Month: October 2024

U.S. Flash PMI: Robust output and sales growth reported in October as selling prices rise at slowest rate since May 2020

The headline S&P Global Flash US PMI Composite Output Index registered 54.3 in October, up from 54.0 in September, to signal a sustained solid expansion of business activity at the start of the fourth quarter. The latest reading was only marginally below the average recorded over the latest six months, which has witnessed a sustained period of steady robust growth. New orders for goods and services also rose at the sharpest rate for 17 months, reflecting higher sales and stronger demand.

By sector, growth remained uneven in October, characterised by strong service sector growth contrasting with falling manufacturing output.

Service sector activity (output) grew at a marginally increased pace at the start of the fourth quarter, the latest expansion having been exceeded only once over the past two-and-a-half years by that recorded in August. The improvement was driven by the largest rise in new business into the service sector since April 2022, in turn fueled by rising domestic demand, which offset a marginal fall in export orders for services.

Manufacturing output meanwhile fell for a third successive month in October, albeit the rate of decline moderating to the slowest recorded over this period. However, while new orders also fell at a reduced rate, the rate of loss of orders remained steep, with weaker than anticipated sales also often having caused an unplanned rise in unsold stock levels. Inventories of finished goods consequently rose for a fourth successive month, keeping the forward-looking orders-to-inventory ratio at one of the lowest levels seen since the global financial crisis to signal further near-term production weakness.

Looking further ahead, having slumped to a 23-month low in September, optimism about output in the coming year rebounded sharply in October, hitting a 29-month high. The shift in sentiment underscores the unusual volatility of the current business and political environment as the US Presidential Election nears. The boost to confidence in October was often a reflection of hopes that paused spending and deferred decisions ahead of the election will lift once the political situation is clarified. Prospects of lower inflation, lower interest rates and stronger economic growth in 2025 also helped instil greater confidence.

Future optimism struck a 16-month high in the service sector and a nine-month high in manufacturing.

Employment fell for a third straight month in October, though the decline was again only very modest and less than reported in August and September. The drop in payrolls was more pronounced in the manufacturing sector, though even here the drop in headcounts was smaller than reported in September. The decline in service jobs was meanwhile only very modest, and often linked to the non-replacement of leavers rather than layoffs.

October saw average prices charged for goods and services rise at a sharply reduced rate, registering the smallest monthly increase since May 2020. The moderation represented a contrast to the uptick seen in September and pushed the rate of inflation below the pre-pandemic long-run average.

The rate of selling price inflation cooled especially sharply in the service sector, down to its lowest for almost four-and-a-half years, but also fell in manufacturing.

Input cost inflation also slowed, though remained elevated by historical standards, notably in the service sector. Although service sector input cost inflation waned slightly, generally linked to lower wage pressures, it remained the third-highest recorded over the past year and well above the pre-pandemic average.

Manufacturing input cost growth fell to a seven-month low, attributed to lower fuel prices, reduced buying and competition among suppliers.

The S&P Global Flash US Manufacturing PMI rose from 47.3 in September to 47.8 in October, signaling a deterioration in business conditions within the goods-producing sector for a fourth successive month but with the rate of deterioration moderating to the slowest since August.

All five PMI components exerted negative drags on the index bar suppliers’ delivery times, with longer lead-times reported for the first time in three months amid freight-related congestion and weather-related disruptions to supply chains.

The largest negative contribution to the PMI again came from new orders, which fell for a fourth straight month, albeit with the rate of decline easing from September’s 15-month peak, followed by stocks (inventories) of purchases, which fell at the sharpest rate for 14 months to be the only component exerting a more powerful negative drag in the PMI than in September. Production and employment fell at reduced rates.

Commenting on the data, Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said:
“October saw business activity continue to grow at an encouragingly solid pace, sustaining the economic upturn that has been recorded in the year to date into the fourth quarter. The October flash PMI is consistent with GDP growing at an annualized rate of around 2.5%. (…)

Goldman Sachs’Jan Hatzius wore rose colored glasses when reading the flash manufacturing PMI: “The underlying composition was strong, as the output (+0.9pt to 48.8), new orders (+0.6pt to 45.3), and employment (+0.2pt to 48.6) components all increased. The new export orders component increased by 1.5pt to 48.7.”

All of these components actually declined but at a slightly slower rate.

The only positive in manufacturing was that, amid “deteriorating business conditions”, “future optimism struck a nine-month high in manufacturing”, potentially reflecting optimism that things would get better after the elections.

Yet,

• “the rate of loss of orders remained steep”
• “the forward-looking orders-to-inventory ratio at one of the lowest levels seen since the global financial crisis to signal further near-term production weakness.”
• “stocks (inventories) of purchases fell at the sharpest rate for 14 months”

But services are booming (“largest rise in new business into the service sector since April 2022 fueled by rising domestic demand”).

Importantly: “The rate of selling price inflation cooled especially sharply in the service sector, down to its lowest for almost four-and-a-half years.”

And if I am not mistaken, it is the first time in a long, long time that the U.S. PMIs reveal “lower wage pressures”. The September Beige Book also noted “a slowdown in the pace of wage increases”.

Wednesday:

• Eurozone manufacturing production remained in a sustained downturn, falling for the nineteenth month running in October and at a marked pace.
• New orders contracted at a sharper pace.
• New export orders decreased at the joint-fastest pace so far this year, equal with that recorded in September.
• Japan’s manufacturing output and new orders contracted with new orders from abroad falling at the quickest pace since February 2023.

Hint: Chinese demand remains soft.

U.S. Consumers Plan Generous Holiday Spending

Gallup’s initial measure of Americans’ 2024 holiday spending intentions finds consumers planning to spend an average of $1,014 on Christmas or other holiday gifts. This is substantially more than their forecast of $923 at the same time last year, signaling that the 2024 holiday shopping season could be a bit kinder to U.S. retailers. (…)

The majority of Americans almost always say they will spend the same amount as the prior year, and that’s the case in the latest poll. However, today’s 52% saying their spending will be the same is below the long-term average of 60%, while the 20% saying they will spend more is significantly higher than the average of 14%. Meanwhile, the 25% saying they will spend less is on par with prior years. (…)

“A bit kinder”? That would be a 9.9% jump in average holiday spending!

FLASH PMIs

Eurozone business activity ticks lower amid falling demand

The seasonally adjusted HCOB Flash Eurozone Composite PMI Output Index, based on approximately 85% of usual survey responses and compiled by S&P Global, posted 49.7 in October, broadly in line with the reading of 49.6 in September. The latest figures suggested that business activity in the euro area decreased marginally for the second successive month.

Manufacturing production remained in a sustained downturn, falling for the nineteenth month running in October and at a marked pace. The rate of contraction softened slightly from that seen in September, however. On the other hand, the eurozone’s service sector remained in positive territory, registering a slight increase in business activity during the month. That said, the pace of expansion eased to an eight-month low as new orders decreased for the second consecutive month.

Overall, new orders were down for the fifth successive month and at a broadly similar pace to that seen in September. New business decreased across both manufacturing and services. While the contraction was sharper in manufacturing, the drop in services new orders was the steepest for nine months.

International demand also waned again in October. New export orders (which includes intra-eurozone trade) decreased at the joint-fastest pace so far this year, equal with that recorded in September.

With customer demand waning, firms in the euro area increasingly looked to scale back their workforce numbers in October. Employment decreased for the third month running, and at the fastest pace since the end of 2020. While the reduction in staffing levels was centred on manufacturers, the service sector saw a near-stagnation of employment. For the first time since early-2021, service sector hiring has almost come to a halt.

The picture was particularly bleak in Germany, where jobs were cut to the largest degree since the opening wave of the COVID-19 pandemic in 2020. Employment decreased slightly in France, while the rest of the eurozone saw staffing levels rise modestly.

Despite the drop in workforce numbers, weak client demand meant that companies continued to deplete backlogs of work at the start of the final quarter of the year. Moreover, the latest solid reduction in outstanding business was the most marked since January.

The worsening demand environment continued to subdue business confidence, which dropped for the fifth consecutive month to the lowest for almost a year. Optimism was also below the series average. Sentiment waned in both the manufacturing and services sectors, but remained stronger in the latter.

Although input costs increased again in October, the pace of inflation eased further and was the lowest in just under four years. As was the case with business activity, there were marked differences in price changes between the two monitored sectors. Manufacturing input costs decreased for the second month running, and at the fastest pace since March. Meanwhile, services input prices continued to increase sharply, albeit at a rate that was softer than the series average.

Similarly, output prices rose at a modest pace that was the slowest since February 2021, as a rise in services charges just outweighed a fall in manufacturing selling prices. Companies in Germany kept their output prices broadly stable, with the fractional pace of inflation the slowest since January 2021. Charges in France rose slightly following no change in the previous month, while the rest of the eurozone posted a modest increase in selling prices.

The retrenchment seen in the manufacturing sector during the month was not limited to output and employment, as firms scaled back their purchasing activity and stocks of both purchases and finished goods in October. Meanwhile, suppliers’ delivery times lengthened for the second month running. Although modest, the deterioration in supplier performance was the most marked since January.

Japan: Output declines for first time in four months

• Japan’s private sector in contraction with both manufacturing and services declining.
• New orders decreased in both manufacturing and services.
• New orders from abroad fell at the quickest pace since February 2023.

Bank of Canada Cuts Policy Rate by Half-Point With Return of Low Inflation Central bank says the bigger cut was possible given inflation returning to its 2% target and forecast to stay there through 2026

The central bank lowered the target for the overnight to 3.75% from 4.25%, marking the fourth consecutive rate reduction. Gov. Tiff Macklem said further rate cuts could be expected, so long as the economy evolves as forecast. (…)

“We took a bigger step today because inflation is now back to the 2% target,” Macklem said at a press conference Wednesday morning. “Price pressures are no longer broad-based.” Coupled with other indicators, “this suggests we are back to low inflation,” he added. (…)

Canada’s unemployment rate has climbed to 6.5% because companies are unable to absorb all the newcomers, via immigration, who have entered the workforce. The Bank of Canada said the share of firms reporting labor shortages has dropped below the historical average.

The central bank sharply revised downward its growth forecast for the third quarter, to 1.5% annualized from its earlier call for 2.8%. It expects growth of 2% in the fourth quarter. Overall, it anticipates growth of 1.2% in 2024, followed by 2%-plus growth in 2025 and 2026.

“It’s a pretty good-looking story—lower inflation, lower interest rates and a pickup in growth,” Macklem said.

Bond Markets Fear the ‘Known Unknown’ of a GOP Sweep They deeply dislike the prospect of unchecked Trump corporate tax cuts driving up deficits, even if stocks are likely to benefit.

(…) To explain why Treasury traders seem so anxious, look to the possibility of a Republican clean sweep of presidency, Senate and House of Representatives. With the improvement in Trump’s chances, and the dwindling odds on Democrats being able to keep control of the Senate, the chances of a sweep are now put at almost 50%.

That would allow much greater freedom of movement to make sweeping tax cuts, and thus arguably push up the deficit and bond yields. The traditional rule of thumb is that bond markets prefer political gridlock. (…)

There are other potential culprits, starting with China. Commodity prices have enjoyed a bounce as investors try to get a handle on just what the Chinese stimulus will entail. That in turn has pushed up inflation breakevens in the bond market:

(…) Over time, the bond yield is supposed to track nominal GDP growth, which is its highest since the 1980s (not that anyone would guess that from the election campaign):

The operative word is “nominal” of course. Inflation has ensured that the very robust growth since 2021 hasn’t translated into any equivalently strong rise in living standards. But it’s worth remembering that there’s real economic strength at present. That’s good news even if one of the side effects is rising interest rates.

Ed Yardeni:

The US presidential and congressional elections aren’t until November 5, but the Bond Vigilantes are voting early. The 10-year US Treasury bond yield has risen a whopping 63 basis points to 4.25% since the Fed’s September 17-18 meeting (chart). In exit polls, the Bond Vigilantes are saying they are voting against Fed Chair Jerome Powell’s dovish monetary policy because the economy is running hot, and the Fed’s premature 50bps rate cut 0n September 18 raises the risk that it will overheat. (…)

The Bond Vigilantes may also be voting against Washington, figuring that no matter which party wins the White House and the Congress, fiscal policies will bloat the already bloated federal government budget deficit and heat up inflation. The next administration will face net interest outlays of over $1 trillion on the ballooning federal debt. [Eating up 1.3% of GDP so far].

We are sticking with our 4.00%-4.50% range for the bond yield. We resisted raising our S&P 500 yearend target of 5800 when it rose above this level recently. We aren’t lowering it now that it is back at that level.

• The fiscal consolidation that never happened

The twice-yearly publication of the IMF’s World Economic Outlook is always a closely watched event, not only because it provides an in-depth analysis of recent macroeconomic trends, but also because it coincides with the updating of the Fund’s forecasts and databases. What caught our attention this time around was the Fund’s substantial reassessment of the evolution of the structural balance of general governments in the United States.

Recall that in its April report, the IMF had projected a significant improvement on this front in 2024 in its April report, which would have meant a sizeable drag on growth from fiscal policy. And while some consolidation would have made sense after a pandemic period characterized by huge deficits, the IMF’s forecast turned out to be way off the mark. Instead of holding back growth this year, today’s Hot Chart shows that public administrations are poised to contribute slightly to it.

This lack of fiscal discipline is certainly one of the main reasons that explain why U.S. growth has held up so well so far and why inflation remains slightly above the central bank’s target. But it is also beginning to raise questions about the Fed’s ability to cut interest
rates as much as investors expected a few months ago.

The expansionary fiscal programs proposed by the two presidential candidates are also helping to fuel these doubts. It remains to be seen whether there will be a significant gap between the candidates’ proposals and what they will be able to get through Congress once elected, but the risk of U.S. monetary policy diverging from that of other advanced economies has certainly increased recently.