Edge and Odds

The enemy of knowledge is not ignorance, it’s the illusion of knowledge (Stephen Hawking)

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so (Mark Twain)

Edge and Odds

Invest with smart knowledge and objective odds

U.S. FLASH MANUFACTURING PMI EASES FROM 52.9 TO 52.1

U.S. goods producers saw a further upturn in overall business conditions during August, though the rate of improvement was softer than seen in July. While output continued to rise markedly, total new work rose at a slower pace and employment expanded at the weakest rate in four months. Meanwhile, companies reported near-stagnant price trends overall, with input prices rising only marginally and companies leaving their prices charged unchanged from the previous month.

The seasonally adjusted Markit Flash U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) registered at 52.1 in August, down from July’s nine-month high of 52.9. The PMI has now pointed to improving business conditions in each month since October 2009. However, August’s reading pointed to a moderate rate of improvement that was weaker than the post-crisis average. A further solid increase in output was the most positive influence on the latest PMI reading. In contrast,
slower growth in total new work and employment, alongside further cuts to inventories, had dampened the overall headline figure.

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U.S. manufacturers signalled increased output for the third month running in August. Furthermore, the rate of expansion remained solid overall, having edged up slightly from July to a nine-month high. Anecdotal evidence suggested that new product launches, stronger underlying demand and new marketing strategies had supported production growth in August.

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Although solid growth of output was sustained, total new orders expanded at a slower rate in August. Data indicated that relatively subdued domestic demand was a reason behind softer growth in overall new work, as export sales increased at the fastest pace in 23 months. While some companies commented that a number of clients had adopted a wait-and-a-see approach until the outcome of the presidential election, others mentioned that total new work had been boosted by new foreign client wins over the latest survey period.

Manufacturing employment increased only slightly during August. Furthermore, it was the weakest rate of payroll growth seen for four months. Greater staff numbers were generally linked to higher amounts of new work. At the same time, other firms mentioned that efforts to raise efficiency had weighed on overall jobs growth.

August survey data pointed to a further rise in purchasing activity, which was generally attributed to greater amounts of incoming new work. In line with the trend for new orders, however, the rate of expansion slowed since July. Meanwhile, stocks of finished goods and purchased items both fell as companies generally adopted cautious inventory policies.

Average cost burdens faced by U.S. manufacturers rose only slightly during August. Furthermore, the rate of input price inflation was the slowest seen in the current five-month sequence of increasing costs.

Prices charged for U.S. manufactured goods were unchanged in August, thereby ending a three month sequence of increase. According to anecdotal evidence, greater competition for new work had weighed on the overall pricing power of firms in the latest survey period.

Chris Williamson, Chief Business Economist at IHS Markit:

The August drop in the PMI is a disappointment but less worrying when looked at in the context of July’s better than expected reading. Taking the July and August readings together suggests that manufacturing is enjoying its best growth so far this year in the third quarter, and should help drive stronger GDP growth.

With August seeing the largest rise in exports for almost two years, the improved trade performance should also help drive faster economic growth.

However, a slowdown in overall order book growth is a warning light that domestic demand has waned in August, and the pull-back in hiring suggests manufacturers have become increasingly cautious about the outlook. Inflationary pressures have meanwhile eased.

NEW$ & VIEW$ (23 August 2016)

Chicago Fed Exceeds Expectations For Second Straight Month

(…) As shown in the table to the right, July’s report came in at a level of +0.2687 versus consensus expectations of +0.2.  This month’s better than expected report was the first time that we have seen back to back reports exceed expectations since last July.  Not only that, but it was also the first time in a year that we have seen two straight positive, or above trend growth, readings.  Not to get ahead of ourselves here, but if next month’s report also exceeds expectations, it would be the longest streak of better than expected reports since November 2009, and if it’s positive it would be the first ‘three-peat’ of above trend readings since the end of 2014.

(…) As shown in the chart, heading into prior recessions, the CFNAI was typically trending lower well ahead of the recession.  In the current period, the CFNAI had been trending slightly lower since the start of 2015.  With the last two reports, however, that string of lower highs appears to have been broken providing further confirmation that the ‘growth scare’ of 2015 was just that and nothing more dire. (Bespoke Investment)

Long Time Chart

Let’s hope Bespoke is right as this Doug Short chart shows:

CFNAI and GDP

Low Earners See Paychecks Grow For Americans in the bottom quarter of the income scale, pay is rising at the fastest rate since the recession, and large firms are setting a public example, putting pressure on competitors to follow suit.

(…) In the second quarter, weekly wages for full-time workers in the 25th percentile, those making about $13 an hour, were up 3.1% from a year earlier, according to Labor Department data. That’s the biggest increase since 2009 and exceeds the growth rate for median earners, or those making about $20 an hour for full-time work.

The raises coincide with a decline in available workers for what are often less desirable jobs. The jobless rate has held at or below 5% this year, and the number of available workers per job opening is hovering near a 15-year low. (…)

Competitive pressures and low unemployment in those cities was a factor, said Gale King,Nationwide’s chief administrative officer.

“We knew our associates could walk out the door and find a job tomorrow,” she said. By raising pay above the median wage for similar work in the area, Nationwide says it can attract better employees to serve customers. (…)

Research firm TDn2K says turnover among hourly restaurant workers hasn’t decreased since September 2013, and that turnover among restaurant managers is at its highest level in more than a decade. (…)

Better pay for workers can lead to higher prices for consumers. Starbucks said last month it would raise the prices of certain drinks by as much as 30 cents. Mr. Travis said many Dunkin franchises also have increased prices. (…)

Vote to Leave EU Gives Boost to U.K. Manufacturers, Survey Shows

(…) The Confederation of British Industry, an employers’ lobby group, said that its monthly survey of sentiment in the sector showed that the export order books of U.K. manufacturers strengthened to a two-year high in August. The pound has weakened by more than 11% against the dollar since the morning of the referendum result.

Export orders book balance for August was at -6, up from -22 in July. The balance reflects the percentage of respondents experiencing an improvement versus those experiencing a decline.

Total order books were largely unaffected in the three months to August, confounding expectations for a more pronounced slowdown. (…)

The depreciation of the pound may prove to be a double-edged sword. Average prices for manufactured goods are expected to rise over the next three months at their fastest pace since early 2015, possibly in response to the higher cost of imported raw materials, the CBI said.

From The Daily Shot:

Goldman Calls It For Oil: “OPEC Freeze Insufficient To Support Prices; The Price Rally Should Stall”

“Supply continues to feature the cross currents of rising low-cost supply, declining high-cost production, and new project ramp up. In fact, marginally more bearish data recently than we had assumed suggests in our view that the recent price rally should stall… While discussions of an OPEC freeze and a weakening dollar have been catalysts for the sharp reversal in oil prices this month, we believe neither will be sufficient to support prices much further”

As Predicted, Obamacare Is Absolutely Killing The Middle Class
SENTIMENT WATCH
It’s Getting Scarily Quiet in the Market The S&P 500 has been remarkably tranquil. The danger isn’t so much complacency about markets but complacency about central banks.

The past 30 days have been the least volatile of any 30-day period in more than two decades. Only five days during the most recent stretch saw the S&P 500 move by more than 0.5% in either direction, the lowest since the fall of 1995. (…)

Previous periods of very low volatility were in early 2011, before the U.S.’s near-default and loss of triple-A status, and January 2007, a few months before the collapse of two Bear Stearns Cos. hedge funds marked the beginning of the credit crunch.

There is more going on now than just the summer holidays. The markets are very rarely this serene, with S&P 500 realized volatility lower only a dozen times in the past half-century. In data back to 1928, this level of volatility appeared frequently only during the period from the 1951 removal of the Federal Reserve’s cap on bond yields to President Richard Nixon’s 1971 scrapping of the dollar’s link to gold. (…)

The danger, then, is not so much complacency about markets, but complacency about central banks. The lesson of the past seven years is that policy makers will step in every time disaster strikes. But investors tempted to rely on the central banks should note that disasters did still strike, and markets had big falls before help arrived. The time to buy insurance is when it is cheap, and for the U.S. stock market, that is now. (JAMES MACKINTOSH)

But no need to worry says Zacks’ Sheraz Mian:

I am no raging bull, but I don’t buy the complacency narrative either. Stocks have made strong gains from the February lows, but the S&P 500 index is up only about +7% for the year (the small-cap Russell 2000 is up about +9%). Valuations are richer and fuller relative to 6 or 12-months back and towards the high points of historical ranges. But they are nowhere near the nose-bleed levels of the last 1990’s.(…)

It may be a crude analogy but the Fed’s backstop of the market essentially plays the same role that the Chinese government plays in that country’s stock market. I am no big fan of the Fed’s outsized role in the market, but I can’t deny its existence either. (…)

I continue to favor being fully invested (…)

Pointing up Jim Grant: “This Will Turn Out To Be Very Bad For Many People”

Too long and good interview to summarize here. Please click and read it all.