Month: October 2023

Note: I am travelling this month. Posting will be sporadic and shorter due to limited time and equipment.

China’s Factory Activity Shrinks, Fueling Calls for More Support Non-manufacturing gauge also missed forecast, falling to 50.6

The official manufacturing purchasing managers’ index slipped to 49.5 this month from 50.2 in September, according to a statement from the National Bureau of Statistics on Tuesday. That compares with an estimate of 50.2 in a Bloomberg survey of economists.

The non-manufacturing gauge, which measures activity in the construction and services sectors, declined to 50.6 from 51.7, lower than the forecast of 52. The 50 level separates growth from contraction. (…)

The PMI numbers partly reflect seasonal factors due to an eight-day holiday at the beginning of October, but it also shows market demand remains weak. The new orders indexes under the manufacturing and non-manufacturing PMIs were both below the 50-point mark, indicating a contraction in demand. (…)

NBS senior statistician Zhao Qinghe highlighted capital market services and real estate as the main drag. As a result, services PMI fell to 50.1 from 50.9.

A contraction in export demand for manufacturing, measured by the new export order index, deepened this month, indicating factories that sell to overseas markets are still under pressure.

“China’s economic activity fell to an extent, and the foundation for a continued recovery still needs to be further solidified,” Zhao said in a statement accompanying the data release.

UAW reaches tentative deal with GM, last of 3 automakers hit by strike

Like the deals at Ford and Stellantis, the tentative agreement at GM would provide 25% wage hikes over four and a half years, as well as cost-of-living adjustments.

• With COLA, the top wage is estimated to rise to over $42 an hour by 2028.
• It also eliminates a despised two-tiered wage scale for newer hires, provides permanent jobs for temp workers and boosts retirement income, including 401(k) contributions.
• Like the other carmakers, GM agreed to provide a path for workers at electric vehicle battery plants to earn the same high wages under the national bargaining agreement that other UAW members earn.
• UAW leaders had feared the transition to EVs would mean fewer jobs, or lower-paying jobs.
• There’s also money for GM retirees, the UAW statement said. “Many thought GM would never put more money on the table for their hundreds of thousands of retirees. In this agreement, however, GM has agreed to make five payments of $500 to current retirees and surviving spouses, the first such payments in over 15 years.”

The UAW said workers at Ultium Cells, the battery joint venture owned by GM and Korea’s LG Energy Solution, will be part of the master agreement, but the union did not provide details on wages or benefits. (Bloomberg)

The exact terms of each deal aren’t fully known. But here’s what UAW won from all three automakers, according to AP:

• 25% wage increases over the 4 1/2-year contract.
• An immediate 11% raise upon ratification.
• A restoration of cost of living adjustments that would bring pay increases to about 30% by 2028.

Ford’s deal includes a $5,000 ratification bonus, increased 401(k) contributions and billions of dollars for plant renovations and new models.

• Under the Stellantis deal, the company would keep open factories in Trenton, Michigan, and Toledo, Ohio. A former plant in Belvidere, Illinois, would reopen.

• Tesla and Anti-Union Elon Musk Make Enticing Targets for UAW’s Next Push The union has before tried and failed to organize the electric-car leader.

(…) Several major car companies, including Toyota and Volkswagen, have auto plants in the US that employ non-union workers, but there’s one particularly enticing target for the UAW: Tesla. (…)

Tesla’s roughly 20,000-worker plant in Fremont, California, currently has a UAW organizing committee whose members are talking to coworkers about the advantages of collective bargaining, according to a person familiar with the efforts who spoke on condition of anonymity. The UAW has committed to providing whatever resources are necessary for the campaign, that person said. (…)

Fain, a force in his own right, hopes to use his wins in Detroit to show how his energy and unconventional tactics get results. He secured record-setting wage gains and beefed-up 401(k) retirement benefits, among other concessions, in talks with Ford, GM and Stellantis. “We’ve had thousands of non-union autoworkers reaching out and wanting to join our movement,” Fain said earlier this month. He has called Tesla, Toyota and Honda workers “UAW members of the future.” (…)

Compensation is hard to compare between Tesla and the Detroit automakers: benefits like pensions and health care complicate the picture. The Detroit automakers have some of the most generous health-care plans. Tesla, for its part, offers its workers both restricted stock units and an employee stock purchase plan. (The tweet that got Musk in trouble with the NLRB suggested that workers would give up their stock benefits if they voted to unionize.) (…)

US Workers Are Concerned About Job Cuts at the Highest Rate Since 2020

(…) After employment unexpectedly surged in September, economists estimate payrolls rose by a still-solid 180,000 this month, based on forecasts compiled by Bloomberg. And the jobless rate, expected to hold at 3.8% for a third month, is historically low.

And yet the share of employees reporting a positive six-month business outlook for their employer fell to 45% in October in the Glassdoor Employee Confidence Index. That’s down from 54.6% a year earlier.

By industry, employee confidence is weakest among information workers. The sector employs almost 100,000 fewer people than at its pandemic-era peak last year, based on government data, and waves of job cuts have reversed confidence among employees. (…)

Construction, an industry that has been booming and experiencing labor shortages, continues to hold the highest employee confidence level in the index — although it’s lower than a year ago.

Confidence among senior managers dropped sharply in October, according to the Glassdoor index. Still, they more confident than mid-level and entry-level employees.

Middle-Class Americans Are Rattled by Fed’s Fight Against Inflation 57% of middle-class hurting from borrowing costs, poll finds

(…) In the Harris poll, the latest in a series taken for Bloomberg over the past year, 57% of middle-class respondents said higher borrowing costs were having a negative impact on their household finances.

That strain contributed to downbeat sentiment about pocketbook issues: Some 44% said they were stressed about the economy, up from 40% a year ago and 39% in March. (…)

On credit cards alone, US consumers paid a record $130 billion in interest and fees last year, according to the Consumer Financial Protection Bureau. (…)

Among middle-class people surveyed by Harris Poll, 61% said their personal financial situation was worse or unchanged from a year ago. Only 12% said they were in a “much better” circumstance.

When asked about the year ahead, just 33% said they expected their own finances to improve. While that was more than the 19% who expect things to get worse, it still points to an electorate that isn’t particularly optimistic about pocketbook issues. (…)

The poll of 4,166 Americans, including 1,478 middle-class adults, found that three-quarters of the latter group said they were “paying more and more for goods and services,” while more than two-thirds said higher prices for household essentials like groceries, insurance, and rent or mortgage payments were hurting them. (…)

A slim majority of middle-class Americans surveyed by Harris Poll for Bloomberg News said their wages have been keeping up with or exceeding rising household bills. But 63% also said that stagnant wages were hurting their finances and 42% said their costs were rising faster than their wages. (…)

When asked what emotions they felt when thinking about the US economy, stress was easily the most-selected choice among middle-class respondents. Yet there was a jump from a year ago in the share that said they were optimistic, suggesting not everyone in this group shares in the gloom. (…)

Some of the pessimism appeared to break on partisan and generational lines. About half of middle-class Republicans and independents said they were stressed about the economy, while only about a third of Democrats said the same.

Roughly 60% of millennials and Democrats said the US economy is working for them, compared to around 30% of baby boomers and Republicans.

See also, if you missed it, yesterday’s Daily Edge which addressed this very issue:

(…) This next chart plots personal expenditures plus interest payments as a % of disposable income. It was 95.4% in September, very uncomfortably high looking at the last 30 years and significantly higher than pre-pandemic levels.

• Oil prices could hit $150 if Israel-Hamas conflict intensifies, World Bank warns
• Rent: Invitation Homes last week said that its blended rent growth slipped 80bp QoQ but was still healthy at 6.2% (vs. +7.0% for 2Q), comprised of renewals at +6.6% (vs. +6.9% in 2Q) and new lease growth of +5.2% (vs. +7.3% in 2Q). The best performing markets include South FL (+9.2%), Tampa (+7.4%), Phoenix (+6.8%), Atlanta (+6.7%) and Orlando (+6.5%), all regions where supply is growing fastest. Demand is just growing faster.

Macklem says Bank of Canada could cut rates before inflation reaches target

Bank of Canada Governor Tiff Macklem said the central bank could begin cutting interest rates before inflation is all the way back to target, although he said that discussion about loosening monetary policy is still a ways off.

“We don’t need to wait until it’s back to 2 per cent,” Mr. Macklem told the parliamentary finance committee on Monday, speaking about the rate of inflation. “But we need to wait until we’re clearly on a path to 2 per cent.” (…)

The near-term inflation outlook is mixed. Higher interest rates are slowing the economy and dragging down inflation across a range of goods and services. However, oil prices are rising amid geopolitical turmoil and shelter costs keep going up, leading the bank to warn last week that inflation risks are increasing. (…)

Mr. Macklem was asked repeatedly by Conservative members of the committee whether government spending was fuelling inflation. He said that spending by federal and provincial governments had not been a driver of inflation over the past year. However, based on current budget plans, he said that fiscal policy may be working at cross purposes to monetary policy next year.

“Over the past year, government spending at all levels, federal and provincial, by our estimates has grown less than 2 per cent, so it has not been getting in the way of getting inflation down. Looking forward our estimate is that it will grow slightly faster than supply and against that background, yes it could begin to make it harder to get inflation down,” he said.

US Cuts Quarterly Borrowing Target to $776 Billion, Still Record Treasury had previously estimated $852 billion net borrowing

(…) Despite the reduction in the estimate, the new projection still marks a record borrowing amount for the calendar fourth quarter. Part of the reason for the smaller figure is the magnitude of deferred tax receipts coming from areas of California and other states that had been granted extensions due to natural disasters, Treasury officials told reporters Monday.

Yields on longer-term Treasuries have soared since the department in August unveiled plans for increased issuance of those securities. Market participants are now eager to see the Treasury’s updated issuance plans, set for release Wednesday. (…)

The federal deficit roughly doubled in the fiscal year through September compared with the year before, effectively reaching $2.02 trillion, forcing the Treasury to step up its borrowing.

For the January-to-March quarter, the Treasury said Monday it expects to borrow a net $816 billion, with a cash balance of $750 billion seen for the end of the period. (…)

In Wednesday’s so-called quarterly refunding, dealers expect debt managers to lift coupon-bearing debt sales across the yield curve for the second straight time — though they don’t all agree on exactly which maturities will carry the most weight of the new issuance.

Ed Yardeni:

During Q3, the Treasury borrowed $1.010 trillion in privately-held net marketable debt. As a result, US Treasury marketable securities held by the public rose to a record $25.7 trillion (chart). This series is up $9 trillion since January 2020, just before the start of the pandemic. It has quintupled since the Great Financial Crisis (GFC). It is scheduled to increase to a record $27.3 trillion over the next six months. In other words, fiscal policy is simply out of control.

Note: I am travelling this month. Posting will be sporadic and shorter due to limited time and equipment.

Inflation Trends Keep Fed Rate Hikes on Pause Underlying inflation picked up in September, government data showed, keeping the Federal Reserve on track to hold short-term interest rates steady at its next meeting.

The personal-consumption expenditures price index, the Fed’s preferred inflation gauge, rose 0.4% in September from the prior month, the same pace as in August, the Commerce Department said Friday. So-called core prices, which exclude volatile food and energy categories, increased 0.3% in September, compared with a 0.1% rise in August.

Core prices were up at a 2.8% annualized rate in April through September, down considerably from a 4.5% annualized rate in the prior six-month period. The Fed’s inflation target is 2%. (…)

At their meeting last month, Fed officials projected core inflation would fall to 3.7% in the fourth quarter from a year earlier. Friday’s report suggests inflation would end the year below that projection, which could strengthen the case to hold rates steady.

But some measures of underlying prices closely watched by Fed officials, such as services excluding housing and energy, showed more strength in September, highlighting why policy makers are likely to keep another rate rise on the table in the coming months. (…)

Consumer spending, the primary driver of economic growth, rose 0.7% in September from the prior month, compared with a 0.4% increase in August, Friday’s Commerce Department report showed. Americans spent more on services such as travel, housing and healthcare, as well like goods such as prescription drugs and vehicles.

Consumer spending growth in September was much faster than income gains, which rose 0.3%. The personal saving rate—a measure of how much money people have left over after spending and taxes—fell to 3.4% in September. That was the lowest rate since December of last year, suggesting households used part of their savings to finance their spending. (…)

• US Core PCE Prices Jump Most in Four Months as Spending Picks Up  One key area of concern for officials is service-sector prices, which rose by 0.5%, the most since January. Excluding housing and energy, services inflation accelerated to 0.4%, from 0.1% in the prior month.

Interesting that most media highlighted the inflation data rather than spending trends. To me, the surprise was that September demand for durable goods jumped 1.1% (+5.5% YoY), in real terms, amid very high interest rates, a depressed housing market and after 3 years of strong goods consumption.

Spending on goods is not only not falling back to trend, as widely expected, it seems to be creating a new, faster growing trend, unlike spending on services which is merely back to trend.

But this is only “transitory”: Americans are catching up on their cars/trucks purchases, delayed by the shortages during the pandemic but recently encouraged by rising labor market participation. Similar trends happened after previous recessions.

It can only be transitory because total spending has unusually diverged from disposable income (left chart) which is now 4% lower than expenditures. Whatever excess savings (deposits) remain, they are illusory since their purchasing power has been totally eroded by inflation.

  

Almost 4 years after the start of the pandemic, helicopter money and floored interest rates, we are back to basic fundamentals: income growth, inflation and savings.

This chart stacks the YoY changes in hours, employment and wages, highlighting the diminishing contribution from the actual job components while wages, up 4.2% in September (down from 4.8% last December), now contribute most of the 5.6% growth rate in total labor income.

Note, however, that wage growth slowed to 2.7% annualized in the last 2 months, well below the PCE deflator growth rate. At that rate, YoY wage growth would slow to 3.6% in December.

Headline and core PCE inflation are now in the 3.5% YoY range. However, on a MoM basis, core PCE inflation jumped from 0.1% in August to 0.3% in September mainly due to services inflation which abruptly interrupted its nice descent since January, rising at a 5.5% annualized rate in September (+4.0% in Q3 after +3.6% in Q2), more than twice the pre-pandemic pace.

Sticky rents were not the sole culprit. Services ex-housing (black bars) are also back in the 5% annualized range.

In truth, wages rising 4% are likely to keep services inflation sustained in the 4% range as well: there is a 99.7% correlation between these two series since 1994. If so, core PCE inflation should stabilize around 3.3%.

The math so far:

• job components:  1.5- 2.0% (employment + hours)
• wages:                 3.5- 4.5%
• inflation:               3.0- 4.0%
• = real income       2.0- 2.5% (worst/best cases 1.0%- 3.5%)

Real income growth averaged 4.2% in 2023.

The big wild card is what happens to savings. The savings rate fell to 3.4% in September, meaningfully lower than the 6.5% pre-pandemic average. It has very, very, very rarely, been lower…

…but even more rarely if we account for consumer interest payments. This next chart plots personal expenditures plus interest payments as a % of disposable income. It was 95.4% in September, very uncomfortably high looking at the last 30 years and significantly higher than pre-pandemic levels.

On September 11, I wrote The Wealth Defect, arguing that the Fed-induced jump in household wealth has been working against FOMC policies aimed at curbing demand.

(…) The Fed’s policies boosted household wealth 15.5% above their 2019 level and 35% above trend. Thanks to rising stock prices but, principally, to rising home values due to unusually low supply of existing homes due to Fed-supplied mortgage handcuffs. (…)

From a monetary policy perspective, the wealth effect is now a wealth defect: rising interest rates have little impact on a very wealthy, under leveraged, consumer looking to enjoy life AMAP (as much as possible) post pandemic.

The coming holiday season will be an interesting test. True, the less wealthy, and often more indebted, segment of the population is under some inflation duress but unemployment is still very low and lower wage earners are enjoying strong wage increases.

This now fairly widely held theory will be put to serious test in coming months, particularly after the recent debacle in financial markets.

Maybe the Fed’s aggressive tightening will finally bite enough, perhaps even too much.

Personal interest payments (which exclude mortgage interest) have doubled since the end of 2021, jumping by $267B to 2.7% of disposable income from 1.5% in December 2021. Both the absolute and percentage numbers are bound to rise further.

The remarkable resilience of the American consumer may be reaching its zenith.

Let’s hope for a soft landing, but we’re defying the odds…

• Americans Hold Off From Big Purchases in Worrying Sign for the Economy Sales of appliances, orthodontics and boats weaken, firms say

(…) Take Whirlpool Corp., the maker of Maytag appliances. The company said consumers continue to replace machines that break, but spending on new ones for renovations or new homes — what the company dubs discretionary purchases — has been weaker than expected, Chief Executive Officer Marc Bitzer said Thursday on a call with analysts.

The softening demand, which includes customers trading down to cheaper models, has sparked discounting across the industry. Now promotions are back to pre-pandemic levels after waning the past three years because Covid-19 upended supply chains and limited production. (…)

At Abbvie Inc., sales of Botox missed estimates last quarter and other facial treatments, such as fillers, declined.

For Harley-Davidson Inc., higher borrowing rates hurt sales of motorcycles, which tumbled 15% in North America. The company has rolled out generous new incentives to stimulate demand, but even then, sales were weak in the third quarter, according to dealerships and research from UBS Group AG. (…)

Marine Products Corp., which makes Robalo boats, reported a 22% drop in revenue last quarter. Brunswick Corp. had a 16% decline in its boat segment. And revenue at Polaris Inc., maker of a wide range of snowmobiles, motorcycles and pontoon boats, fell 4% last quarter. (…)

That said,

This week’s employment indicators are likely to remain strong. Initial unemployment claims (Thu) should remain low as they have been in recent weeks suggesting that October’s unemployment rate (Fri) remained low too and that payroll employment (Fri) expanded at a solid pace during the month (chart). September’s NFIB small business owners survey showed an increase in job openings suggesting that the comparable JOLTS series (Wed) will do the same. (Ed Yardeni)

The flattening trend in Indeed’s job postings through Oct. 20th supports that view:

BTW, FYI, Taylor Swift’s 53 US concerts this year are estimated to have added $4.3 billion to GDP (Bloomberg).

China Evergrande Winding-Up Hearing Adjourned to Dec. 4

EARNINGS WATCH

245 companies in the S&P 500 Index have reported earnings for Q3 2023. Of these companies, 77.6% reported earnings above analyst expectations and 17.1% 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, 74% of companies beat the estimates and 22% missed estimates.

In aggregate, companies are reporting earnings that are 7.9% 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 4.8%.

Of these companies, 60.2% reported revenue above analyst expectations and 39.8% 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, 69% of companies beat the estimates and 31% missed estimates.

In aggregate, companies are reporting revenues that are 1.0% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.3% and the average surprise factor over the prior four quarters of 1.9%.

The estimated earnings growth rate for the S&P 500 for 23Q3 is 4.3% [it was estimated +1.6% on Oct.1]. If the energy sector is excluded, the growth rate improves to 9.7%.

The estimated revenue growth rate for the S&P 500 for 23Q3 is 1.4%. If the energy sector is excluded, the growth rate improves to 3.6%.

The estimated earnings growth rate for the S&P 500 for 23Q4 is 8.5% [+11.0% on  Oct. 1]. If the energy sector is excluded, the growth rate improves to 11.6%.

Trailing EPS are now $217.27. Full year 2023: $219.91e. Forward EPS: $238.46. Full year 2024: $246.10.

The S&P 500 Falls Into a Correction, Following the Nasdaq Composite. The S&P 500 entered corrections three times in 2022, according to Dow Jones Market Data, most recently in September of that year.

• Worst October for Stocks in Five Years Has Investors Exiting Market Active manager poll, positioning show investors reduce risk

(…) Surveys of professional managers show big-money allocators have cut their equities to levels last seen at the depths of the 2022 bear market. Hedge funds just pushed up single-stock shorts for an 11th straight week. Models of investor positioning show everyone from mutual funds to systematic quants reducing equity exposure well below long-term averages. (…)

Dip buyers are hard to find, with the S&P 500 falling more than 1% five different times in October and pushing the index into a correction on Friday. A gauge of projected price swings in the Nasdaq 100 Index hovers near the highest level since March. Even after tech finally caught a break Friday on solid earnings from Amazon.com Inc. and Intel Corp., the Nasdaq 100 closed out the worst two-week drop this year and is poised for its steepest October loss since 2018. (…)

Equity positioning has fallen below long-term averages for most investor categories, particularly hedge funds and mutual funds, according to Barclays Plc analysis of CFTC data. A nearly three-month ramping of short positions by professional speculators is the longest increase in the history of data, says Goldman Sachs Group Inc.’s prime brokerage.

Wall Street’s “fear gauge,” the Cboe Volatility Index, held above 20 for a second consecutive week after staying below the threshold more than 100 days. (…)

Strategists at Barclays said lower exposure to stocks, bullish technical signals and seasonality are raising the odds of a year-end rally. It’s a message that was echoed earlier at Bank of America Corp. and Deutsche Bank AG.

• Bye Bye Buybacks:  Q4 is typically a stronger quarter in terms of buybacks, but it is notable that the recent trend has been down in terms of buyback announcements. Some of this will have to do with the cost pressures dampening margins last year, but especially also with borrowing costs now a lot higher — making it more difficult a calculus for firms to fund buybacks with debt. (Callum Thomas)

Source:  @WallStHorizon via Daily Chartbook and @MikeZaccardi

US, China Agree in Principle to Hold Biden-Xi Meeting Next Month

Where Americans are moving

Data: U.S. Census American Community Survey; Chart: Erin Davis/Axios Visuals

New data from the U.S. Census shows that around 820,000 people moved out of California and 550,000 out of New York in 2022. They join more than 8 million Americans who moved states in 2022.

The rising cost of living is pushing people out of expensive coastal areas, and the trend doesn’t look likely to change in coming years: four in ten Californians and and three in ten New Yorkers say they’re considering moving out of state.

• Many of those moving are headed to Florida or Texas, the states with the largest influxes in 2022.
• But Texans worried about the “California-ing” of their state may not need to worry: Democrats are much more likely to move to blue states, while Republicans move to red states.