Breakthrough or breakdown: G20 sets trade war turning point The United States and China have in the coming week what may be their last chance to broker a ceasefire in an increasingly dangerous trade war when their presidents meet in Buenos Aires.
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- China “hopes the Xi-Trump meeting goes smoothly,†Vice Minister of Foreign Affairs Wang Chao said.
- China hopes to meet the U.S. halfway in addressing trade issues, Vice Minister of Commerce Wang Shouwen said. “Chinese and U.S. trade teams have been in close touch,†he said, echoing White House economic adviser Larry Kudlow’s comments last week that they have resumed contact “at all levels.â€
- Wang Shouwen appeared to echo Trump’s line: “We noticed that the U.S. wants to reach an agreement to solve trade frictions with China. China hopes to work with the U.S. to contain disputes.†U.S. trade action hurts China, America and the world, he added.
(…) I think it’s necessary for the two leaders to review the developments of the relations, and also give us a clear strategic guidance on where the relationship is going and how the two sides should conduct this important and complicated relationship together. Hopefully, this meeting will enable us to make further progress on many fronts, including on the economic and trade issues. (…)
But if we allow the current situation to go on, not only between China and the United States, but also between the U.S. and other countries and also on the multilateral front, there’s a real risk that the integrating global market might become fragmented. I don’t know whether this will serve the interests of any country. I don’t think that this will serve the interests of China. I don’t think it will serve the interests of the United States. (…)
We are the two largest economies in the world, so whatever happens in our economic cooperation will have an impact globally. This is just a fact, this is reality. So in other words, we have to be fully aware of our shared responsibility to the global economy, the prospects of global economic growth. If we solve our economic issues in a mutually beneficial way and in a timely manner, it will certainly enhance people’s confidence about global economic prospects. If we fail to do that, probably it will weaken people’s confidence for the global economy.
For economic and financial issues, confidence is very important. If people lose confidence, then a lot of bad things could happen. Some of these things could become self-fulfilling prophecies. So I think as the two largest economies in the world, we have to be fully aware of this and we have to act responsibly. (…)
U.S. Push to Isolate Huawei Ripples Through Markets ZTE shares fell sharply and Chinese stocks retreated more broadly as news that the U.S. was discouraging sales of Chinese telecoms gear abroad exacerbated trade concerns.
(…) U.S. officials have briefed government counterparts and telecom executives in friendly countries where Huawei equipment is already in wide use, including Germany, Italy and Japan, about perceived cybersecurity risks, according to people familiar with the situation. The U.S. is also considering increasing financial aid for telecommunications development in countries that shun Chinese-made equipment, some of these people say.
The international effort extends the battle lines of an American campaign to keep Huawei electronics out of the U.S. It could give Western companies a boost at a time when wireless and internet providers around the world prepare to buy new hardware for 5G, the coming generation of mobile technology. (…)
FLASH PMIs
U.S.: Slower growth of new orders and employment
November data pointed to another robust increase in U.S. private sector output, supported by resilient rates of expansion at both manufacturing and service sector companies. However, the latest survey also revealed a loss of momentum for new business growth, with order books improving at the slowest pace since December 2017. At the same time, private sector firms indicated greater caution in terms of staff hiring, with payroll numbers expanding at the weakest rate for almost one-and-a-half years.
Adjusted for seasonal influences, the IHS Markit Flash U.S. Composite PMI Output Index registered 54.4 in November, down from 54.9 in October but still well above the 50.0 no-change threshold. The average reading so far in the final quarter of 2018 is broadly in line with that seen during the third quarter (54.8).
Robust rises in service sector activity and manufacturing output were recorded in November, although in both cases the rate of growth moderated since the previous month. Survey respondents noted that strong domestic demand and improving underlying economic conditions continued to support business activity expansion.
However, while still solid, new order growth eased for the second month running in November, with the latest upturn the weakest seen so far in 2018. A slower improvement in order books helped to alleviate capacity pressures and contributed to the smallest rise in payroll numbers since June 2017. Moreover, latest data indicated that business confidence towards the year-ahead outlook moderated from October’s five-month high.
November data indicated that strong input price inflation persisted across the private sector economy, which survey respondents often linked to higher costs for transportation and raw materials (particularly metals). Overall input cost inflation nonetheless eased to a three-month low, in part due to lower commodity prices. Average prices charged for goods and services rose at the slowest rate since April as a result.
The seasonally adjusted IHS Markit Flash U.S. Services PMIâ„¢ Business Activity Index dropped from 54.8 in October to 54.4 in November. The latest reading nonetheless was well above the 50.0 no-change value and signalled a robust upturn in service sector activity.
In contrast to the resilient trend seen for business activity, new work expanded at a much slower pace than in October. Service providers responded to weaker new business growth by exercising more caution with their staff recruitment during November. The rate of job creation was the softest since June 2017.
On the inflation front, latest data pointed to a moderation in cost pressures faced by service sector companies. The latest rise in operating expenses was the least marked for three months, which contributed to the slowest increase in average prices charged since June.
Manufacturing companies experienced further robust rises in output, new work and employment during November. The latest increase in new orders was the fastest for six months and the rate of job creation hit an 11-month high, which contrasted with the softer trends seen in the service economy.
Despite stronger growth of new orders and employment, the seasonally adjusted IHS Markit Flash U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) eased from 55.7 in October to 55.4 in November, thereby signalling the weakest improvement in operating conditions for three months. Weaker production growth and a slower rate of inventory accumulation contributed to the fall in the headline PMI during November.
Manufacturers suggested that robust domestic demand and strong confidence among clients had supported their order books during the latest survey period. A number of firms noted that capacity constraints and stretched supply chains were the main headwinds to output growth at their plants.
Meanwhile, latest data pointed to another sharp rise in average cost burdens. Manufacturers widely commented on strong demand for raw materials and higher metals prices linked to tariffs. However, overall input price inflation eased slightly from October’s three-month high.
Solid flash PMI numbers for November add to evidence that the US is enjoying sustained robust economic growth in the fourth quarter. The surveys are broadly consistent with the economy growing at an annualised rate of 2.5%, building further on the country’s best growth spell since 2014 seen in the second and third quarters.
The November survey does raise some warning flags to suggest growth could slow in coming months. In particular, growth of hiring has waned as companies grew somewhat less optimistic about the outlook. Goods exports also appear to also be coming under increasing pressure, often linked to trade wars having dampened demand. However, it should also be remembered that some pull back in growth was to be expected after October’s numbers were boosted by a post-hurricane rebound, especially given the historically high levels of production, order books and employment.
With growth remaining reassuringly robust and price pressures elevated, policymakers will be encouraged that the economy has so far withstood both the headwinds of trade war worries and the steady progress made to date towards normalising interest rates.
According to the flash reading (which is based on approximately 85% of usual monthly replies), the IHS Markit Eurozone Composite PMI® fell from 53.1 in October to 52.4 in November. The latest reading was the lowest since December 2014.
The weaker rise in business activity was fuelled by a slowdown in new business inflows to the lowest since the start of 2015, which was in turn linked to a second successive monthly fall in new export orders across the manufacturing and service sectors. The drop in exports was the largest seen in the four-year history of this new survey indicator, published for the first time this month.
The slowdown in business activity growth was again most pronounced in manufacturing, where output rose only marginally. The rise in factory output was the weakest since the recovery in production began in July 2013. Production growth came to a near-standstill in response to second successive monthly falls in factory orders and exports. Manufacturers commonly blamed slower growth on subdued global demand, rising political and economic uncertainty, trade wars and especially sluggish car sales.
Service sector growth remained more resilient by comparison to the goods-producing sector, with sales often reportedly buoyed by strong labour markets in some countries, linked in turn to higher consumer spending. However, November brought further signs that the slowdown is broadening out beyond manufacturing, as even the rate of service sector expansion waned to the lowest for just over two years. Service sector new business inflows hit a 25-month low and export orders fell to the greatest extent for almost two years.
The slower order book inflows meant backlogs of work rose only marginally across the eurozone in November, registering the smallest gain for over two years in a sign of diminishing capacity constraints.
Employment growth meanwhile slowed in both sectors, dropping to a 22-month low overall as firms scaled-back expansion plans in line with the recent waning of order book growth and gloomier prospects. Expectations of growth in the coming year sank to a four-year low.
While growth slowed, price pressures remained elevated. Input cost inflation eased only very marginally to remain slightly higher than the average recorded so far this year, attributed mainly to higher energy, raw material and staff costs. Although some signs of a further cooling of input price pressures from recent highly-elevated levels was evident in manufacturing, service sector cost inflation accelerated to one of the highest rates seen over the past seven years.
Output price inflation meanwhile remained elevated and unchanged on October, albeit down from highs earlier in the year. While companies often cited the need to pass higher costs on to customers, intense competition often limited their pricing power. Factory gate prices showed one of the smallest increases over the past year as a result. However, service sector selling price inflation remained unchanged for a second straight month, with charges once again rising at one of the strongest rates seen since the global financial crisis.
Within the eurozone, Germany was again a key area of concern, with business activity growth slowing to a near four-year low. A near-stagnation manufacturing output was the weakest performance since April 2013. The German service sector proved more resilient, though still reported the weakest expansion for six months. Growth held up better in France, outperforming Germany for the second straight month. That said, although growth eased only marginally in November, the rise in output was nonetheless the joint-lowest since December 2016. Factory output fell for a second consecutive month, offset by robust (but marginally weakened) growth in the service sector.
Especially sluggish growth was meanwhile recorded across the rest of the single-currency area, where the rate of expansion was the slowest since November 2013, easing in both sectors to register only modest expansions.
As such, the survey data suggest that the weakness of GDP in the third quarter may not have been a blip, and that the underlying trend is one of slower economic growth. The PMI readings so far in the fourth quarter are indicative of 0.3% GDP growth, with forward-looking indicators such as new orders and future expectations remaining worryingly subdued.
Although the elevated levels of the survey price gauges will give some encouragement to the ECB in relation to firmer inflationary pressures, the disappointing business activity readings will add to concerns that risks to the growth outlook have become increasingly skewed to the downside.
Holiday Spending Gets Push From Low-Income Earners A surge in online shopping and higher spending by low-income Americans gave a lift to the start of the holiday season, even as initial reports showed foot traffic to traditional stores continued its long decline.
During Thanksgiving and Black Friday, traffic to U.S. stores fell between 5% and 9% compared with the same days last year, estimated RetailNext, which uses cameras to track people in both mall-based and stand-alone retailers. Another measurement firm, ShopperTrak, estimated traffic fell less sharply, about 1% over the two-day period from a year ago.
(…) Internet sales for Wednesday through Black Friday surged 26.4% from a year earlier to $12.3 billion, estimated Adobe Systems Inc., which tracks activity on thousands of websites. (…)
Around 57% of online consumers with a household income of $35,000 or less bought online in the past three months, while 70% of online consumers overall did so, according to research firm Forrester. (…)
Store pickups of online orders rose 73% over Thanksgiving and Black Friday compared with the same days last year, said Adobe. (…)
(…) GM is in cost-cutting mode amid signs of a slowdown in each of its largest markets, China and the U.S. The company recently offered buyouts to more than one-third of its 50,000 salaried employees in North America, citing the need for belt-tightening, while the economy and car market remain relatively strong. (…)
In Crude Oil’s Huge Drop, All Signs Say Made in the U.S.A. The downward spiral in oil prices is accelerating as a surge in crude production from a turbocharged U.S. petroleum industry runs into weaker global economic growth.
Crude prices slid 7.7% Friday, their largest one-day drop since July 2015, and are now down by nearly a third since the start of October. The U.S. benchmark, West Texas Intermediate futures, closed at $50.42 a barrel—its lowest level in over a year.
As economic growth outside the U.S. has flagged, producers and traders are beginning to worry that demand for crude will also decline. (…) The steepness of the drop has prompted Saudi Arabia and the Organization of the Petroleum Exporting Countries to consider a plan to quietly cut production to bolster prices, according to people familiar with the matter.
The idea would see the cartel retain the official output targets it set in 2016. But, because Saudi Arabia is overshooting those targets by nearly 1 million barrels a day, it would effectively be a cut. Such a move may help support prices without raising the ire of President Trump, who has been calling on OPEC to keep prices lower. (…)
This summer, the U.S. surpassed Saudi Arabia and Russia as the largest crude-oil producer—a title it hadn’t held since 1973, according to the International Energy Agency. Monthly output in the U.S. was a record 11.65 million barrels a day in September and nearly the same amount in October, according to energy consulting firm Wood Mackenzie, while Saudi Arabia’s supply was nearly 11 million barrels a day last month and Russian production stood at 11.4 million a day. (…)
U.S. crude stockpiles have climbed for nine consecutive weeks. Inventories advanced by 4.9 million barrels in the week ended Nov. 16, and rose more than 10 million barrels the week before, the largest one-week increase since February 2017.
Bottlenecks in getting oil out of the prolific Permian basin in Texas have led to a big divergence in the benchmark prices of oil. The global benchmark, Brent crude, trades for roughly $9 more than West Texas Intermediate, which is harder to get to global markets.
However, the U.S. has continued to pump oil and many expect those hurdles to be cleared next year as new pipelines are built, unleashing even more crude on the rest of the world.
Uncertainty on the geopolitical front has also contributed to worries about oversupply.
Mr. Trump has signaled a willingness to look past the killing of a prominent U.S.-based journalist in his relations with Saudi Arabia. And the U.S., after months touting strict enforcement of sanctions on Iran, granted more generous waivers than expected for eight governments to buy Iranian oil. This could lead to higher-than-expected supply from the Islamic Republic. (…)
Adding to the pressure on oil is a stronger U.S. dollar. Since crude is priced in dollars, it becomes more expensive for foreign buyers when the U.S. currency rises. On Nov. 12, the dollar jumped to its highest level since March 2017, bolstered by expectations of higher interest rates. This could start to hinder global demand, one of the initial drivers that underpinned the recovery in crude.
If the price of oil drops too far, too fast, that could also hurt U.S. producers, especially in the shale patch. Most shale drillers now maintain they can break even at $50 or lower. But the falling prices have begun to eat into their profitability, and some may be forced to curtail spending next year and reduce ambitious growth plans if prices decline much more. (…)
(…) That move would imply a production pullback because Saudi Arabia is overproducing by nearly 1 million barrels a day, according to people familiar with the matter. (…) The cut “would be more discrete,†said an OPEC official, who added the production cut and U.S. silence on oil prices “would be a quid-pro-quo†between the Saudis and Mr. Trump. It also would avoid a confrontation with non-OPEC member Russia, which has shown no appetite for a new cut, the official said. (…)
“It is quite a political move. The last thing Saudi Arabia wants to do at the moment is to risk upsetting Trump,†the senior Saudi oil adviser said. (…)
Mr. Trump has threatened to support legislation that would effectively label OPEC an illegal cartel. The proposed measure, dubbed NOPEC, has withered during several U.S. administrations, but its bipartisan backers have said they think it might fare better under Mr. Trump.
“Because of Khashoggi, the Saudis will do anything to make sure Trump doesn’t do anything nasty†to them, said an OPEC official said.
In addition, oil prices have fallen in just over a month far below the $88-a-barrel level that the International Monetary Fund says Saudi Arabia needs to balance its budget.
The $88-a-barrel price the IMF referred to was for Brent crude, the global benchmark, which on Friday broke below $60 for the first time in over a year.
(Bespoke)
Relax, Falling Oil Prices Are Mostly a Good Thing Is the big drop in oil prices going to be good or bad for the U.S. economy? Probably good, but getting to that answer isn’t as simple as it used to be.
(…) But even if prices keep dropping, it probably won’t be as disruptive as before.
That is because the shale production is far less speculative, and far more efficient, than it was a few years ago. Even though the U.S. is pumping much more crude now than when production peaked in 2015, the oil industry accounts for a smaller share of overall capital spending. It also employs fewer people. As of last month, there were 153,200 oil and gas extraction jobs in the country, according to the Labor Department, which compares with 200,700 jobs four years earlier.
Will the drop in oil prices cool capital spending and lead some people to tighten their belts? Sure—but not by as much as it did during the last big price drop, and probably not by enough to offset the positives of low gasoline prices.
EARNINGS WATCH
Almost done with 484 reports in. The beat rate is 78% and the surprise factor a record +6.4% with all sectors but 2 at over +4.4%. Revenues are up 8.5% (+1.3% surprise factor). Q3 earnings are now seen up 28.2% (24.8% ex-Energy).
Pre-announcements are in line with Q3’18 and Q4’17 at the same time so no announced deterioration there just yet.
Q4 estimates are +17.3% (+14.6% ex-E), down from 20.1% on Oct. 1 and from 17.8% on Nov. 9, bringing full year EPS to $162.79, up 23.3%.
Q1’19 estimates are +6.9%, down from +8.1% on Oct. 1 but Q2’19 estimates are +8.0% from +9.2%.
Revisions on S&P 500 companies were about evenly distributed up vs down last week but analysts keep revising smaller companies downward as only 43% saw their outlook improve last week.
Trailing EPS are now $157.77 or about $160.30 pro forma the tax reform for the full 12 months. On that basis and using a 2.1% inflation rate, the Rule of 20 P/E is 18.5, very close to the 18.3 low seen in January 2016 when the very volatile AAII bearish sentiment spiked up. Recall that in early 2016, earnings were trending down (trailing EPS troughed in August 2016) and inflation was rising. On the other hand, the Fed was still in QE mode and trade wars were in no one’s mind.
(Bespoke)
- Ed Yardeni has the more useful Investors Intelligence data which is not as conclusive from a contrarian viewpoint. There has been no capitulation yet from advisory newsletter publishers.
- Ned Davis Research’s Crowd Sentiment Poll is at “extreme pessimismâ€, a bullish signal:
- Here’s another type of sentiment poll: Openinsider.com has a chart plotting insider activity currently showing high purchases by insiders recently (sales are not as significant)
- A recent survey by the National Association of Active Investment Managers shows that mutual funds’ equity exposure has fallen to 30.5 percent, the least since 2016. It isn’t helping much — practically everything is falling. Treasuries, raw materials and corporate bonds are all down for the year. (Bloomberg)
TECHNICALS WATCH
Despite the plunging price indices over the past couple of weeks, Lowry’s Research sees “clear signs of emerging underlying strength beginning to appear in the market.â€
One of the key differential in Lowry’s work is that its OCO indicators (Operating Companies Only) exclude all preferred issues, all real estate partnerships, all foreign issues and ADRs, and all closed-end stock and bond funds included in the NYSE. Lowry’s argues that recent signs of improvements “are especially noticeable in our Operating Companies Only (OCO) data.†It cites the 159 OCO New Lows “on Nov. 20th, substantially below the 184 OCO New Lows at the Oct. 29th market low and the 202 OCO New Lows at the Oct. 11th reaction low. Typically, a drop in the number of New Lows can be an indication the market is either at or close to an important bottom.â€
As in New Lows, OCO data suggests more strength than seems apparent in the all issues figures, as the OCO Adv-Dec Line is currently much further above its Oct 29th reaction low than its counterpart NYSE all-issues Adv-Dec Line. (…) while the S&P and OCO Large Cap Adv-Dec Lines remain well above their Oct. 29th reaction lows, the S&P and OCO Small Cap Adv-Dec Lines are roughly matching their Oct. 29th lows, suggesting breadth has deteriorated much more among small caps during the market correction. The Mid Cap Adv-Dec Lines are about mid-point between the losses of their Large and Small Cap counterparts.
Nevertheless, I remain uncomfortable with the criss-crossing between Lowry’s Buying Power and Selling Pressure Indices showing no clear trend one way or the other. Ned Davis Research has a Volume Demand vs. Volume Supply chart which is “nearing a cross lower which is a bearish indicator for equities†warns Steve Blumenthal:
In addition:
The 13/34–Week EMA Trend Chart has proven to be a pretty good cyclical bull/bear market indicator and, as Steve Blumenthal says, it is now
approximately a week away from registering its first major sell signal since August 2015. 13 weeks is 65 trading days. 34 weeks is 170 trading days. Sell signals trigger when the shorter term 13-week trend line declines below the 34-week trend line. (…) What this is likely telling us is that short-term rally attempts will likely face selling pressure. The longer-term trends are weakening.
The 200-day moving average is also an important trend indicator. It is always best when it is rising. The S&P 500 200dma peaked on October 22 at 2765.2 and is now at 2758.1. NDR’s work suggests that a 0.5% reversal is a “get out signalâ€. That would occur at 2751, 7 points lower. It took one month to see it decline by 7 points but we are already 126 points below currently. One week may be enough…
In all, we have a reasonably inexpensive equity market (large caps at least), rising profits, no recession in sight and subdue inflation. Sentiment is negative, which is a positive, and insiders are buying. Technicals are “ok†per Lowry’s work but dangerous per my lens.
One way or the other, equities will get trumped this week. 
Confused? Sorry but this won’t help:
Trump’s conflicting demands create deficit dilemma President Trump is asking his aides to address the country’s ballooning budget deficits, but his limits on what they can do and calls for other spending have all but ruled out meaningful reduction.
President Trump is demanding top advisers craft a plan to reduce the country’s ballooning budget deficits, but the president has flummoxed his own aides by repeatedly seeking new spending while ruling out measures needed to address the country’s unbalanced budget. (…)
But even as he has demanded deficit reduction, Trump has handcuffed his advisers with limits on what measures could be taken. And almost immediately after demanding the cuts from his Cabinet secretaries, Trump suggested that some areas — particularly the military — would be largely spared.
The president has said no changes can be made to Medicare and Social Security, two of the government’s most expensive entitlements, as he has promised that the popular programs will remain untouched. (…)
In total, government debt has risen roughly $2 trillion since Trump took office, and the federal government now owes $21.7 trillion, according to the Treasury Department. (…) The U.S. Treasury projects it will issue $1.3 trillion in new debt this year, more than double its borrowing from one year ago.
Rising interest rates are projected to make the cost of borrowing money much more expensive. The United States will soon spend more money on interest payments than it does for the entire Medicaid program, more than $400 billion. (…)
“We’re going to start paying down debt,†Trump said during a White House event last month. “We have a lot of debt.†(…)
Even as Trump has told aides he’s finally interested in taking steps to reduce deficits, he has floated several ideas that would further expand them. He has proposed a 10 percent tax cut for the middle class, a huge package of infrastructure spending and billions of dollars for a wall along the U.S.-Mexico border. He hasn’t specified how he would pay for any of those things. (…)
Bitcoin just had the week from hell: The digital currency lost nearly a third of its value in seven days, one of its worst weekly selloffs on record.
(…) “Neither global efforts to mitigate the causes of climate change nor regional efforts to adapt to the impacts currently approach the scales needed to avoid substantial damages to the U.S. economy, environment, and human health and well-being,†the report said.
The federal report concludes “that the evidence of human-caused climate change is overwhelming and continues to strengthen, that the impacts of climate change are intensifying across the country, and that climate-related threats to Americans’ physical, social, and economic well-being are rising.â€
Mandated by law since 1990, the official climate assessment is produced every four years by the U.S. Global Change Research Program to guide federal policy makers. The new edition, released in English and Spanish, highlights the local impact of rising temperatures across the U.S. (…)
Why Warren Buffett Is Big on Big Banks Berkshire Hathaway has been plowing money into banking stocks like JPMorgan Chase. Financials now account for 45% of its equity holdings
(…) “Buffett’s investments offer validation for what we see as the value in the group,†says Mike Mayo, a banking analyst with Wells Fargo. “Banks are less cyclical than they have been in decades and have more resilient earnings streams because of improved financial discipline and risk control.†He sees earnings growth of 50% or more for JPMorgan, Citigroup, and Bank of America over the next four years. (…)
The KBW index of 24 bank stocks is down 8% this year. Wells Fargo, led by CEO Timothy Sloan, and Citigroup are off about 15%. Goldman, the worst performer in the Dow Jones Industrial Average, is down 25%. (…)
Large banks now have an average forward price/earnings ratio of just 10.2, against a forward P/E of 12.6 at the start of the year, based on 22 institutions covered by Barclays analyst Jason Goldberg. (…)
Buffett and his two investment lieutenants, Todd Combs and Ted Weschler, plowed money into stocks in the first three quarters of 2018, buying a net $24 billion of equities, versus $4 billion in the same period of 2017. (…)
Note: I will be on vacation next week.
