Empire State Manufacturing Survey
Business activity contracted sharply in New York State, according to firms responding to the January 2023 Empire State Manufacturing Survey. The headline general business conditions index fell twenty-two points to -32.9.
New orders and shipments declined substantially. Delivery times held steady, and inventories edged higher.
The index for number of employees fell eleven points to 2.8, its lowest level in more than two years, signaling that employment growth stalled. The average workweek index remained negative at -10.4, indicating a decline in hours worked.
Input price increases slowed considerably, with the prices paid index dropping eighteen points to 33.0. Selling price increases also moderated, with the prices received index falling six points to 18.8.
The index for future business conditions held steady at 8.0, suggesting that firms expect little improvement over the next six months. New orders and shipments are expected to rise somewhat, while employment is expected to increase only modestly. The capital spending index held steady at 22.3, and the technology spending index rose to 17.0.
Weak, very weak!
Points to ISM Manufacturing around 42-43
Declining ISM New Orders generally point to declining S&P 500 profits. The index was 45.2 in December:
Core machinery orders fell 8.3% in November from the previous month, government data showed on Wednesday.
The decline was significantly bigger than the 0.9% dip expected by economists in a Reuters poll and marked the first decrease in two months after a 5.4% gain in October.
Orders from manufacturers fell 9.3% in November, a third consecutive month of contraction, driven down by a 32.7% decline in orders from electric-machinery companies. Demand for items such as semiconductor-making equipment turned weaker, a government official told a media briefing. (…)
Non-manufacturers in “core” sectors excluding ship and electric utility firms also cut their orders by 3.0%, following a 14.0% increase in October.
Core orders, a highly volatile data series regarded as a leading indicator of capital spending in the coming six to nine months, were down 3.7% in November on a year earlier, versus a forecast 2.4% increase, the data showed.
Business confidence at big Japanese firms slid in January with manufacturers showing a negative reading for the first time in two years, the Reuters Tankan survey found, reflecting a slow recovery from the pandemic amid a global economic downturn and rising living costs. (…)
The Reuters Tankan index for big manufacturers stood at -6 in January, down from +8 last month, with car, electronics and textiles manufacturers among the gloomiest sectors. (…)
“Prices are rising everywhere including prices for gas and electricity, materials, shipping and processing machinery. And some clients won’t swallow price hikes, squeezing our profits to a degree,” wrote a manager at a metal firm.
Morale was much stronger in the service sector, with that index at +20 in January, a drop from +25 in the prior month which was its highest level in more than three years. Among non-manufacturers, only the real estate and construction sectors had negative readings. (…)
Microsoft to Cut Engineering Jobs This Week as Layoffs Go Deeper The reduction is said to be larger than in previous rounds.
Oil Demand to Hit Record as China Reopens, IEA Says
The energy watchdog lifted its forecast for oil demand growth this year by nearly 200,000 barrels a day to 1.9 million barrels a day. The extra demand means that the IEA now expects total oil demand this year to average 101.7 million barrels a day, well above pre-Covid levels and a record amount. (…)
A similarly sudden turnaround for the fortunes of economies in Europe and the U.S. is also boosting oil-demand expectations, the IEA said. Europe’s economy this year is expected to fare better than previously forecast, as warmer temperatures have eased its energy supply crisis. Meanwhile, the Federal Reserve’s efforts to tame inflation have shown recent signs of success. (…)
The IEA raised its forecast for Chinese demand by 100,000 barrels a day to 15.9 million barrels a day. (…)
In a separate report Tuesday, the Organization of the Petroleum Exporting Countries held off from making adjustments to its demand forecasts, said that China’s reopening could spur a flare-up in Covid-19 cases that could delay a rebound in crude demand.
The stronger economic outlook for Europe is also not entirely positive for oil demand, the IEA said. High natural-gas prices and reduced gas supplies from Russia had in recent months boosted expectations that European nations would need to burn more crude-derived heating fuels to compensate.
In December, the IEA had raised its demand forecasts on those expectations. But it said Wednesday that the extra demand would be around 200,000 barrels a day less than expected last month, as warmer-than-usual winter temperatures in Europe meant fewer European utilities were switching from natural gas to oil.
The Paris-based agency kept its estimate of 2022 oil demand largely unchanged at 99.9 million barrels a day.
Goldman Sachs:
Through financial deleveraging and physical destocking, market participants and physical end-users in commodity markets are preparing for one of the most widely anticipated recessions in history, that we do not believe is going to materialize. We believe that, aside from the broader structural underinvestment thesis, oil markets are therefore simply unprepared for the sequential demand growth we expect this year as China reopens and international travel continues to recover.
Canada: December’s CPI data ends a tumultuous year on a good note (NBF)
The spectacular drop in gasoline prices in December (-13.1%) has largely contributed to the monthly weakness, but other elements are also very encouraging, including the moderation of the food component.
Excluding food and energy, m/m inflation came in at 0.28%, its lowest pace in 13 months, and would have been lower had it not been for the ongoing spike in mortgage interest costs (MIC), primarily due to central bank tightening. CPI excluding F&E&MIC is running at an annualized pace of 2.4 % over the past three months, within the central bank’s target range of 1 % to 3 %.
The recent trend is also encouraging for the central bank’s preferred measures, as evidenced by the three-month annualized change of 3.6% for the CPI-Trim and 4.3% for the CPI-Med, compared to over 7% earlier this year.
This morning’s data does not change our view that the Bank of Canada should consider a pause next week after the extremely aggressive tightening orchestrated in 2022 that brought real rates essentially back to pre-pandemic levels.
Inflation in the last quarter of 2022 turned out to be 4 tenths lower than what the BoC projected last October (6.7% vs. 7.1%). In that same projection, the central bank saw inflation settling at 2.8% at the end of 2023, whereas we believe it will be below that level as early as the second quarter of the year.
The actions taken so far will continue to dampen economic activity in the quarters ahead and, consequently, inflation. GDP and the labour market have remained healthy until the end of 2022, but the economic outlook is darkening according to the BoC’s Business Outlook Survey.
As many as 30% of corporations expect their sales volumes to decline, a record level outside of a recession. Higher inventories than before during the pandemic, significantly lower transportation costs, sales price reductions by Chinese producers and the global economic slowdown suggest that the lull on the goods side will continue.
For services, the return to normal inflation levels may take a little longer, but there are reasons to believe that the labour market will ease in a low-growth environment, contributing to a reduction in wage pressures.
But Goldman Sachs sees one more hike coming:
(…) we think the BoC would be worried about whether enough progress has been made on the labor market given strong recent employment growth, elevated wage growth, elevated wage-sensitive inflation, and the message from both the BOS and CSCE today.
Moreover, it is possible that consumers/businesses have responded more negatively to surveys given heightened discussion around recession and growth concerns (like the outperformance of hard vs. soft data in Europe this winter).
Given upside risks to inflation are more concerning when the starting level is so high, we think the BoC will hike another 25bp next week. However, we think the soft tone of the reports suggests that we are near the end of the cycle, and we do not expect further hikes after next week.
JPMorgan’s Kolanovic Cuts Equity Allocation Again on Growth Risk
(…) “We remain cautious on risk assets and are reluctant to chase the past weeks’ rally as recession and overtightening risks remain high, and we believe that a lot of good news is already in the price in terms of inflation moderation or the potential for a soft landing,” a team of strategists led by Kolanovic wrote in a note to clients.
One of Wall Streets biggest optimists through most of the market selloff last year, Kolanovic has since reversed his view, cutting his equity allocation in mid-December due to a soft economic outlook this year. (…)
“The market is behaving as if we were in an early cycle recovery phase, but the Fed has not even concluded hiking yet,” Kolanovic wrote. “While signs of declining inflation pressures are in principle positive, ongoing tightness in labor markets is likely to put pressure on margins, and may cause central banks to tighten further than markets expect.” (…)
Kolanovic’s baseline forecast is that the US will fall into a recession at the end of 2023, with inflation gradually normalizing and the Federal Reserve cutting rates in early 2024. (…)
ChatGPT
We evaluated the performance of a large language model called ChatGPT on the United States Medical Licensing Exam (USMLE), which consists of three exams: Step 1, Step 2CK, and Step 3.
ChatGPT performed at or near the passing threshold for all three exams without any specialized training or reinforcement.
Additionally, ChatGPT demonstrated a high level of concordance and insight in its explanations.
These results suggest that large language models may have the potential to assist with medical education, and potentially, clinical decision-making.
