impact on growth prospects and challenging global market conditions.