Month: February 2025

U.S. Services PMIs

S&P Global: Stronger job creation despite slowdown in output growth at start of 2025

The seasonally adjusted S&P Global US Services PMI^® Business Activity Index posted 52.9 in January, down markedly from 56.8 in December but still signaling a solid monthly expansion in business activity in the service sector. Output has now increased on a monthly basis throughout the past two years, with the latest rise generally reflecting sustained new order growth.

The pace of output expansion slowed sharply, however, and was the weakest since April 2024. Some panellists reported that the unusually freezing weather conditions seen in parts of the country had been behind the slowdown in growth.

The securing of new customers and client approval of projects contributed to a ninth consecutive monthly rise in new business. Here too, the pace of expansion eased from December, but remained solid.

The rise in total new business was recorded in spite of a renewed decrease in new export orders, which fell for the first time in seven months. The pace of decline was only marginal, however.

As well as seeing growth of activity ease in January, there was also a slight reduction in business confidence at the start of the year, after optimism hit an 18-month high in December. That said, sentiment remained broadly in line with the series average. More than 42% of respondents predict an increase in activity over the coming year, while only 6% forecast a reduction.

In some cases, confidence was linked to the incoming administration, with economic conditions expected to improve. Marketing activity and increases in new orders were also central to business optimism.

Service providers looked to expand capacity at the start of 2025 and ramped up hiring accordingly. Employment rose for the second month running, with the rate of job creation accelerating to the fastest since June 2022.

Despite stronger jobs growth, the recent period of rising new orders meant that capacity pressures remained evident in January. Outstanding business increased for the third consecutive month. The latest rise was slight, but more pronounced than seen in December.

Higher labor costs was the main factor behind a further sharp increase in input prices in January. The rate of inflation reached a three-month high and was broadly in line with the series average. Higher prices for materials and utilities were also recorded.

In line with the picture for input costs, the pace of output price inflation also quickened in January as companies passed through higher cost burdens to customers. The solid increase in charges was the fastest since last September.

ISM:

The Institute for Supply Management’s gauge of services slipped to 52.8 in January from 54 at the end of the 2024, according to data released Wednesday.

A gauge of new orders placed with service providers declined to the lowest level since June, marking the third month in the last four of cooler demand growth. (…)

The PMIs suggest employment remains healthy but also that inflation is not totally under control just yet. John Authers says that “services prices remain within historical bounds” but only if your history begins in 2013.

ECB’s Wage Tracker Points to Steep Slowdown This Year Pay to rise 1.5% y/y in 4Q 2025, down from 5.3% in 4Q 2024

The ECB’s wage tracker, published Wednesday, predicts salaries rising by an annual 1.5% in the fourth quarter of 2025. While that’s up a touch from the 1.4% projection seen in December, it’s way down from the 5.3% peak recorded a year earlier. (…)

The ECB’s December outlook foresees a sustained decline in salary growth — to 2.8% in 2027 from 4.6% last year. (…)

The Eurozone January PMI surveys:

Turning to prices, January survey data signalled an intensification of cost pressures across the eurozone. The rate of input price inflation accelerated to a 21-month high and was above the long-run series trend. Both monitored sectors recorded stronger rises in their operating expenses at the beginning of the year. Subsequently, euro area firms raised their prices charged more aggressively. Output prices rose at the quickest pace in five months.

EARNINGS WATCH

Via John Authers:

Deutsche Bank AG’s Binky Chadha estimates that 80% of S&P 500 companies topped their earnings estimates, more than the 74% historical average. The size of the aggregate beat, 5.9%, and the beat by the median company, 4.1%, are also above historical averages. Strong performance is broad-based, with financials and consumer cyclicals recording double-digit beats. Sectors like materials, industrial cyclicals, energy, mega-cap growth, and tech are ahead of estimates by mid-single-digit rates. Defensive stocks are more modest:

Importantly, with the exception of energy, all sectors are recording earnings growth, and banks are on course to outstrip third-quarter growth:

The discussions on earnings calls, and what they reveal about executives’ thinking, perhaps matter more — particularly amid the upheavals of Trump 2.0. A search of earnings transcripts reveals that tariffs shenanigans are getting a lot of attention as companies weigh the consequences and seek workarounds. Tariffs hadn’t been as topical since 2018, when Trump 1.0 made punitive levies against China. Meanwhile, at a much lower level, immigration — and its possible ramifications on inflation and the difficulties it could create for recruiting workers — is also attracting far more comment.

(…) executives’ mentions of inflation have dropped back below levels seen before the pandemic, suggesting that they tend to believe the problem is over:

Meanwhile in China:

China: Yet to Bottom

The Chinese corporate profit cycle is worsening, which together with risk aversion in the household sector, signal the economy is yet to bottom.

In business cycle analysis framework the profit cycle is the single most important business cycle indicator. Profits are the core driver of economic activity. It underpins investment decisions, drives innovation and the fluctuations in economic activity. The profit cycle is the leading indicator of the business cycle and marks the tipping points. Moreover in a downturn the stabilisation of the profit cycle precedes the bottoming of the economy. The Chinese corporate profit cycle downswing deepened through the first three quarters of 2024.

In the first 11 months of the year the number of loss-making manufacturing companies rose 11% compared with the same period in 2023, and accounted for over 25% of the manufacturing sector, up from 24% in 2023. Loss making firms are rising across most sectors. The private sector has been hard hit. The number of loss-making industrial companies have been increasing in the private sector since June, up 12.9% YoY compared with 8.7% YoY for state owned, that have been under pressure since August.

The upshot is manufacturing sector profits in the current year to November 2024 were down almost 5% and fell in half of the 34 industrial sectors covered. (…)

Operating costs though are rising more quickly than operating revenues, which together with weak consumer pricing power, is squeezing profit margins and accounts for the weakness of profits. Manufacturer’s operating costs rose by 3.2% YoY between January and November last year. (…)

The corporate debt overhang is growing rather than being addressed through restructuring, consolidation and by weeding out weak companies. By 3Q24 end, corporate debt had surged to 174% of GDP (Figure 7). Combined with persistent overcapacity, this creates a significant drag on economic growth.

Figure 7: Debt as a share of GDP trends

Source: Haver Analytics & Westbourne Research

Private credit growth is slowing even as interest rates fall (Figure 8). The deceleration in corporate credit growth is a positive and reflects healthy caution on the part of banks. The weakness of household credit growth stems from a lack of demand. This trend in private credit growth serves as yet another sign that the economy is not undergoing a sustainable recovery. It also highlights a deeper and more challenging issue—risk aversion.

Figure 8: Domestic credit growth

Source: Haver Analytics & Westbourne Research

Risk appetite is pro-cyclical. However, in China’s case risk aversion has become entrenched and explains why counter cyclical monetary and fiscal policy easing are not working. Risk aversion in the household sector stems directly from the housing market downturn. (…)

Figure 9 shows existing and new home prices, measured on a year-on-year basis, are falling more slowly. However, while the pace of contraction may be slowing, the reality is that both existing and new home prices continue to decline in absolute terms, meaning property values are depreciating year after year.

Figure 9: Existing and new home prices

Source: Haver Analytics & Westbourne Research

The housing market downturn is the root cause of risk aversion in the household sector — and understandably so. For most homeowners, property represents the largest asset on their balance sheet. With a homeownership rate of 90% (compared to 65% in the U.S.) and a significant portion of Chinese households owning multiple properties — over 20% in urban areas and 16% in rural regions — the challenges posed by the property downturn are amplified and is a huge dampener for consumption spending. (…)

Until property prices rise consistently, the lack of risk appetite will continue to suppress household spending and broader economic activity. It is not enough for property prices to stop falling to restore confidence. (…)

SENTIMENT WATCH

Unstoppable Retail Crowd Breaks Stock Buying Record Despite Rout Mom-and-pop investor sentiment has reached record level

Mom-and-pop investor sentiment has reached the highest level on record, surpassing what was seen during the meme-stock mania in 2021, according to Emma Wu, JPMorgan’s global quantitative and derivatives strategist. Individual investor exposure to stocks is near the highest level its been since 1997, an analysis by Barclays’ global head of equities tactical strategies Alexander Altmann shows. And as long as the US economy remains resilient, those investors probably will stay stay in the game.

Even as US stocks got hit Monday when President Donald Trump’s tariff negotiations rattled global markets, mom-and-pop investors continued to buy in. They poured $3 billion into stocks that day and then broke the $2 billion threshold within the first 1.5 hours of trading on Tuesday — the largest inflow at that time of the trading session back to 2015, a JPMorgan analysis shows.

Not surprisingly, about 70% inflows went to Magnificent 7 stocks on Tuesday, the largest on record, JPMorgan’s data shows. And Nvidia Corp., which lost 3% the day before, was a top pick. The daily inflow from retail investors exceeded $2 billion twice last week, a level reached only nine times in the past three years, the bank said. (…)

Trading platform eToro says that on Jan. 27 it saw the largest amount of equity buy orders from retail clients in the last six months. (…)

In a December eToro survey, 59% of respondents said they’re bullish on AI stocks but just 22% had exposure to this group and that majority of them were looking for an opportunity to buy AI names sometime in 2025. (…)

Bessent Says Trump Wants Lower 10-Year Yields, Not Fed Cuts

Treasury Secretary Scott Bessent said the Trump administration’s focus with regard to bringing down borrowing costs is 10-year Treasury yields, rather than the Federal Reserve’s benchmark short-term interest rate.

“He and I are focused on the 10-year Treasury,” Bessent said in an interview with Fox Business Wednesday when asked about whether President Donald Trump wants lower interest rates. “He is not calling for the Fed to lower rates.”

Does this explain that?

The bond market relaxed today after Treasury Secretary Scott Bessent’s debut Quarterly Refunding Announcement (QRA) proved to be a non-event.

Bessent had been critical of Janet Yellen’s usage of short-term Treasury bills to finance the federal budget deficit. Many investors, therefore, were worried that he would issue more longer-term notes and bonds, which would boost bond yields. The QRA said that auction sizes for notes and bonds would remain the same for the coming quarters, which means that bills will remain at a historically high percentage of the Treasury market for the foreseeable future. This also is a positive for the stock market. (…)

An increase in auction sizes would likely upset both the bond and stock markets, and probably President Trump as well. (Ed Yardeni)

JOLTS

For-Hire Signs Become Less Common

US labor vacancies declined sharply to end the year, according to this morning’s Job Openings and Labor Turnover Survey (JOLTS) from the Bureau of Labor Statistics. The result jolted the stock market higher, as equity traders know that the Federal Reserve may tolerate a little inflation but is extremely sensitive to decelerating labor conditions.

IB’s account of the JOLTS report omits to highlight the changing trend in its 3-m m.a.

Indeed’s Job Postings through Jan. 24 confirm that the slide in job openings has stalled.

We get the U.S. Services PMIs later today and the employment report Friday but the flash PMI released on January 24 had this warning on employment:

Optimism about the year ahead was matched by a jump in hiring. Employment rose in January at the fastest rate for two-and-a-half years, up for a second successive month after four months of job shedding. The improvement was led by a surge in service sector hiring, where jobs were added at the sharpest rate for 30 months, though manufacturing payroll growth also edged up to a six-month high. The latter remained modest, however, reflecting ongoing cost concerns at producers amid low sales. Firms more broadly also continued to report ongoing issues with poor staff availability.

SERVICES PMIs

Eurozone output rises slightly at start of 2025

The HCOB Eurozone Services PMI Business Activity Index signalled another monthly increase in services output during January. At 51.3, the measure was only slightly below December’s 51.6, suggesting that December’s modest rise was followed by another similarly sized expansion as 2025 got underway.

January survey data indicated an improvement in demand conditions for eurozone services companies as new orders rose for a second month in a row. The rate of increase accelerated slightly but remained weak. Sales growth was domestic driven as the latest survey data showed new export business decreasing, albeit more slowly.

Service providers continued to work through their orders pending completion, and to a slightly quicker degree than in December. A faster rate of reduction in backlogs came amid stronger hiring activity. Employment growth picked up from that seen at the end of 2024.

Inflation remained stubborn in January. Operating costs for services companies rose at the steepest pace in nine months, although selling price inflation held steady, matching that seen in December (which was the strongest since May 2024).

Eurozone services companies remained positive towards the 12-month outlook for activity, although growth projections were fractionally weaker than at the end of last year and well below the long-term average.

The seasonally adjusted HCOB Eurozone Composite PMI Output Index posted above the critical 50.0 level that separates growth from decline during January, rising from 49.6 in December to 50.2. As a result, this indicated the first monthly increase in private sector business activity since August last year. A slower fall in factory production was central to January’s overall expansion, sector data showed, as services activity posted a slightly softer rise on the month.

Spain was again the main growth engine of the single-currency market, national PMI data revealed, although output grew at a weaker rate than at the end of 2024. However, a key reason behind the broader upturn was Germany, which saw its best monthly performance since last May. Still, with an index reading of 50.5, January’s expansion was only marginal. Meanwhile, Italy’s economy was again virtually stagnant, and France endured a fifth successive contraction in private sector business activity.

Output growth was achieved at the start of the year despite an eighth successive decline in new business inflows. A marked drag on sales came from exports*, which fell at a considerably stronger pace than that seen for order books in aggregate. That said, total new business decreased only marginally overall and to the softest degree in the current sequence.

A sustained reduction in demand for eurozone goods and services implied that activity growth was driven by work on existing business. Backlogged orders fell for a twenty-second month in a row at the start of 2025, with both manufacturers and service providers clearing outstanding work.

A near-stabilisation of employment was also a boost for activity in January. Although workforce numbers across the euro area fell, they did so to just a marginal extent. Sector data indicated that job losses were confined to manufacturing as services firms saw a slightly stronger rise in net employment at the start of 2025.

Eurozone companies looked to the future with greater optimism in January. The pick-up in positive sentiment meant that firms’ growth expectations were their most robust since July 2024. Although, confidence was weak when compared against the long-term average. Notably, manufacturers were more bullish than services companies for the first time in three years.

Turning to prices, January survey data signalled an intensification of cost pressures across the eurozone. The rate of input price inflation accelerated to a 21-month high and was above the long-run series trend. Both monitored sectors recorded stronger rises in their operating expenses at the beginning of the year. Subsequently, euro area firms raised their prices charged more aggressively. Output prices rose at the quickest pace in five months.

China: Business activity growth softens at the start of 2025

The seasonally adjusted headline Caixin China General Services Business Activity Index posted 51.0 in January, down from 52.2 in December. This extended the period of expansion that commenced in January 2023. The pace of business activity growth softened since December, however, and was modest.

Higher new business, underpinned by improvements in underlying demand and successful business development efforts, supported the rise in services activity at the start of 2025. This included foreign demand, with new export business returning to growth after falling at the end of 2024. The rate of overall new business growth was modest, however, having eased since December.

The softening of new business growth and better efficiency at service providers led to the first decline in the level of unfinished business since July 2024. Moreover, the rate of decline was the most pronounced in two-and-a-half years despite being marginal. The lack of capacity pressure therefore led to further job shedding in the service sector at the start of the year. Both resignations and redundancies contributed to the fastest decline in services employment in China since April last year, according to panellists.

Meanwhile, cost pressures intensified for Chinese services firms at the start of 2025. Higher raw material and labour costs were often mentioned by panellists as reasons for the latest rise in average input prices. The rate of cost inflation, though marginal, was the highest in three months.

As a result of rising input costs, Chinese service providers raised their selling prices for a second straight month in January. The increase in average charges was fractional, however, and smaller than in December. The latest softening of charge inflation was reflective of firms’ willingness to partially absorb price increases in order to support sales.

Finally, sentiment in the Chinese service sector was positive at the start of 2025. Firms expressed hopes that business growth plans and supportive government policies can support sales in the next 12 months. Despite rising from December, the level of confidence remained below-average as some firms indicated concerns over heightening competition and trade uncertainties negatively affecting demand for services from China.

But maybe there is hope if this is an indication: China’s Lunar New Year Travel, Spending Boom Offer Positive Signs A total of 14.37 million cross-border trips in and out of China were made during this year’s holiday Data showing consumers spending more on both goods and services could signal that Beijing’s flurry of measures to bolster demand are taking effect. Sustainably reviving consumption in the world’s second-largest economy has taken on particular urgency as China’s exports face growing headwinds from U.S. tariffs. Tourism revenues in China during the eight-day holiday that ended Tuesday rose 7.0% in year-over-year terms to 677 billion yuan, or about $94.23 billion, while the number of domestic trips rose 5.9% to 501 million, the state-run Xinhua News Agency reported Wednesday, citing data from China’s Ministry of Culture and Tourism. Several indicators for the cultural and tourism market, including the number of trips and tourism spending, hit record highs during the eight-day holiday following the Lunar New Year, said Xinhua. Box office data was also upbeat, with revenue and moviegoer numbers both hitting new highs. Box office revenue reached 9.51 billion yuan as more than 187 million people went to cinemas, according to the China Film Administration. (…) A total of 14.37 million cross-border trips in and out of China were made during this year’s holiday, marking a 6.3% increase from the same period last year, data from the National Immigration Administration showed. Of that total, foreign nationals accounted for 958,000 trips, up 22.9% in year-over-year terms after Beijing eased restrictions on foreign travel. During the Lunar New Year, China’s goods consumption grew 9.9%, while services consumption rose 12.3% from the same period a year ago, according to the State Taxation Administration, based on value-added tax data. Sales of home appliances and furniture saw strong growth, driven by trade-in policies, alongside robust demand for tourism, cultural, and sports services, it said. (…) Bloomberg adds: Many regions also reported a surge in smartphone sales after the national trade-in subsidy program for consumer products was expanded to include phones and other electronic devices. Nearly 15 million shoppers applied for the subsidy to buy 18.9 million phones and gadgets between Jan. 20 and Feb. 1, the national broadcaster CCTV cited commerce ministry data as showing. The Lunar New Year holiday ran from Jan. 28 to Feb. 4 this year. On average, almost 170 yuan was spent daily on each trip during the holiday, up from last year but still below the pre-pandemic level recorded in 2019, based on Bloomberg calculations of the data. Wells Fargo: Trump’s “negotiate from a position of power” approach may not work as well on China this time. Yes, China has plenty of economic vulnerabilities that could be exploited, most relevant of which to the U.S. is China’s export driven economic model. But the U.S.-China trade relationship is significantly weaker today relative to Trump’s first term. The U.S. imports significantly fewer goods relative to 2017, while China has found replacement trade partners intra-Asia and has set up manufacturing capabilities in Mexico to circumvent tariffs. U.S. tariff influence may not be as powerful, as China has made some necessary adjustments. In fact, an argument can be made the U.S. has become more dependent on China as a source of critical imports. Maybe a greater U.S. dependency on China is why Trump implemented softer tariffs relative to the tariffs proposed on Canada, Mexico and Colombia. And maybe why China opted for a more strategic and targeted retaliation rather than matching U.S. tariffs dollar for dollar. China may not want a trade war, but in our view, China is also unlikely to back down from one. Lastly, a question we have been asking ourselves is: what concessions can China even offer the United States? Buy more U.S. products. But if China has developed new trade relationships, is turning more inward looking, and possibly at the point where authorities’ deploy large fiscal stimulus, what incentive does China have to make a new trade deal with the United States?