LEADING ECON. INDIC.

Flash PMIs:

• U.S. Business activity growth quickens in November

U.S. private sector output increased at a faster pace in November, with the rate of expansion quickening to a four-month high. Growth was supported by stronger increases in activity across both the manufacturing and service sectors.

Adjusted for seasonal factors, the IHS Markit Flash U.S. Composite PMI Output Index posted 51.9 in November, up from 50.9 during October, to signal the fastest expansion in private sector output since July. That said, the pace of growth was well below the series trend and only marginal overall.

Although the upturn in service sector new business quickened to a three-month high, the increase was only marginal and weighed on the overall expansion. Meanwhile, manufacturers registered a solid rise in new orders that was the sharpest since April, with goods producers signalling a further recovery from the slowdown seen earlier in the year.

At the same time, both manufacturers and service providers indicated a rise in workforce numbers. The overall increase in employment followed two successive months of payroll cuts. That said, the rate of job creation was only marginal, with service providers remaining hesitant towards hiring additional workers.

Greater pressure on operating capacity was signalled during November, with backlogs of work rising across the private sector for the first time since July.

Inflationary pressures remained historically subdued in November, with private sector firms registering only a modest increase in input prices and a marginal rise in output charges. Companies often stated that, despite higher cost burdens, increases in selling prices were muted due to greater market competition.

Business confidence weakened halfway through the final quarter of 2019, with the degree of optimism dropping from October’s four-month high. Less robust expectations were commonly linked to hesitancy among clients in placing orders.

The seasonally adjusted IHS Markit Flash U.S. Services PMIâ„¢ Business Activity Index registered 51.6 in November, up from 50.6 in October and indicated the quickest expansion since July.

Although service providers noted a pick up in client demand, the upturn in new business was historically weak and well below the rates of growth seen at the start of the year.

Nonetheless, firms responded by increasing their workforce numbers for the first time since August. The pace of job creation was only fractional, however, as many firms kept their employment numbers unchanged.

Optimism among service providers dipped from that seen in October, and remained historically subdued, amid reports of less favourable demand conditions.

Meanwhile, service sector firms increased their selling prices at a faster rate, reportedly due to a slightly quicker rise in input costs.

Goods producers signalled a stronger improvement in operating conditions in November, as signalled by a rise in the IHS Markit Flash U.S. Manufacturing Purchasing Managers’ Index™ (PMI™)1 to 52.2, up from 51.3 in October. The rate of overall growth was the fastest since April, albeit moderate overall.

The improvement in the health of the manufacturing sector was supported by sharper and solid expansions in production and new orders. The rate of increase in the former reached a ten-month high amid reports of stronger client demand.

Manufacturers registered the first increase in backlogs since June, with firms responding to greater pressure on capacity by increasing staffing levels at the steepest pace since March.

At the same time, a faster rise in input costs led to a steeper increase in factory gate charges in November. Greater customer demand allowed firms to partially pass-through higher costs to clients.

Nevertheless, goods producers were less confident towards the outlook for output over the coming 12 months. Firms commonly stated that reduced optimism was linked to ongoing economic uncertainty.

Chris Williamson, Chief Business Economist at IHS Markit

A welcome upturn in the headline index from the flash PMI adds to evidence that the worst of the economy’s recent soft patch may be behind us. Output of the combined manufacturing and service sectors rose in November at the fastest rate since July, spurred by improved inflows of new business. Encouragingly, firms took on staff again after two months of headcount reductions, primarily to help deal with rising backlogs of work. (…)

“However, although improving, the picture of current business conditions remains subdued by standards seen over the past decade and the business mood sombre in relation to prospects for the year ahead. The latest survey results are indicative of GDP rising at a modest annualised rate of just 1.5%, with payrolls rising at a monthly clip of approximately 100,000

Although up on lows seen in the summer, business expectations for the future are still well below levels seen earlier in the year, reflecting heightened anxiety regarding trade wars and geopolitical uncertainty, as well as recent low customer enquiry numbers and the weakness of new sales volumes.

• Eurozone near-stalled for third month running in November

The Eurozone economy remained close to stagnant for a third successive month in November, according to the flash PMI, losing growth momentum slightly again as new orders fell for a third straight month. The survey showed signs of
the steep ongoing manufacturing decline spreading
further to services. Employment growth meanwhile
slipped to the lowest for almost five years as firms
took an increasingly cautious approach to hiring.
Price pressures also cooled further, running at the
lowest for over three years.

At 50.3 in November, the ‘flash’ IHS Markit
Eurozone Composite PMI® fell from 50.6 in October
to signal the second-smallest expansion of output
across manufacturing and services since the
current upturn began in July 2013. The past three
months have consequently seen a continual near stagnation
of output, contrasting markedly with
robust growth seen over the same period one year
ago.

Weak output growth reflected a third successive
monthly decline in new orders for goods and
services, albeit with the rate of decline easing
slightly for a second month running to register only
a marginal drop in demand. The ongoing decline
nevertheless represents the worst spell of demand
since mid-2013.

The further fall in new business meant backlogs of
work decreased for the eleventh time in the past
year, deteriorating at one of the steepest rates seen
over the past five years.

Expectations about future output remained well
below levels seen earlier in the year, reflecting
heightened geopolitical uncertainty, including Brexit,
trade wars and auto tariffs, plus general concerns
about slowing demand. However, sentiment was
nonetheless the best for four months, albeit by a
small margin.

The worsening order book picture meanwhile
contributed to a further pull-back in hiring, with firms
increasingly cautious about extending their
overheads. Employment growth slowed for the fifth
consecutive month in November, down to its lowest
since January 2015.

The weakening demand environment also fueled
more price discounting as firms sought to boost
sales. Average prices charged for goods and
services rose at the joint-weakest rate for three
years, while average input cost inflation slipped to
the lowest since August 2016.

Manufacturers continued to report the toughest conditions, with the rate of decline of output easing
modestly for a second month running but remaining
one of the steepest since early-2013.
Encouragingly, new order inflows fell at the slowest
rate for five months, though the rate of decline
remained steep, led by falling exports*. Optimism
about future factory output nevertheless also
improved, reaching a five-month high, helping ease
the rate of job losses. Factory employment has now
fallen for seven consecutive months, representing
the worst period for manufacturing jobs since 2013.

Service sector growth meanwhile waned to the
lowest since January as new business inflows
showed the third-smallest increase for almost five
years. Backlogs of work fell at an increased rate
and expectations for future service sector growth hit
the lowest since June 2013, leading to the smallest
rise in service sector employment since January.

Price pressures were again the weakest in
manufacturing, where both input costs and selling
prices fell further during the month, the latter
declining at the sharpest rate since April 2016.
While both costs and selling prices continued to rise
in the service sector, average charges levied grew
at the joint-slowest rate since August 2017.

By country, business activity fell for a third
successive month in Germany. Although the rate of
decline eased very slightly again, the fourth quarter
so far is the worst since the third quarter of 2012.
While service sector growth slowed to the lowest
since September 2016, the manufacturing downturn
showed further signs of moderating, with new
orders notably falling at the slowest rate for ten
months, helping push the headline manufacturing
PMI to a five-month high.

France again outperformed Germany, with
business activity rising to the greatest extent for
three months, meaning the fourth quarter is so far
looking the strongest of the year to date. Service
sector growth continued to run at one of the highest
recorded over the past year while manufacturing
output growth picked up to the second-highest
since August 2018.

While Germany and France saw some signs of
improvement, the rest of the euro area saw output
fall, albeit only marginally, for the first time since
July 2013. An increased rate of decline of
manufacturing output was accompanied by a near stalling
of service sector growth

Chris
Williamson, Chief Business Economist at IHS
Markit

The eurozone economy remained becalmed for a
third successive month in November, with the
lacklustre PMI indicative of GDP growing at a
quarterly rate of just 0.1%, down from 0.2% in the
third quarter. (…)

• JAPAN ECONOMY BROADLY STAGNANT IN NOVEMBER

We can now deduce from the November PMI data that there is a strong possibility of Japan’s economy contracting in the fourth quarter.

  

  

U.S. Leading Economic Indicators Index Continues to Slip

The Conference Board’s Composite Index of Leading Economic Indicators eased 0.1% (+0.3% y/y) during October. That came after September’s 0.2% drop, revised from -0.1%, and a 0.2% August shortfall. (…)

Performance amongst the components of the Leading Indicator index remained mixed last month. Contributing negatively to the index change were the average workweek, initial unemployment insurance claims, ISM new orders, stock prices and the yield spread between 10-year Treasuries & Fed Funds. Offsetting these declines were more building permits, consumer expectations for business/ economic conditions, new consumer goods orders, new orders for nondefense capital goods and the leading credit index.

Three-month growth in the leading index of -1.8% (AR) remained below the high of +9.1% in December 2017. The y/y change held steady at 0.3% compared to a 6.6% high in September of last year.

The Index of Coincident Economic Indicators held steady (1.4% y/y) during October following a 0.1% September gain, revised from no change. Stability in the index reflected counterbalancing influences: increases in payroll employment, personal income less transfer payments and manufacturing & trade sales offset by a decline in industrial production.

Three-month growth in the coincident index held steady m/m at 1.5% (AR) but was down from 2.3% in August.

The Index of Lagging Economic Indicators improved 0.1% (2.5% y/y) for the second straight month. Increases in the series pertaining to the average duration of unemployment, the ratio of consumer credit outstanding to personal income and the six-month change in the services CPI contributed positively to the index change. These gains were offset by declines in the series covering the business inventory-to-sales ratio, the change in unit labor costs, the prime rate charged by banks and commercial & industrial loans outstanding.

Three-month growth in the lagging index declined to -1.5%, down from +4.2% growth as of July. Twelve-month growth has been fairly steady at 2.5%.

The ratio of coincident-to-lagging economic indicators is sometimes considered a leading indicator of economic activity. It was little changed from September but up from the July low.

U.S. Existing-Home Sales Increased 1.9% in October Sales of higher-priced homes picked up last month, but those involving starter homes and others aimed at lower- and middle-income buyers were slowed by a lack of inventory.

On an annual basis, sales in October increased 4.6% from the same month the previous year, marking the fourth straight month of year-over-year gains. September sales were revised down to 5.36 million, compared to an earlier estimate of a 5.38 million pace.

October’s gains were most robust near the top of the housing market. Homes in the $500,000 to $750,000 range experienced the strongest improvement in October versus a year ago, while sales of homes priced below $250,000 declined. The decline in lower-priced homes was greatest on the West Coast, where sales of homes priced between $100,000 and $250,000 fell 19.5%. (…)

The median-sales price for an existing home in October was $270,900, up 6.2% from the previous year. That was the strongest price appreciation since June 2017, according to the NAR.

Less than a third of sales in October involved first-time buyers, a figure that has not changed much during 2019, suggesting that the recent increase in sales is mostly driven by those who have previously owned their home, according to Mark Fleming, chief economist at First American Financial Corporation. (…)

Americans now live in their home for five years longer than they did just a decade ago, according to a recent analysis by the real-estate brokerage Redfin. That makes it harder for would-be, first-time homebuyers to find a place they can afford. (…)

Even the South is showing little life in housing as this Haver Analytics chart illustrates:

WeWork to Cut Around 17% of Workforce Troubled office-space startup WeWork said it would shed around 2,400 jobs following its botched initial public offering in an effort to reduce mounting losses. The job cuts, which represent about 17% of its workforce, began around the globe weeks ago and spread this week to employees in the U.S.

SENTIMENT WATCH

Same comments, different treatments. Obviously, the media and the market want to see the glass half-full:

Headlines from the WSJ, the Globe and Mail and Reuters respectively:

• U.S. Futures Edge Higher As China Signals Interest in Trade Deal China has been “working actively” to avoid a trade war, President Xi Jinping said in Beijing.

• China’s Xi Jinping says he wants to work out initial trade deal with U.S.

• China’s Xi says he wants to work out initial trade deal with U.S.

Here’s Bloomberg’s account:

• China’s Xi Stresses Need for ‘Mutual Respect and Equality’ in Trade Deal

Chinese President Xi Jinping said his nation wants to work toward a phase one trade agreement with the U.S. on the “basis of mutual respect and equality,” his first comments on a partial deal that he could potentially sign with U.S. President Donald Trump.

“We didn’t initiate this trade war and this isn’t something we want,“ Xi reiterated in a meeting Friday with prominent international visitors to Beijing including former U.S. Secretary of State Henry Kissinger. “When necessary, we will fight back, but we have been working actively to try not to have a trade war.” (…)

Xi emphasized that China’s overall goal wasn’t “a dream about hegemony“ but was rather “working to realize the Chinese dream of renewal” and to ensure that China was never humiliated again.

“We are just trying to restore our place and role in the world rather than reliving the humiliating days of semi-colonial and semi-feudal era,” Xi said. “In those days there were signs in Shanghai saying Chinese and dogs are not allowed inside — and we will not relive those days again.”

One of the three key demands for any trade deal with the U.S. is that it should be “balanced” to ensure the “dignity” of both nations, indicating that this quest for respect still motivates policy. (…)

The half-full glass drinkers read “Xi wants to work out initial trade deal with U.S.”. To me, Xi said “We want to work for a ‘phase one’ agreement on the basis of mutual respect and equality”. This after Trump said last week “China is going to have to make a deal that I like. If we don’t make a deal with China, I’ll just raise the tariffs even higher.”

For good measure, Xi added yesterday: “As we always said, we don’t want to start the trade war, but we are not afraid”. He also was reported, by BB again, to have said:

The result of innovation should benefit the whole world, instead of burying it in caves hidden in the mountain. China and the US have some disputes over innovation cooperation, but the key is to form a consensus through dialogue to continue cooperation instead of being suspicious.

China and the United States should step up communication on strategic concerns to avoid misjudgment and enhance mutual understanding.

Somebody should seriously check his sincerity on that important statement.

Meanwhile:

• Pelosi, White House Fail to Seal USMCA Deal in Crucial Meeting

• Trump weighs new trade investigation to justify tariffs on EU

Trump administration officials are considering whether to start a new trade investigation against the European Union as the window closes for hitting Brussels with automobile tariffs, according to multiple people briefed on the issue.

Such a move would mean that European auto imports wouldn’t be subject to duties out of national security concerns, but the trading bloc would be subject to a much broader inquiry, the people said.

“What it would do is it would create a situation that for another year would give the president leverage over the EU,” said a former administration official. (…)

“Many countries charge us extraordinarily high tariffs or create impossible trade barriers. Impossible,” Trump said last week in an economic policy speech in New York. “And I’ll be honest: European Union — very, very difficult. The barriers they have up are terrible. Terrible. In many ways, worse than China.” (…)

A recent court ruling has raised questions about whether Trump’s failure to make a decision by the deadline nullifies his use of the law to threaten auto tariffs.

The U.S. Court of International Trade ruled last week that Trump violated a separate Section 232 deadline when he tried to double steel duties on Turkey in August 2018 after a 90-day deadline. (…)

“The president’s expansive view of his power under section 232 is mistaken, and at odds with the language of the statute, its legislative history, and its purpose,” the court wrote in a Nov. 15 opinion. (…)

Legal experts say the ruling also puts firmer ground under future challenges to any action Trump might take now on auto tariffs against the EU.

“I strongly believe if the president were to impose tariffs now, there would unequivocally be legal challenges,” said Jennifer Hillman, a Georgetown University law professor who previously served as a WTO judge and general counsel at USTR.

“They could be at substantial risk of losing that one,” she added.

Some interesting facts:

(…) The EU is the US’s premier trading partner and vice versa: trade between them reached $1.3 trillion in
2018. While goods make up most of this ($807 billion), trade in services is also huge, at $452 billion in
2018. Trade between the two economies is fairly balanced: while the EU has a trade surplus in goods of
$109 billion with the US, the US has a services trade surplus with the EU of $60 billion. (…)

Trade between the US and the EU is so intense in part
because it is heavily intra-industry, in sectors ranging from aircraft to car parts and components to
pharmaceuticals to financial and professional services, relying on skills, technology and product
differentiation, whereas trade with China has historically relied more on the latter’s labour cost
advantage. Thus, in 2017, 81 percent of China’s trade was one-way, ie trade that is inter-industry and
where exports and imports are not in the same category, whereas 43 percent of US trade and 39
percent of Germany’s trade was identified as one-way. (…)

And while the U.S. is at war with China:

Currently, China is the EU’s second largest export market behind the US. China’s exports to the EU have
grown even more rapidly and the EU is now China’s largest trading partner and the second largest export
market for Chinese goods.

• Bridgewater Bets Big on Market Drop Bridgewater Associates, the world’s largest hedge fund, has bet more than $1 billion that stock markets around the world will fall by March, said people familiar with the matter.

(…) It couldn’t be determined why Bridgewater made the investment. Several clients said it may simply be a hedge for significant exposure to equity markets the firm has built up. Funds often hedge, or take offsetting positions, against other exposure to protect against losses.

The massive size of the wager has prompted chatter among traders and caused the price of some options to rise. (…)

Key Square Capital Management, a $4.5 billion macro hedge fund founded by Scott Bessent, a former investment chief for George Soros, is betting against the dollar in a variety of currencies anticipating Ms. Warren’s continued strength, according to people familiar with the matter.

Key Square said in a Nov. 14 letter to investors that “intelligent people can argue whether Ms. Warren’s numerous programs will be good or bad for American society, but they are unequivocally negative for U.S. asset prices.” (…)

• PE Bubble

Looking for bubbles?

(…) Citing data from p.e. fundraising firm Triago, the Financial Times reports today that eager shoppers in the secondary market are paying premiums of up to 7% for interests in top-drawer buyout funds. That compares to slight NAV discounts in recent years. (…) The secondary market for p.e. ownership stakes is projected to reach $90 billion in trading volume this year, up from less than $40 billion in 2016.  (…) (Almost Daily Grant)

PE deals are already valued at historically high levels (see TIME TO GET SCARED?) even with record high leverage. Non-PE players are now willing to pay a 7% premium to get in the game…

TECHNICALS WATCH

Last Friday, I posted on the “Hindenburg Omen” and “Titanic Syndrome,” which flashed in unison—”an unusual event that sometimes precedes a selloff”.

I quoted SentimenTrader’s Jason Goepfert:

It was very rare to see these trigger, and not see weakness in the Composite over the next couple of months. The signals in 1991 and 1996 managed it, but other than that, not so much. It was also a bad sign for the broader market, with the S&P suffering a poor risk/reward ratio. If these start to trigger for the NYSE as well, then it’ll be even more reason to worry.

Jason yesterday:

(…) So, this will probably be one of the last times we focus on some of the breadth warnings that are popping up. The only reason to bring it up again is that it has branched out from only triggering on the Nasdaq to also now being on the NYSE. Both exchanges are throwing off Hindenburg Omens and Titanic Syndromes.

For the first time since July/August, a Hindenburg Omen triggered on both exchanges on the same day. And over the past 7 sessions, there has been a cluster of both types of warning signs on both exchanges.

(…) we can see a simple test of future returns when there was a Hindenburg Omen that triggered on both exchanges on the same day. There is some green in the table, mostly from 1995 and 2017, which were two of the most extraordinary momentum years in history.

Outside of those two remarkable years, it was almost all negative returns over the medium-term.

It hasn’t just been an isolated event, as noted above. Looking at the combined Hindenburg Omen and Titantic Syndrome warning signs on both exchanges, there have been 11 signals in the past 7 sessions. That counts as one of the largest clusters in more than 30 years.

These kinds of clusters were killers of whatever momentum had been generated up to that point. Over a multi-month time frame, it was extremely unusual to see upside momentum persist.

The reason these signals are compelling are that they’ve been “in the wild” for a couple of decades. We’ve used the same parameters, with the same data, since 2001, with no adjustments to try to avoid false signals. It is what it is. And what it is is consistently negative for stocks’ risk/reward profile over the next 2-3 months.