Year: 2023

ADP National Employment Report: 103K Private Jobs Added in November

The ADP employment report showed that 103K nonfarm private jobs were added in November, a slight slow down from the 106K private jobs added in October. The latest figure is lower than the expected 130K new private jobs and is the second smallest monthly increase since January 2021.

The forecast for the forthcoming BLS report is that 155,000 private nonfarm jobs were added in November. However, the forecast for the full nonfarm jobs (the PAYEMS number) is for 180,000 jobs to have been added. Here is a visualization of the two series over the past twelve months. (…)

ADP also reported that job-stayers saw a 5.6% YoY pay increase in November, the slowest increase since September 2021. Job-changers also saw slowing pay growth at +8.3%, the smallest YoY increase since June 2021.

Goldman Sachs:

We do not place much weight on the ADP miss because of ADP’s negative correlation with BLS private payrolls since the introduction of the new methodology. We left our nonfarm payroll forecast unchanged at +238k ahead of Friday’s release.

Nonfarm productivity was revised up by more than expected in Q3 (+0.5pp to +5.2%, qoq ar) and the year-over-year rate now stands at +2.4%. Since 2019 Q4, labor productivity has grown at an annualized rate of 1.5%.

Unit labor costs—compensation divided by output—were revised down by more than expected (-1.2%, qoq ar), and the year-on-year rate now stands at +1.6%.

Compensation per hour increased at a 3.9% annualized rate and a 4.0% year-over-year rate in Q3. Our wage tracker remains at 4.4% annualized in Q3 (vs. 5.2% in Q2) and 4.4% year-over-year (vs. 5.0% in Q2).

Charts from Ed Yardeni:

Bank of Canada retains its hawkish bias

The Bank of Canada kept rates unchanged at 5.0% today, as widely expected. The policy statement noted that “higher interest rates are clearly restraining spending: consumption growth in the last two quarters was close to zero, and business investment has been volatile but essentially flat over the past year”. Incidentally, the BoC recognised the faster pace on the disinflation front, dropping the reference to “slow” progress on inflation.

Those considerations would have likely led to a more dovish tone on the policy outlook as a consequence, but the BoC decided to reiterate the threat of more monetary policy tightening instead: “Governing Council is still concerned about risks to the outlook for inflation and remains prepared to raise the policy rate further if needed”.

The concerns about the inflation outlook come not only from potential external shocks (e.g. energy prices), but also from a resiliently tight domestic labour market, as confirmed by last week’s strong jobs figures.

We are still convinced that the BoC will not tighten policy further given the deterioration of the economic outlook and our expectations for a steady decline in Canadian’s inflation.

However, there is a likely intent to fight the ongoing dovish repricing of rate expectations in Canada, and that means the BoC out-of-meeting commentary may be careful to send dovish messages to the market before the January meeting, when new economic projections will be released.

China’s Weak Trade Data Signals More Economic Pain to Come Imports in dollar terms declined 0.6% in November from 2022

Imports in dollar terms declined 0.6% after clocking an improvement the previous month, according to official data released Thursday. That was worse than economists’ consensus forecast of a 3.9% gain.

Overseas shipments rose 0.5% from a year ago, slightly better than the consensus estimate of no change, and marked the first year-on-year expansion since April. The resulting trade surplus was $68.39 billion. (…)

An expected seasonal surge in trade also failed to deliver because of weak global demand. Exports are usually stronger in the final months of a year, due to a boost in demand ahead of the Christmas and holiday season overseas. Disruptions from the pandemic in November last year resulted in a steep contraction in trade, which makes the headline numbers this year look better by comparison. (…)

Capital Economics analyst Zichun Huang said in a Thursday note that November’s uptick in exports was likely driven by price cuts. “This is not sustainable and is negatively affecting firms’ profit margins, which have dropped near to levels not seen since at least 2010,” she added.

Exports to the US and European Union have fallen by over 10% so far this year from the same period last year, while those to Russia surged 50%, according to the official data. Imports of steel plunged 27% so far in 2023 as the property downturn deepened, while chips declined by 16.5%. (…)

• Xi Tells EU Leaders China Wants to Be ‘Key Partner’ on Trade Chinese leader urges ‘mutually beneficial cooperation’ with EU

(…) “China is promoting high-quality development and high-level opening up, and is willing to regard the EU as a key partner in economic and trade cooperation,” Xi said in a meeting Thursday in Beijing with European Commission President Ursula von der Leyen and European Council President Charles Michel. He said China wants to consider Europe a “trusted partner in industrial and supply chain cooperation to pursue mutual benefit and win-win results,” state broadcaster China Central Television reported.

The talks marked the first in-person summit between China and the EU officials in four years, and was expected to cover long-standing issues ranging from data flows to market access. (…)

During the meeting, Xi called on Beijing and the bloc to “eliminate all kinds of interference,” according CCTV. That remark is likely aimed at the US, which has taken actions including enlisting the Netherlands in its effort to stop China from from developing the ability to make high-end semiconductors. (…)

Ahead of Thursday’s meeting in Beijing, Italy formally told China it would exit the nation’s Belt and Road Initiative. While Italy had for months been preparing to end its involvement in Xi’s signature investment program, the timing of the announcement underscored continued strains between the world’s second-largest economy and members of the bloc. (…)

Wall Street Puts a ‘Sell’ on Its China Holdings Institutional investments in the nation have plunged as its economy slows and property market craters; “a bit of an awakening.”

(…) China’s economic slowdown is deepening. An unprecedented property slump is scaring investors who hold hundreds of billions of dollars of debt issued by Chinese developers. And Chinese leader Xi Jinping’s emphasis on national security has restricted access to data and sparked raids and investigations involving foreign firms assessing investment risks in the country.

The amount of money that institutional investors have in Chinese stocks and bonds has declined by more than $31 billion this year, through October, the biggest net outflow since China joined the World Trade Organization in 2001, official Chinese data show.

Hedge funds, including Bridgewater Associates, whose founder Ray Dalio has long been a China bull, have significantly reduced their holdings of Chinese securities.

Private-equity firms, including Carlyle, have slashed fundraising targets for their Asia funds or stopped raising China-oriented funds altogether. Mutual-fund managers such as Vanguard and Van Eck Associates have either pulled out or aborted their China plans.

Over the past decade, private-equity funds targeting China have raised an average of nearly $100 billion each year. So far this year, they have raised a meager $4.35 billion, according to data firm Preqin. (…)

The reduction of that Wall Street money is another blow to a Chinese economy already facing an exodus of foreign manufacturers and other companies. In the third quarter, for the first time since the late 1990s, more foreign investment in assets such as factories and stores left China than flowed in. (…)

Bridgewater has substantially reduced its holdings of Chinese securities. In the third quarter, the fund’s regulatory filings show, it liquidated or reduced its positions in some three dozen Chinese companies, including electric-car maker Xpeng and e-commerce giant PDD Holdings. As of the end of September, the value of its equity ownerships in Chinese companies was 60% lower than a year earlier.

“China is in the midst of secular deleveraging that will likely take many years to work through,” it said in a Sept. 30 research report. “Growth remains weaker than desired.” (…)

• Chinese Stocks Are Trading Near A Record Discount To Peers

(…) The MSCI China Index has lost 15% this year, compared with a 2% increase in the gauge for emerging-market shares and a 15% gain in the MSCI India Index (…).

The MSCI China Index is trading at 8.9 times of earnings over the next 12 months, compared with 11.4 of MSCI Emerging Markets Index. Apart from a brief period at the onset of the pandemic, the 22% discount marks the biggest since Bloomberg started to compare the data in 2006.

The stocks are trading cheaply for a reason. Chinese companies’ return on equity has been persistently declined since 2011, reflecting deteriorating investment opportunities.

They have missed earnings estimates for nine consecutive quarters, and bottoming isn’t likely in the first quarter, according to Morgan Stanley’s strategists including Laura Wang. The strategists expect the MSCI China to return 7% next year, with an upside potential of 25%, and a downside risk of 34%. (…)

This RBA chart sums up various equity market valuations vs their own 20-year history:

While the US market appears expensive on the index level, aggregate market statistics hide what could be a historic range of valuations. The ‘Magnificent 7’ dominate standard indices and look very expensive, and their weights in the major indices skew index valuation upward. Yet the vast majority of US stocks are relatively cheap. This stark valuation bifurcation has gotten more pronounced throughout 2023.

Ed Yardeni’s take excluding IT stocks. His calculations also reveal that growth in forward EPS for S&P 500 IT companies is 14.9% vs 5.7% ex-IT.

“Nobody seems to be aware that market breadth is so bad that 44% of the individual stocks in the S&P 500 are down year-to-date!” David Rosenberg

Hot Service Sector Might Be Cold Water on Swift Rate Cut Hopes

Wells Fargo’s take of the ISM:

Not only is the services sector still expanding, it picked up steam in November with the ISM coming in at 52.7. With prices still firmly in expansion and employment rising slightly, it suggests that recent expectations for rate cuts might have been pulled too far forward. (…)

It is tough to justify cutting rates when the prices paid component is still consistent with rising prices (…)

The employment component of the ISM services index rose modestly to 50.7, consistent with a faster expansion in jobs last month, though the gain was slightly smaller than expected and presents some downside to our estimate for November job growth.

When we get the full employment situation release on Friday, we expect to see employers continued to add jobs at a robust clip in November. Specifically we forecast about 230,000 jobs were added during the month, as the conclusions of the United Autoworkers and Hollywood strikes lead to a pickup in payroll growth. Despite the rise, the overall trend in hiring has downshifted since earlier in the year. (…)

Goldman Sachs’ take:

The ISM services index increased by 0.9pt to 52.7 in November, against expectations for a smaller increase. The underlying composition was strong, as the employment (+0.5pt to 50.7) component and business activity (+1.0pt to 55.1) components increased while the new orders (55.5) component was unchanged.

S&P Global’s survey was much more muted:

• U.S. Services PMI: Renewed upturn in new business supports output growth in November

The seasonally adjusted final S&P Global US Services PMI Business Activity Index posted 50.8 in November, matching the earlier released ‘flash’ estimate and little-changed from October’s reading of 50.6. The latest data signalled the fastest expansion in output since July, albeit only marginal and slower than the long-run series average. Greater business activity was often linked to stronger client demand and a renewed upturn in new orders.

Service sector firms recorded a return to growth in new business in November, following a three-month period of decline. The upturn was only slight overall and historically muted, but firms attributed the rise to an improvement in demand conditions and successful marketing campaigns.

Contributing to the rise in total new orders was a second consecutive monthly uptick in new business from abroad. Stronger demand from key export partners in North America and Europe reportedly drove the expansion.

Relatively subdued demand conditions led firms to rein in hiring activity during November. Employment rose at the weakest pace since October 2022, and only fractionally.

Some firms noted that greater new orders spurred growth in staffing numbers, but others highlighted that cost-cutting initiatives and evidence of spare capacity led to the non-replacement of voluntary leavers.

Services firms reported a sustained decrease in backlogs of work during November, as incomplete business fell for a fifth successive month. The rate of contraction quickened from October to a solid pace, as companies were able to process incoming work in a timely manner.

Cost pressures weakened for the third month running in November, as the pace of input price inflation dropped to the slowest in over three years. The rate of increase was below the long-run series average, as some companies noted that lower fuel and supplier prices had eased inflationary pressures. Upticks continued to be driven by higher wage, food and transportation costs, however.

Although business expenses rose at a softer pace, firms increased their selling prices at a quicker rate midway through the fourth quarter. The pace of inflation was the fastest since July and above the series trend, as companies sought to pass through higher costs to customers.

Finally, concerns regarding the sustainability of demand amid strain on customer purchasing power dampened business confidence in November. Service providers remained upbeat that output would increase over the coming year, but the degree of optimism slipped to the joint-lowest in 2023 to date.

At 50.7 in November, the final S&P Global US Composite PMI Output Index was unchanged from October, and signalled a marginal upturn in business activity. The expansion reflected growth at manufacturers and service providers, albeit only slight.

Despite a renewed contraction in manufacturing new orders, a return to growth in the service sector drove the latest rise in new business, ending a three-month sequence of decline. Supporting the rise in new orders was a broad-based increase in new export business.

Cost pressures across the private sector eased in November, as input prices rose at the slowest pace in over three years. Although muted demand conditions in the manufacturing sector led to a moderation in charge inflation, overall output prices increased at a sharper pace as service providers hiked selling prices at a steeper rate.

Meanwhile, a further decline in manufacturing employment and only a fractional rise in service sector headcounts led to broadly unchanged workforce numbers. The Composite Employment Index posted its lowest reading since June 2020.

• Only three out of seven US sectors recorded an expansion
  in business activity during November, down from five in October, according to the latest PMI data compiled by S&P Global. Latest data also suggested lacklustre demand conditions in the Consumer Services sector, which led to a second successive monthly decline in business activity.

What the ISM respondents are saying:

• “Restaurant sales and traffic trends are consistent with the previous month and at our annual seasonal lows — should pick up again in December. We continue to trend positive to pre-pandemic and last year.” [Accommodation & Food Services]
• “Business conditions remain steady to the end of 2023. Annual cost escalations are a bit higher than planned, more than 5 percent versus 3 percent due to overall economic conditions and concerns.” (Finance & Insurance)
• “There are fewer new projects in comparison to last month and November 2022. Customers are not requesting quotes for new services.” [Information]
• “Customers are conservative in spending, so competition to maintain market share is tight.” [Management of Companies & Support Services]
• “Fourth-quarter revenues lower than projected. Seeing negative revenues trend into the first quarter of the new year. We remain positive yet concerned about 2024.” [Professional, Scientific & Technical Services]
• “Prices for most items increasing, but only slightly. Increase in pricing for services much more noticeable and impactful on the organization.” [Public Administration]
• “Candidate expectations during the hiring process have made staffing up more difficult.” [Retail Trade]
• “Solid activity heading into the final stretch of the fourth quarter.” [Transportation & Warehousing]
• “Labor, equipment and material price escalation requests are increasing, both through existing contracts as well as re-pricing of markets via requests for proposal.” [Utilities]
• “A comparably flat month of business activity — no major swings one way or the other. Inventories in our extended supply chain look healthy, and fill rates are improving.” [Wholesale Trade]

JOLTS: Labor Market Coming into Balance

The October JOLTS report is supportive of the view that labor supply and demand have come into better balance. Job openings fell to 8.73 million at the end of the month, the lowest reading since March 2021.

The ratio of openings to unemployed persons is 1.34, only a bit above the 1.2 ratio that prevailed before the pandemic. The quit rate is also in line with its pre-pandemic level in a sign that workers are no longer quitting their jobs at the same pace they were when the labor market was at its hottest.

On balance, today’s labor market data are consistent with a cooling labor market and decelerating wages, which bodes well for future progress in the Federal Reserve’s fight to bring inflation back to its 2% target.

The FT’s headline: US job openings drop to lowest level in more than 2 years

The strange fact is that the U.S. economy has been producing a lot more job openings than actual jobs and that private hires have been falling for almost 2 years to levels currently below their pre-pandemic levels.

This NFIB chart from Ed Yardeni shows that small companies, the main job providers in the USA, display substantially more job openings than in 2019 while actually planning fewer hires over the next 3 months.

Perhaps more emphasis should be placed on actual hires vs posted openings. The private sector is now generating fewer than 100k new monthly jobs, 70 % of all new jobs on average in the last 4 months, down from 84% in the last 4 months of 2019.

• Economists see Fed keeping rates at 22-year high until at least July FT-Booth survey respondents think US central bank will remain more hawkish than market expects

Canada: Service sector activity falls in November to greatest degreesince June 2020

November’s index reading came in at 44.5, down from 46.6 in October. It was the lowest level since June 2020 and consistent with a steep decline in activity. Moreover, the index has now posted below 50.0 for six months in a row.

Panellists widely commented that market activity was slow and securing new sales challenging. Overall, new business was down for a fourth successive month, and to the greatest degree for nearly three years. There were some reports that market activity was being negatively impacted by elevated interest rates. New export business was also down, falling to the greatest degree since April 2021.

A lack of new work enabled firms to comfortably keep on top of their existing workloads. November’s survey showed that work outstanding was cut to the greatest extent since the end of 2020. Such evidence of excess capacity weighed on employment, which fell slightly for the first time in three months. Some panellists noted difficulties in finding suitable staff to replace leavers.

There was also evidence from the survey panel of the need to pay higher wages both for retention purposes and to help workers with the high cost of living. Rising salary payments, alongside price increases throughout the supply chain, meant that overall operating expenses continued to increase sharply. That said, inflation did ease during the month, slipping to its lowest level since September 2021.

Similarly, output charges rose to a softer degree, with inflation dropping to its weakest for 27 months. Where charges increased, this was linked to efforts to protect margins from rising input costs.

Finally, service providers retained some confidence about the future, and firms are hopeful of an improvement in economic conditions over the next 12 months. There were suggestions, however, that high interest rates and the possibility of economic recession could weigh on activity. Confidence subsequently dropped to a three-month low and remained below trend during November.

Latest PMI data showed output declines across the manufacturing and services sectors during November. In both cases, rates of contraction accelerated, and overall private sector output fell to the greatest degree since June 2020. This was highlighted by the S&P Global Canada Composite PMI Output Index* which fell to 44.8, down from 46.7 in the previous month. November marked the sixth successive month that the index has posted below the 50.0 no-change mark.

Concurrent declines in new orders were also recorded, and there was evidence of spare capacity with backlogs of work falling to the greatest degree for nearly three-and-a-half years. Private sector employment fell slightly for the first time in three months, although the contraction was centred on services as manufacturing staffing levels increased.

Cost inflation remained elevated, though eased to a six-month low. Output charge inflation was little-changed but remained well below that of input costs and thereby pointing to continued margin pressure for private sector companies in November.

FYI, Canada’s GDP declined 1.1% a.r. in Q3.

Moody’s changes Hong Kong’s outlook to negative from stable

Companies Are Going Broke Gradually, Not Suddenly

(…) Financial strength has been declining for a while, a trend that was only briefly interrupted by the attempted cleanup in the wake of the Global Financial Crisis in 2008. The following chart, compiled by Dimos Andronoudis, economist at Fathom Consulting in London, classifies all quoted US companies by their Altman Z-scores — a measure promulgated by the New York University professor Edward Altman to estimate how close they were to bankruptcy. It combines concepts such as account profitability, leverage, liquidity, solvency, and activity ratios.

In the last century, more than half of all public companies looked strong and healthy on Altman’s metric. That number has now dropped below 10% for the first time on record:

Presenting this differently, we find the number of companies that are imminent candidates for bankruptcy has also been rising consistently, and has reached a new high. The “post-Volcker” era of low interest rates has seen companies grow more and more accustomed to taking risks with their financial health, and getting away with it:

Andronoudis stresses that the Altman system may be outdated by now, as intangible assets make up a far greater share of balance sheets and generally do have value. But the idea that credit quality is degrading still stands. (…)

This chart from Andronoudis defines zombies loosely as companies whose earnings before interest and tax did not cover their interest costs for one year, and also on a stricter basis where this situation needs to have persisted for at least three consecutive years. By this standard, slightly more than a fifth of US companies are zombies:

(…) In this chart from Bank of America, which gauges balance street strength with the simple measure of the cover they have to pay interest charges, we discover that the biggest 150 companies have barely ever been stronger on this metric. Smaller companies are dramatically weaker, and have seen a significant weakening over the last two years:

(…) As a share of employment, the mass of severely indebted smaller companies could do serious damage. (…)

The following chart, from Jim Reid of Deutsche Bank AG, illustrates the average length of high-yield bonds in circulation in the US and Europe going back to 2002. On both sides of the Atlantic, high-yield borrowers have never had less time to play with: (…)