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FLASH PMIs

Eurozone growth slows, exports fall, business sentiment slumps and prices rise at record rate as Russia invades Ukraine

The headline S&P Global Eurozone Composite PMI® fell from 55.5 in February to 54.5 in March, according to the preliminary ‘flash’ estimate*. The decline indicates some loss of economic growth momentum from February’s five-month high but still signals the second-strongest expansion since last November. The rate of expansion also remained above the survey’s pre-pandemic long-run average.

While firms – notably in the service sector – continued to benefit from resurgent demand linked to the further reopening of the economy from COVID-19 containment measures, companies also reported that the Ukraine war and accompanying sanctions had led to weakened demand, rising uncertainty, higher costs and renewed supply chain issues.

Manufacturing output growth waned most sharply, dropping to the lowest since last October as new orders placed with eurozone factories rose at the joint-slowest pace since the recovery from the first pandemic lockdowns began in July 2020. New export orders for goods fell for the first time in 21 months. Auto makers were especially hard hit, with output back in decline, with chemicals and resources firms also near-stalled.

Business activity and new orders in the service sector also rose at reduced rates compared to February’s rebound, led by a renewed drop in service sector exports, though the overall expansions remained well above the long-run averages thanks principally to the easing of pandemic restrictions. March saw virus containment measures ease across the eurozone to the lowest since the pandemic began, boosting tourism and recreation activity.

A major impact of the war was evident on prices, with the invasion of Ukraine widely linked to a further rise in companies’ costs, exacerbating existing supply and demand imbalances and causing a surge in energy prices. Average input prices across both manufacturing and services rose at a rate far in excess of any previous increase recorded since comparable data were first available in 1998. The eurozone PMI input cost index reading of 81.6 compared to 74.8 in February and a prior peak of 76.0 seen back in November. A record increase for service sector input costs was accompanied by the steepest rise in manufacturing input costs since the near-record increases seen late last year.

The increase in raw material and energy input costs, combined with further upward pressure on wages, drove an unprecedented rise in average prices charged for goods and services in March, with rates of inflation reaching new highs in both manufacturing and services.

The Ukraine war and sanctions on Russia were also widely reported to have led to a worsening of supply chain delays, aggravating pandemic-related supply disruptions, including new delays from China amid fresh lockdowns. Having shown signs of moderating in February, average supplier delivery times lengthened in March to the greatest extent since last November.

An additional impact of the invasion was evident on business sentiment, as tracked by the PMI’s future output expectations index, which fell in March to its lowest since October 2020. Expectations of output in the coming year fell to the lowest since November 2020 in the service sector, and down even further in manufacturing to the lowest since May 2020. Backlogs of work, another indicator of future business activity, meanwhile rose at the slowest rate for a year.

Despite the drop in business optimism and weakening order book trend, firms again took on more workers to help alleviate current staffing shortages. Employment growth accelerated for a third month running to the highest since last November, though an increased rate of jobs growth in services was partly offset by slower hiring in manufacturing.

By country, France bucked the slowdown trend with business activity rising at the fastest rate since last July, as rebounding service sector activity offset a marked slowing in the manufacturing sector and rising domestic demand countered a marked drop in exports.

Growth meanwhile slowed in Germany but remained above that seen in the four months prior to February thanks to sustained expansions in both manufacturing and services, though in both cases rates of increase moderated from February and exports fell.

Output growth in the rest of the region as a whole also slowed. Barring the near-stalling seen in January amid the onset of the Omicron wave, the expansion was the weakest for a year, with growth slowing in both sectors but most notably in services.

Japan: Decline in private sector activity eases in March

At 53.2 in March, the headline au Jibun Bank Flash Japan Manufacturing Purchasing Managers’ Index™ (PMI)® rose from 52.7 in February to signal a moderate improvement in operating conditions. Output returned to expansion territory in the latest survey period, albeit only marginally. That said, new order growth continued to slow, with the latest data pointing to the softest rise in six months.

Manufacturers continued to signal severe supply chain disruption, as supplier delivery times lengthened to the greatest extent since April 2011 amid material shortages, notably for semiconductors. This strengthened inflationary pressures further, pushing input price inflation to the highest since August 2008, with firms reporting higher energy, oil and semiconductor prices.

The au Jibun Bank Flash Japan Services Business Activity Index rose from 44.2 in February to 48.7 in March, indicating the softest decline in services activity in the current three-month sequence. Positively, new business inflows returned to growth as COVID-19 restrictions were eased, albeit at a fractional pace overall. Concurrently, input price inflation quickened for the second month running to reach the highest since last December. In turn this contributed to a renewed rise in prices charged. Moreover, service providers noted the softest degree of optimism regarding the year ahead outlook for activity since January 2021.

We get the U.S. flash PMI later this morning. But here’s the March Sales Managers Index from World Economics:

Dramatic Falls in US Sales Managers March Survey

The US Sales Managers March Survey, researched entirely after the Russian invasion of Ukraine, shows a steep decline in sentiment across all indexes.

Business Confidence on business prospects for the next few months, already steeply falling in the days immediately prior to the invasion moved to a 16 month low, at the 50 “no growth” level.

The Sales Growth Index fell an alarming 4 points to an index reading of 49.6, a 19 month low, taking sales sentiment back to the gloomy Covid days of August 2020.

The Staffing Index fell even further below the 50 line, to an Index reading of 48.5, a 13 month low.

The Headline Sales Managers Index also fell to a new 16 month low at an Index reading of 49.5. Longer term worries came to the fore in March with sharply contrasting views from many respondents indicating worries about sales growth prospects in the markets in which they operate, reflecting the as yet unknown impact of the Russian invasion on different sectors of activity.

Price Inflation remained a serious worry in many sectors with the Price Index continuing to register very high levels around the 58 mark, indicating continuing Price inflation far above levels seen for most of the past decade.

Finally the Profit Levels Index reflected a sharp reduction in margins in the month, associated in many cases with the expectation of rising costs associated with the new war, notably energy related.

  

The Odds Don’t Favor the Fed’s Soft Landing Inflation is higher, the labor market tighter and real rates more negative than in past periods when the Fed raised rates without causing a recession

(…) In 1965, 1984 and 1994, the Fed raised interest rates enough to cool an overheating economy without precipitating recession, he [Powell] noted, adding it may have done the same in 2019 but for the Covid-19 pandemic.

Unfortunately, history isn’t on his side. Inflation is much further from the Fed’s objective, and the labor market, by many measures, is tighter than in previous soft landings. Yet the Fed starts with real interest rates—nominal rates adjusted for inflation—much lower, in fact deeply negative. In other words, not only is the economy already traveling above the speed limit, the Fed has the gas pedal pressed to the floor. The odds are that getting inflation back to the Fed’s 2% target will require much higher interest rates and greater risk of recession than the Fed or markets now anticipate. (…)

History and the Fed’s own models are pretty clear: When inflation is too high, pushing it down requires damping demand and pushing up unemployment so that workers and firms must settle for lower pay and prices. Yet the median projections released by Fed officials show no such thing: They anticipate core inflation falling to 4.1% at the end of this year, 2.6% next year, and 2.3% in 2024 while unemployment stays near a 50-year low of 3.5% to 3.6% for the entire period. (…)

Suppose goods inflation drops to its pre-pandemic rate of around zero. If services inflation continues at its recent pace, overall inflation will stay above 3%. (…)

Since December, bond yields have risen sharply but so has expected inflation, so real yields are still deeply negative. Fed officials project their federal-funds rate target will peak at 2.8% next year. If inflation is above 3%, that is a negative real rate. (…)

In fairness, there are several unusual features to today’s economy that support the case for a soft landing. Unlike in the past, high inflation now results from strong demand interacting with constrained supply. Higher interest rates may reduce demand, such as the number of bidders per house or the waiting list for new cars, thereby reducing prices but not the number of houses and cars sold. Job openings are 70% higher than the number of unemployed. Reduced demand for labor could mean the same number of workers get hired but at lower wages than otherwise.

Second, the labor force shrank during the pandemic due to early retirements, child-care issues and Covid-19. As the pandemic recedes, the Fed expects the labor force to bounce back, allowing employment and output to grow briskly without pushing unemployment down further or putting upward pressure on wages.

Still, history doesn’t provide much precedent for those things. If they don’t pan out, and supply chains don’t swiftly normalize, then the Fed will likely have to accept higher inflation—which Mr. Powell said isn’t in the cards—or raise interest rates until unemployment rises. In theory, that can happen without a recession. That, too, would be unprecedented.

Greg Ip omits one important variable in the wage inflation picture: if productivity grows sufficiently to allow wages (unit labor costs) to rise without a complete pass through, prices may not need to be hiked too much to preserve profit margins, avoiding the dreaded wage-price spiral.

The problem is forecasting productivity …

The hope is we get a repeat of the productivity boom of the 1996-2004 period thanks to rising capex and pandemic-induced investments in tech tools.

While total capex are finally rising, IT spending is nowhere near its pre-2000 level.

David Rosenberg: Yes, my resolve at being a bond bull is being tested – but a sea change in markets is now imminent

(…) We have gone into a contraction in real economic activity 90 per cent of the time in the past when both fuel and food prices have shot up as much as they have already. The overall economy is not in recession yet, but incomes are, even with the “hot” jobs market. That’s because in real terms – and recessions/expansions are determined by real (not nominal) variables – wages have contracted in each of the past five months and in six of the past seven (this landed the economy in an official recession 75 per cent of the time in the past). (…)

Tack on the food crisis to energy, and we are talking about a 2 per cent hit to discretionary spending, which is enough to tip the odds for a consumer recession — unless the household sector does end up dipping heavily into its “rainy day” fund (that came courtesy of last year’s Biden-led untargeted stimulus checks).

Statistics can be interpreted many ways. The Employment Cost Index is probably the best gauge for wage trends. The red line is real wages, down from their Q2’20 peak but still (barely) above their pre-pandemic level. The blue line is the YoY change in the red line, real wages, down 1.6% in Q4’21. Note how such a drop did not trigger a recession in 2005 nor in 2011.

The next chart is real weekly earnings of employees other than those in managerial positions. That series sometimes has compositional biases but it does show that staff workers’ real wages, though down sequentially recently, remain nearly 5% above their pre-pandemic levels.

That said, hurdles to consumer spending and the overall economy will be getting worse as Goldman Sachs explains:

We estimate that price increases for oil, natural gas, and agriculture over the last year represent 1.9% of US consumer spending, even larger than the 1.2% shock in 1990 recession and similar to the 1.8% shock in 2008. Higher commodity prices erode the real incomes of consumers and are a key reason we forecast GDP growth of just +1.9% this year (Q4/Q4 basis). We also forecast below-potential growth in the first half of the year, when the impact of commodity prices should be largest.

The largest headwinds to real spending growth in 2022 are the pullback in government transfer payments and high inflation that will weigh heavily on real income growth. We forecast that real household income will only grow by ½% on a Q4/Q4 basis in 2022, and our distributional income and inflation estimates imply an even worse outlook for lower-income households. Additionally, rising interest rates will likely challenge durable goods spending, and low consumer sentiment will likely be a headwind to spending.

The largest tailwind to spending is the ongoing recovery of virus-sensitive services spending, which should pick up going forward since consumers appear less concerned about virus risks post-Omicron. Additionally, household net worth has increased to a very high level, and many households will be able to support spending by drawing down savings.

We put weight on both sets of signals, and expect that a recovering service sector and spend out of savings will keep real PCE growth positive in 2022, but that weak income growth will weigh on spending, particularly for lower-income consumers. (…) we now forecast real PCE growth of +0.6%/+2.0%/+2.5%/+2.25% in 2022Q1-Q4, implying a modest upgrade to our 2022 GDP forecast to +0.5%/+2.25%/+2.75%/+2.25% in Q1-Q4 (vs. +0.5%/+1.5%/+2.5%/+2.5% previously) and +1.9% on a Q4/Q4 basis (vs. +1.75% previously; +2.7% consensus).

It’s the lower income group that will take the brunt. Goldman “forecast discretionary cash inflows to decline y/y by -27% and -12% for the bottom two quintiles, which together reflect about 15% of total inflows.”

The Chase card spending tracker, updated through March 19, is not showing a collapse in nominal sales. Control sales are currently estimated up 0.5% MoM in March after -1.2% in February.

 U.S. gas demand is showing signs of a slowdown. The weekly demand figure has fallen for two consecutive weeks. (Bloomberg)

• Canada: Surging food and energy prices already equal to 3 rate hikes! (NBF)

U.S. New Home Sales Fell for Second Consecutive Month

New single-family home sales fell 2.0% m/m (-6.2% y/y) to 772,000 units at an annual rate in February from a downwardly revised 788,000 in January (initially 801,000). The downward January revision was more than offset by a 21,000 upward revision to December. The most recent peak in sales was 993,000 in January 2021. The Action Economics Forecast Survey expected sales of 813,000 sales in February. Supply continues to revive as the number of new homes for sale rose to 407,000 in February, the highest reading and the first above 400,000 since August 2008.

By region, sales in February fell in two major regions and rose in the other two. Sales jumped 59.3% m/m in the Northeast in February to 43,000 at an annual rate following a 20.1% m/m drop in January. Sales rose 6.3% m/m to 84,000 in the Midwest after an 8.1% m/m decline in January. By contrast, sales in the South edged down 1.7% to 451,000 in February on top of a 5.4% m/m drop in January while sales in the West decreased 13.0% m/m to 194,000 after a 12.6% monthly decline in January.

The median price of a new home declined 6.3% m/m (+10.7% y/y) in February to $400,600 following a 7.1% m/m increase in January. The average sales price of a new home rose 3.4% m/m (+25.4% y/y) in February to a record high $511,000. These sales price data are not seasonally adjusted.

The seasonally adjusted supply of new homes for sale rose to 6.3 months in February from 6.1 in January. The record low was 3.5 months reached in August, September and October of 2020. The median number of months a new home stayed on the market fell to 2.5 months in February, tying the record low reached in October, from 2.9 months in January. These figures date back to January 1975.

  

• CalculatedRisk says that builders are still reporting strong demand. Supply constraints are limiting deliveries:

The inventory of new homes under construction is at 4.1 months (blue line) – well above the normal level. This elevated level of homes under construction is due to supply chain constraints. And 106 thousand homes have not been started – about 1.7 months of supply (grey line) – almost double the normal level. Homebuilders are probably waiting to start some homes until they have a firmer grasp on prices.

• About 40% of Americans live in apartments, and there’s a huge demand for more. RealPage projects that 426,000 apartment units will be built in the U.S. this year, representing a 30-year high in such activity, Smart Cities Dive reports. (Axios)
• Build-for-rent developers are buying plenty of land.

Build-for-rent operators are actively buying land across the country, according to our Residential Land Broker Survey. Many of these BFR operators are competing for the same lots both public and private builders are also bidding for, particularly on higher density parcels.

The build-for-rent share of land purchased has grown over the course of the last couple years, as a flood of capital and rising single-family rents drive demand for development sites.

BFR operators are buying land most actively in:

• Southeast = 9% to 14% of lots (finished lots, entitled land / paper lots, raw land)
• Southwest = 10% to 11% of lots (entitled land / paper lots and raw land)

Public builders are also pursuing single-family rental and build-for-rent despite a hot for-sale market. They are building entire communities for rental operators, selling one-off homes to operators, or building, renting and then selling the homes themselves. (John Burns Real Estate)

BTW:

Data: Kastle Systems. Chart: Axios Visuals

China Envoy Says Xi-Putin Friendship Actually Does Have a Limit

Xi Jinping and Vladimir Putin declared a “no limits” friendship between China and Russia before the Olympics began. Two months and a war later, Beijing’s envoy to the U.S. has added an important caveat. 

“China and Russia’s cooperation has no forbidden areas, but it has a bottom line,” Ambassador Qin Gang told state-backed broadcaster Phoenix TV on Wednesday. “That line is the tenets and principles of the United Nations Charter, the recognized basic norms of international law and international relations.”

“This is the guideline we follow in bilateral relations between China and any other country,” Qin added, responding to a question about Beijing’s commitment to Moscow following its Feb. 24 invasion of Ukraine.

The remarks are the first from a Chinese official clarifying a lengthy joint statement released by the two countries last month that heightened concerns among U.S. allies about a rejuvenated China-Russia bloc. (…)

Jake Sullivan, the U.S. national security advisor, said Wednesday administration officials “have not seen the Chinese government move forward on the supply of weapons, but it’s something we’re watching every day.” (…)

Xiao Bin, a research fellow at the state-backed Chinese Academy of Social Sciences, last week noted that China and Russia’s strategic partnership “emerged from a state of no war,” saying that the subsequent invasion had changed those dynamics. “Therefore, China-Russia relations certainly have upper limits, which are the interests of the Chinese people,” he wrote on the website of the China-United States Exchange Foundation. That post is still available on China’s internet.

“In other words, relations should be constrained to areas that don’t harm those interests,” Xiao added. (…)

NATO estimates Russian combat deaths topped 7,000.

Russia Central Banker Wanted Out Over Ukraine, Putin Said No Russia’s highly regarded central bank Governor Elvira Nabiullina sought to resign after Vladimir Putin ordered an invasion of Ukraine, only to be told by the president to stay, according to four people with knowledge of the discussions.

Powell Flags Risks of New Digital Financial Products Fed chief highlights potential financial stability worries from proliferation of private cryptocurrencies

(…) “There are potential financial-stability concerns for some products,” Mr. Powell said. “We don’t know how some digital products will behave in times of market stress.”

He said the central bank would be guided by a principle of “same activity, same regulation,” which means that activities that are regulated in the banking system needed to be subject to the same rules if those activities migrate outside of the regulated banking sector. (…)