Month: April 2024

Note: I am travelling in Asia until April 24. Limited equipment and different time zones will limit the frequency and depth of my postings.

MANUFACTURING PMIs

USA: Factory output growth hits 22-month high in March

The seasonally adjusted S&P Global US Manufacturing Purchasing Managers’ Index™ (PMI^®) was above the 50.0 no-change mark for the third successive month in March, thereby signalling a further monthly strengthening in the health of the sector. That said, at 51.9 the index was down from 52.2 in February, pointing to a slightly less pronounced improvement at the end of the opening quarter of the year.

Manufacturers recorded a solid and accelerated rise in production during March, with the rate of growth the sharpest in almost two years. Respondents mentioned signs of improving demand conditions.

Stronger demand was also evident in data for new orders, which showed an increase for the third month running. The pace of expansion was solid, but softer than that seen in February. Total new orders rose more quickly than new business from abroad, which increased only marginally in March.

Firms remained confident that output will increase over the coming year, thanks to expectations for improving economic conditions, marketing efforts and improving capacity.

This confidence in the outlook, allied with recent increases in new orders, encouraged manufacturers to expand their staffing levels in March. Although modest, the pace of job creation was the most pronounced since July last year. Improved operating capacity and a slower expansion of new orders meant that firms were able to deplete backlogs of work modestly. Outstanding business has now decreased on a monthly basis throughout the past year-and-a-half.

While firms took on extra staff at an accelerated pace, they scaled back their purchasing activity in March following a rise in February. Respondents signalled a preference for using existing stocks to help support production rather than purchasing additional inputs.

A desire to draw down stock holdings was evident, with inventories of both purchased items and finished goods decreasing in March after having increased in the previous survey period. Firms indicated that inventory holdings were sufficient to satisfy current requirements, with efforts to improve cash flow also behind the reductions in stocks.

Input costs increased sharply, with the rate of inflation ticking up from that seen in February. Higher oil and raw material costs, plus increased transportation rates, reportedly added to cost burdens at the end of the first quarter.

Meanwhile, the impact of rising labor costs was mentioned as a factor pushing up selling prices at a number of manufacturers. As a result, the rate of output price inflation quickened for the fourth month running to a sharp pace that was the fastest in just under a year.

Finally, suppliers’ delivery times shortened for the fourteenth time in the past 15 months, albeit only marginally. Quicker deliveries reportedly reflected a continued normalization of supply chains and sufficient stock holdings at vendors.

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

(…) “A key development in recent months has been the broadening-out of the upturn from services to manufacturing, with reviving demand for goods driving the fastest increase in factory production since May 2022. Jobs growth has also picked up as firms boost capacity to meet demand. Rising capex spending has likewise buoyed orders for machinery and equipment, in a further sign of firms gaining confidence in the outlook.

“The upturn is, however, being accompanied by some strengthening of pricing power. Average selling prices charged by producers rose at the fastest rate for 11 months in March as factories passed higher costs on to customers, with the rate of inflation running well above the average recorded prior to the pandemic. Most notable was an especially steep rise in prices charged for consumer goods, which rose at a pace not seen for 16 months, underscoring the likely bumpy path in bringing inflation down to the Fed’s 2% target.”

• ISM Manufacturing Index Breaks Higher

The ISM manufacturing index surprised to the upside in March. Not only did it surpass the expectations of 55 forecasters who submitted to the Bloomberg Consensus, but it rose by the most in three years (up 2.5 points) to an expansionary-reading of 50.3 for the first time in 16 months.

(…) New orders and production were up and consistent with expansion, but so too were prices paid. In short, a pickup in manufacturing activity is welcome news for the broader economy, but can be troublesome for the Fed if it acts as a headwind to the recent disinflationary trend in consumer price inflation.

To that end, the prices paid measure rose to 55.8, or the highest reading in 20 months, and is consistent with a broad expansion in prices paid by manufacturers last month. The move higher stems from the recent lift we’ve seen in commodity prices, and we’ve long cautioned the disinflationary trend from core goods is likely less of a support factor in continued disinflation this year as the normalization in pandemic-related supply chains has run its course. A slowdown in services inflation is thus all the more important in driving overall inflation lower from here, raising the stakes for Wednesday’s ISM services release. (…)

 

Institute for Supply Management and Wells Fargo Economics

After more than a year of reporting conditions consistent with recession, the expansion in March activity is encouraging for manufacturers. Specifically the production and new orders indices rose back above 50 and hit their highest readings in over a year and a half. The production index rose by the most of any component, up 6.2 points with just two industries (furniture and machinery) reporting a decrease in output last month. Furniture and transportation equipment were the only two industries to report a decline in new orders in March.

The select industry comments were broadly positive as well, though there was a notable emphasis on improved expectations, suggesting we’re still a few months out from a sustained manufacturing recovery. Select comments from the transportation equipment, computer & electronic products, primary metals, and wood products all mentioned they expect orders to pickup; “Expecting to see orders and production pick up for the second quarter…optimism is high that orders are ‘just on the horizon’…There is optimism that order activity will increase in the late second quarter…Many manufacturers are anticipating better business in the second quarter and much better in the third quarter…” (…)

Manufacturing is positively surprising (not if you cared about S&P Global’s Flash PMI). The important Services PMIs are out tomorrow. The flash PMI gave us a preview last week with

a loss of momentum in the service sector, where activity rose at the weakest pace in three months. While there were some reports of demand improving, anecdotal evidence also suggested that price pressures had restricted the ability of customers to commit to new projects. As a result, the rate of new business growth in the service sector also softened.

That may be a blessing for the Fed. Slowing demand could allow Powell and Co. qualify rising inflation as “bumps on the road”. But the flash PMI was worrisome:

The rate of input cost inflation quickened to a six-month high amid faster increases across both monitored sectors. Service providers indicated that higher operating expenses generally reflected increasing wages, while rising oil and gasoline costs were often mentioned by manufacturers.

In turn, companies in the US raised their own selling prices at a faster pace. In fact, the rate of inflation was the sharpest in just under a year and stronger than the series average. Respective rates of output price inflation accelerated sharply across both manufacturing and services, quickening to 13- and eight-month highs as companies passed through higher input costs to their customers.

The steep jump in prices from the recent low seen in January hints at unwelcome upward pressure on consumer prices in the coming months.

Interestingly, the Mexico Manufacturing PMI revealed that

Growth across Mexico’s manufacturing industry was broadly stable in March, as stronger expansions in new orders and production contrasted with softer job creation and an outright fall in stocks of purchases. New export orders decreased at the fastest pace in five months, with firms particularly mentioning weaker demand from the US.

Mexican manufacturers were able to pass on their higher cost burdens to clients, however, with output charge inflation reaching a 17-month high in March. The rate of increase was above its long-run trend, but considerably below that seen for input costs.

In Canada: “Sales to key international markets (like the US) were also reported to be lower, evidenced by a seventh successive monthly decline in new export orders during March.”

In Japan: “According to panellists demand in both domestic and international markets continued to cool. As such, the rate of contraction in the latter was the most marked seen since February 2023. (…) Charged price inflation however
picked up for the first time in nearly a year to reach the strongest since last December.”

in ASEA: “Demand for ASEAN manufactured goods bounced back as new orders rose for the first time in seven months in March. The rate of expansion was the fastest since mid-2023. However, the latest upturn appeared to have been driven primarily by domestic demand rather than international markets. In fact, the downturn in new export orders deepened and extended the current run of decrease to 22 months.”

CHINA: Operating conditions improve at quickest pace since February 2023

Manufacturing sector conditions in China further improved at the end of the first quarter of 2024, according to the latest PMI® data. This was driven by greater inflows of new work, including from abroad. In turn, Chinese manufacturers increased production, while also raising their purchasing levels amid improved optimism. That said, a cautious stance was maintained with regards to staffing levels.

Meanwhile input costs fell for the first time in eight months, enabling Chinese manufacturers to further lower selling prices in a bid to drive sales.

The headline seasonally adjusted Purchasing Managers’ Index™ (PMI) rose to 51.1 in March, up from 50.9 in February. This signalled a fifth successive monthly improvement in the health of the sector and at the most pronounced pace in 13 months.

Supporting the latest advancement of manufacturing sector health was better demand conditions. Incoming new orders, including export orders, grew at accelerated rates as both domestic and external market conditions improved according to panellists. Although modest, the rate at which new export orders rose was the fastest in just over a year.

As a result of a quicker rise in new orders, Chinese manufacturers raised their production in March. Adjusted for seasonal factors, the rate at which manufacturing output recovered to the fastest since last May. Nonetheless there was a renewed accumulation of backlogged work in March, albeit at a marginal pace.

Employment levels declined again in March. While resignations partly accounted for the decline in headcounts, comments from panellists further indicated that firms were cautious about hiring in an attempt to rein in costs.

Purchasing activity meanwhile rose across the Chinese manufacturing sector in line with growth in new work. Firms also opted to raise their holdings of raw materials and semi-finished items to meet current and future production needs. In contrast, the level of post-production inventories fell for a second successive month as rising new orders led to increased outbound shipments of goods for the fulfilment of orders.

Turning to prices, average input costs fell for the first time since July 2023, albeit only marginally. Survey respondents often linked the reduction in input prices to a fall in raw material costs.

In turn, Chinese manufacturers lowered their selling prices for a third straight month and at the most pronounced pace in eight months. Export charges similarly declined in March and at a modest pace that was comparable with overall selling prices. Firms indicated being able to reduce selling prices with lower costs, which further helped to drive sales at the end of the first quarter of 2024.

Overall optimism among Chinese manufacturers improved for a third straight month in March. Firms pinned hopes of rising manufacturing activity upon a better economic outlook. The level of business confidence was the highest seen since April 2023.

  

FYI, the Eurozone PMI is out today.

In all, it seems that the improvement in the U.S. manufacturing sector is essentially domestic so far.

A Million Simulations, One Verdict for US Economy: Debt Danger Ahead Bloomberg Economics ran a million forecast simulations on the US debt outlook. 88% of them show borrowing on an unsustainable path.

The Congressional Budget Office warned in its latest projections that US federal government debt is on a path from 97% of GDP last year to 116% by 2034 — higher even than in World War II. The actual outlook is likely worse.

From tax revenue to defense spending and interest rates, the CBO forecasts released earlier this year are underpinned by rosy assumptions. Plug in the market’s current view on interest rates, and the debt-to-GDP ratio rises to 123% in 2034. Then assume — as most in Washington do — that ex-President Donald Trump’s tax cuts mainly stay in place, and the burden gets even higher. (…)

In the end, it may take a crisis — perhaps a disorderly rout in the Treasuries market triggered by sovereign US credit-rating downgrades, or a panic over the depletion of the Medicare or Social Security trust funds — to force action. That’s playing with fire. (…)

For the US, the dollar’s central role in international finance and status as the dominant reserve currency lowers the odds of a similar [UK] meltdown. It would take a lot to shake investor confidence in US Treasury debt as the ultimate safe asset. If it did evaporate, though, the erosion of the dollar’s standing would be a watershed moment, with the US losing not just access to cheap financing but also global power and prestige. (…)

Still, the world is changing. China and other emerging markets are eroding the dollar’s role in trade invoicing, cross-border financing and foreign exchange reserves. Foreign buyers make up a steadily shrinking share of the US Treasuries market, testing domestic buyers’ appetite for ever-increasing volumes of federal debt. And while demand for those securities has lately been supported by expectations for the Fed to lower interest rates, that dynamic won’t always be in play.

The CBO’s assumptions for crucial variables — GDP growth around 2%, inflation returning to 2%, interest rates drifting down from the current levels — are squarely in the ballpark of plausibility. They’re also not far from numbers in the Federal Reserve Bank of Philadelphia’s Survey of Professional Forecasters. Indeed, the CBO’s view on rates is a little higher than the most recent consensus.

Examine them closely, though, and key assumptions underpinning the CBO forecast appear optimistic:

• By law, the CBO is compelled to rely on existing legislation. That means it assumes the 2017 Trump tax cuts will expire as scheduled in 2025. But even President Joe Biden wants some of them extended. According to the Penn Wharton Budget Model, permanently extending the legislation’s revenue provisions would cost about 1.2% of GDP each year starting in the late 2020s.
• The CBO also must assume that discretionary spending, which is set by Congress each year, will increase with inflation, not keep pace with GDP. As a result, defense spending falls from around 3% of GDP now to about 2.5% in the mid-2030s — a tall order given the wars currently raging and the geopolitical threats that loom. Former Treasury Secretary Lawrence Summers says a more realistic forecast would add at least 1% of GDP to the CBO’s outlook.
• Market participants aren’t buying the benign rates outlook, with forward markets pointing to borrowing costs markedly higher than the CBO assumes.

Bloomberg Economics has built a forecast model using market pricing for future interest rates and data on the maturity profile of bonds. Keeping all the CBO’s other assumptions in place, that shows debt equaling 123% of GDP for 2034. Debt at that level would mean servicing costs reach close to 5.4% of GDP — more than 1.5 times as much as what the federal government spent on national defense in 2023, and comparable to the entire Social Security budget. (…)

In the worst 5% of outcomes, the debt-to-GDP ratio ends 2034 above 139%, which means that the US would have a higher debt ratio in 2034 than crisis-prone Italy did last year. (…)

Note: I will be travelling in Asia until April 24. Limited equipment and different time zones will limit the frequency and depth of my postings.

Powell Reiterates Fed Doesn’t Need to Be In Hurry to Cut Rates It won’t be appropriate to cut rates until the Fed is confident inflation is on track toward the 2% goal.

“The fact that the US economy is growing at such a solid pace, the fact that the labor market is still very, very strong, gives us the chance to just be a little more confident about inflation coming down before we take the important step of cutting rates,” Powell said Friday at an event at the San Francisco Fed. (…)

The core personal consumption expenditures price index — which excludes volatile food and energy costs — rose 0.3% in February after climbing 0.5% in the previous month, marking its biggest back-to-back gain in a year. The measure is up 2.8% from a year earlier, still above the Fed’s 2% target.

“It’s good to see something coming in in line with expectations,” Powell said of the data, adding that the latest readings aren’t as good as what policymakers saw last year. “February is lower but it’s not as low as most of the good readings we got in the second half of last year; but it’s definitely more along the lines of what we want to see.”

Powell said officials expect inflation to continue falling on a “sometimes bumpy path,” echoing remarks he made following the Fed’s last policy meeting earlier this month. (…)

The Fed chief said Friday he doesn’t see the possibility of a recession as elevated at this time. Still, he reiterated that an unexpected weakening in the labor market could warrant a policy response from Fed officials. (…)

That’s another confirmation that inflation is now on the back seat, behind employment as Powell said after the last FOMC: “We’re strongly committed to bringing inflation down to 2% over time,” Powell said. “But we stress, over time.”

He was pleased by the “in-line” inflation numbers but he must have been surprised by many other numbers in last Friday’s report:

• Wages and salaries jumped 0.8% in February (the largest one-month gain since January 2023) for a +0.55% average (+6.7% a.r.) in the last 2 months vs +0.33% (+4.1% a.r.) in Q4’23. Same data for total compensation of employees (labor income).
• Consumption expenditures followed, up 0.8% in February (the biggest jump in over a year and a half) and +0.5% on average in the last 2 months after +0.4% on average in Q4’23. Demand is not slowing, is it?
• Expenditures on services rose 0.9% after +1.0% in January (the biggest monthly jumps since mid-2021). The Q4’23 average growth rate was 0.6%. In real terms, services rose 0.6% in February and +5.5% a.r. in the last 2 months vs +4.0% a.r. in Q4’23 and 2.0% a.r. in Q3’23.

The “refreshingly in-line” inflation number was really the result of 2 other, also surprising, numbers:

• Goods prices jumped 0.5% in February after 4 consecutive negative months. Some of that was because of higher energy prices but food prices only rose 0.1%. Durables prices rose 0.2% like in January after 6 consecutive declines.
• Services inflation was somewhat muted at +0.3% after +0.6% in January. But last 2 months: +5.5% a.r. following +3.5% in the second half of 2023.

Just a bump?

Data: Bureau of Economic Analysis; Chart: Axios Visuals

The inflation rate for services less housing, or super-core inflation came in at 3.3% year-over-year, but the three-month annualized rate of 4.5% points to a problematic rise in service sector pricing. While financial markets may take some comfort in the annual rate of the core PCE deflator coming in at 2.8% with a slightly smaller-than-expected monthly rise of 0.3% in February, service prices are no longer cooling as they were a few months ago. (Wells Fargo)

Source: U.S. Department of Commerce and Wells Fargo Economics

And BTW, rental income jumped another 1.6% MoM in February after +1.4% in January and +0.5% on average in the second half of 2023. Somebody’s income is somebody else’s expense. The long, long, long-awaited slowdown in rents remains elusive.

In fact, Zillow reports that “new rents” rose 0.41% in February, in line with the previous 4 months and well above the 2023 average of +0.28%.

Many pundits highlight the fact that real disposable income has been flat since November, eventually curbing demand.

But labor income keeps rising strongly and the wealth (d)effect is alive and well:

S&P 500 Market Cap Is Up $10.9 Trillion Since the Fed Pivot

The S&P 500 is up 25% since the November FOMC meeting. That is a $10.9 trillion increase in the market cap of the S&P 500 in five months.

Similarly, with lower rates and tighter credit spreads, the market cap of the US bond market is up $2.6 trillion. That’s a total increase in wealth since the Fed pivot of $13.5 trillion. For comparison, US consumer spending in 2023 was $19 trillion.

Combined with higher home prices and higher bitcoin prices, the bottom line is that the wealth gain experienced for US households since the Fed pivot is at least 70% of consumer spending, and this is going to be a strong tailwind for private consumption over the coming quarters. (Torsten Slok, Apollo chief economist)

• The typical homeowner who has owned a home for the last 4 years just received a $208K boost in net worth as home prices have exploded at an unprecedented rate. Homeowners hold $31.8 trillion in home equity, a staggering increase from just under $15 trillion in home equity at the prior housing cycle peak in 2006. (John Burns)

• Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors:

It’s a pretty mixed report, so I wouldn’t expect it to meaningfully shift the narrative on inflation or the Fed. The story remains that the steady moderation of inflation has stalled above where the Fed wants it to be, and if growth continues to gain momentum, or even just stays as strong as it’s been, there’s a real risk that inflation heads higher. That would lead us down the path toward no Fed cuts and potentially even a hike.

• 32% of small businesses expect to raise prices over the coming months, the highest share since 2022. Historically, this data point is a strong leading indicator of overall inflation. Data pointing to a potential reacceleration in inflation will surely spook Fed members, supporting the case for keeping rates higher for longer. (John Burns)

• The Fed and most everybody else take food inflation out of the equation but this chart from Tavi Costa (via John Mauldin) suggests that we should beware:

Source: Tavi Costa

• Gavekal:

(…) In short, over the past two months the case for Federal Reserve rate cuts has taken on some serious water. This leaves investors with an important question. What will the Fed do next? Will it try to get ahead of the curve and beat back the expectations of imminent rate cuts that it raised in December? Or will the Fed deliver on the promise of rate cuts, even though the macro backdrop is no longer so supportive of easier policy?

One added complication is the calendar. The Fed will be loath to start a new rate cut cycle in July, smack in between the Republican and Democratic conventions. It will also be loath to start a new cutting cycle in late October, days before the US presidential election. This means that the obvious times for the Fed to start a new rate cut cycle are either in June or in December (unless a Lehman-style or Covid-type crisis forces its hand). (…)

Against all the possible reasons to cut, the main reason Fed policymakers might want to sit on their hands is that Powell has made it clear he does not want to be remembered as another Arthur Burns. That’s basically it: the fear of being remembered as Arthur Burns versus the fear of no longer getting invited to D.C. dinner parties.

But Mr.Powell has not been very subtle lately stressing that the 2% inflation target is “over time” along a “bumpy road”, acknowledging an economy growing at “such a solid pace” and a “labor market [that] is still very, very strong”.

Demand for goods remains well above trend while demand for services is back on trend…

… and rising faster than service-sector employment:

Curiously, the unemployment rate in service occupations rose from a near all-time low of 4.1% in September 2023 to 5.1% in February. This in spite of service wages having risen 23% since 2019 vs 16.7% for all private employees.

Productivity is clearly welcome!

One month ago:

• “at some point, I think it will be appropriate to pull back on restrictive monetary policy, likely later this year.” (NY Fed’s John Williams)
• “if inflation expectations. . . continue to move down then I think we’re in a good spot where we could consider an easing of the restrictive level that we’re in.” (Cleveland Fed’s Loretta Mester)
• “the question is, how long to remain this restrictive?” (Chicago Fed’s Austan Goolsbee)

This restrictive? Interest rates going from 0% to 5.5% in 18 months have not bothered consumers nor the whole economy much, have they?

This questioning is clearly helping boost the wealth (d)effect.

Helping?

BTW, National Bank Financial held its Annual Canadian Financial Services Conference last week. Here`s what some bank executives said about the impact the Canadian monetary policy is having on the admittedly more leveraged and interest-sensitive Canadian consumers:

• Customers and delinquencies are holding up despite higher interest
  rates. (BNS)
• Clients remain resilient despite facing challenges such as higher rates and
  inflation. CM expects some credit migration but sees no signs of systematic issues in its
  portfolios. (CIBC).
• Mortgages. Customers are absorbing higher payments, with no major
  impact to delinquency trends. (National Bank)
• Commercial. Delinquencies and impairments are still below pre-pandemic
  levels, on a path towards normalization. (National Bank)

A Hollywood Ending for Fourth Quarter GDP

In its latest revision to fourth quarter GDP, the Commerce Department flagged growth during the period at 3.4%, which is a faster clip than previous estimates. With the benefit of even more hindsight, consumer spending is now pegged at an annualized growth rate of 3.3% up from just 3.0% previously. What drove the adjustment higher was a better finish than expected for services outlays.

While it may be encouraging to see sustained consumer spending growth in this sector, the staying power could be problematic for the Fed should the sustained demand there prevent a cooling in service prices.

Structures spending jumped to 3.7% from 2.4% in the prior estimate on upward revisions to private nonresidential construction spending. One theme we’ve highlighted is how a boom in manufacturing construction has scope to lift future output capacity. In the meantime it can be supportive to topline growth through stronger structures investment. (…)

  

The new data in this release come on the income side of the National Income & Product Accounts (NIPA) and show a slightly brighter picture of the economy at the end of last year than implied by the GDP estimates. The output and income side of GDP accounting should in theory be equivalent as the creation of output generates an equal amount of income, but in reality the two differ due to statistical discrepancies and data omissions.

Real gross domestic income (GDI) rose at an annualized rate of 4.8% in Q4, indicating a stronger pace of growth to end the year. As seen in the nearby chart, this outturn has led the recent unusually wide gap between the annual growth rates of GDP and GDI to narrow. We expect the two measures to converge further in subsequent data releases.

The largest component of GDI is employee compensation, which was revised a touch lower in this updated release. It was still up at a 4.5% annualized rate during the quarter, consistent with solid income growth that has helped sustain consumer spending.

The new piece of income data in this release is economy-wide corporate profits. Pre-tax profits were stronger than we had anticipated, rising 4.1% (not annualized) during the quarter, or by $105 billion. This marks the largest quarterly gain since the second quarter of 2022 and leaves profits about 5% above where they stood at the end of last year.

Most of the year-end profit strength was concentrated in domestic industries specifically, where profits rose $142 billion in Q4. Foreign profits, or remittances from foreign subsidiaries less remittances of American subsidiaries to foreign parents, fell by $8.9 billion. (…)

Broad measures of profit margins remain elevated suggesting businesses have been able to offset higher input costs of material and labor by increased sales. (…)

HOUSING

GS: “Existing home sales increased by 9.5% to a seasonally adjusted annualized rate of 4.38 million units in the February report, significantly above expectations.”

7% rates are keeping the housing market in check.

• Mortgage rates remain stubbornly high at 7% as the economy stays strong and the Fed hesitates to cut interest rates.
• Resale inventory is inching higher as the lock-in effect (when homeowners are “locked in” and unwilling to give up their sub-6% mortgage rates) slowly loosens.
• Demand is sluggish for this time of year as affordability issues persist.
• Builders still have the edge, but rising resale inventory could erode their advantage.

The inventory of existing homes for sale, while still near historic lows, has grown +2% since this time last year. The housing market is well past the peak lock-in days of early 2022, when 92% of borrowers had a rate below 6%.

As of 3Q23 (our most recent data), the share of borrowers with rates below 6% had fallen to 88%—and the actual number is likely closer to 85% today based on trends. Millions of borrowers are no longer locked in, which will only grow as rates stay high and homes take longer to sell.

Canada GDP Grows Stronger-Than-Expected 0.6% in January Canada’s economy made a solid start to the new year with growth in the first two months tracking well ahead of the BOC’s forecast, reinforcing expectations the central bank will once again stick to the sidelines at its coming policy meeting.

The expansion in January was the strongest in a year, bolstered by a recovery with public sector strikes ending in Quebec and backed by increased activity across many segments of the economy. And a flash estimate suggests the strength carried through to last month thanks to increases in areas ranging from natural resources extraction to manufacturing and finance, Statistics Canada said Thursday.

Although inflation in the country has cooled in recent months and slack is building in the labor market, the rebound in industry growth in 2024 suggests no urgency for the Bank of Canada to begin cutting interest rates and economists continue to expect it to leave its policy rate unchanged at next month’s meeting and possibly through the first half of the year. (…)

Compared with a year earlier, GDP by industry in the first month of the year rose 0.9%.

Preliminary data suggest GDP by industry expanded 0.4% month-over-month in February.

“The economy started 2024 with a bang. Broad-based gains suggest that the economy is faring better than expected despite restrictive monetary policy,” said Arlene Kish, director of Canadian economics at S&P Global Market Intelligence, who only expects the first rate cut in Canada in July. (…)

Economic activity in January was driven by services-producing industries with a rebound in education following the end of public sector strikes in Quebec that had contributed to downwardly-revised 0.1% dip in GDP in December.

Canadian manufacturers also saw a recovery in January, as did utilities with a sudden drop in temperatures mid-month that drove a surge in demand in western parts of Canada. While the Quebec strikes in November and December, which also covered some health care workers in the province ended, Statistics Canada said the start of a strike by some teachers in the province of Saskatchewan tempered some of the education sector’s rebound.

Overall, services-producing industries increased 0.7% on-month and goods-producing industries were up 0.2% in as manufacturing recouped all of the decline seen in December and utilities rebounded with a sudden drop in temperatures mid-month that drove a surge in demand in western parts of Canada. Still, rail transportation was down for a second consecutive month, dented by the winter weather in Western Canada that affected train operators, and oil and gas extraction pulled back after reaching a record high level in December while and mining and quarrying declined after three straight months of growth.

Statistics Canada’s early indications for February suggest activity by utilities faded but only partially offset growth in other areas. The estimate is due to be updated with the release of official GDP data for the month on April 30. (…)

SENTIMENT WATCH

From Callum Thomas:

• Tech stocks have broken out to an all-time high relative to the S&P 500 — not to jinx it, but that looks like the establishment of a new permanently higher plateau for tech stocks!

• US tech stock valuations have now surpassed the 2021 highs in both absolute terms (vs their own history) and relative terms (vs the rest of the market).

• Tech insiders have been selling.

Source: @financialtimes

Citing data firm Verity, the Financial Times relayed Monday that the ratio of insider sellers to buyers in the lynchpin technology sector stands at roughly 13:1 in the quarter to date, a ratio topped only twice in the past decade and comparing to less than 5:1 throughout 2022 as the market endured its post-Covid downshift. (…) “We are also seeing a number of the big names in this space with insider selling that is not typical.”

Indeed, several captains of industry have opted to ring the register since the start of 2024:  Amazon.com founder Jeff Bezos and CEO Andy Jassey have collectively offloaded $30 million in company shares, while Meta CEO Mark Zuckerberg cashed out $135 million worth of stock, Palantir co-founder Peter Thiel parted with $175 million and outgoing Snowflake CEO Frank Slootman hit the bid to the tune of $69.2 million. (FT via ADG)

• The average stock has seen record underperformance — as proxied by the performance of the equal-weighted vs cap-weighted S&P500 (this is another way of saying that the top stocks have been really strong). What’s really interesting though is how when that performance differential indicator gets to extremes like this it has often market a turning point in equal vs cap-weighted relative performance (which comes down to sector/style/size relative performance).

Source:  @sentimentrader

CHINA

From Oaktree Capital:

The current market narrative about the “uninvestability” of China reminds us of a recent comment from our co-chairman Howard Marks: “If you have two piles of assets – one with things that everyone loves, that are priced well and performing well, and the other with assets that everyone dislikes, that have poor price performance and are believed to be troubled – you have to ask yourself where will you find the best opportunities?” The answer is clearly in the latter.

Chinese equities may be at the top of the “disliked and troubled” pile today. They are currently trading at a record-low 8.2x forward estimated earnings, on average, and the gap between U.S. and Chinese technology stocks is the widest it has been in many years.

Moreover, sentiment regarding investment in China is as bad as we’ve ever seen it, with global positioning surveys showing China to be a large consensus underweight.

Counterintuitively, many investors who favored Chinese equities a few years ago when large Chinese companies were often being very aggressive in their use of capital, now consider the same equities to be too risky, even though the companies involved have become much more conservative and the equities themselves have become much less expensive.

Importantly, we think many high-quality Chinese companies are being punished not because of concerns about their fundamentals, but because of broad macro concerns about China. In fact, the fundamentals of many companies are actually improving. For example, net cash positions at the top 15 Chinese companies in the MSCI Emerging Markets Index have risen from negative $19 billion in 2019 to $113 billion in 2023.

In early 2023, few people were negative on China. Its housing problems were barely discussed other than here. The FTSE China H Share Index peaked in early May before sinking 30% while the doom and gloom scenarios moved to the front pages.

China’s problems and challenges are now widely known. What we don’t know is if the worst is near.

FYI, the last time the S&P 500 was at 8.2x forward EPS was in June 1982 (red line):

That said, China remains China…

Yesterday:

• The NBS manufacturing PMI index rose to 50.8 in March from 49.1 in February. The new orders sub-index jumped to 53.0 from 49.0, the output sub-index increased to 52.2 from 49.8, and the employment sub-index inched up to 48.1 from 47.5.
• The new export order sub-index increased sharply to 51.3 in March vs 46.3 in February. The import sub-index also improved to 50.4 in March vs 46.4.
• The input cost sub-index increased to 50.5 from 50.1, while the output prices sub-index fell to 47.4 from 48.1.
• The official non-manufacturing PMI (services and construction sectors) rose to 53.0 in March vs 51.4 in February.

Huawei Bounces Back From U.S. Sanctions as Profit Doubles The results are a stunning comeback for the Chinese tech-giant, years after U.S. export controls cut it off from advanced technology.

The tech giant on Friday said profit rose to 87 billion yuan, or $12 billion, a rise of more than 140% from the same period a year ago. It is the largest jump in profit for the company since it started reporting comparable figures in 2006. Revenue rose 10% to $99 billion.

It said growth was driven by higher sales in its consumer electronics and cloud computing offerings. Last September, Huawei surprised U.S. authorities by releasing a new smartphone, the Mate 60 Pro, with 5G-like capabilities, running on its homegrown chips.

Five years after the U.S. restricted sales of the most powerful chips to Huawei, the telecom equipment and mobile phone maker has shown strong resilience. The company has diversified into new business lines such as cloud computing, enterprise software and automobile systems and retooled its products.

Last year nearly 70% of Huawei’s revenue came from China as its overseas presence shrunk. Five years ago, China formed about 60% of its revenue, while the rest came from Europe and emerging markets. Huawei doesn’t break out U.S. sales figures.

Revenue from its telecommunication equipment and enterprise technology business grew 2%. Sales at its consumer business group, encompassing products such as smartphones, laptops and smart wearables, rose 17%. (…)

Huawei has managed to deliver AI chips that developers say match the capabilities of some of Nvidia’s top processors. Nvidia named Huawei as one of its competitors in its annual report in February.

In 2023, Huawei spent $23 billion on research and development, about 23% of its total revenue.