Edge and Odds

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Edge and Odds

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CHINA MANUFACTURING PMI SINKS TO FOUR-MONTH LOW

Overall, economic conditions in the second quarter were considerably weaker than in the first quarter, which means there has been no easing of the downward pressure on growth.

Chinese manufacturers reported the sharpest deterioration in operating conditions for four months in June, with output falling at the quickest rate since February amid a further drop in new work. Consequently, companies continued to pare back their staff numbers at a solid pace, while trimming their inventory holdings of inputs and finished goods further. Prices data indicated a renewed fall in cost burdens faced by Chinese goods producers, while output charges were left broadly unchanged after a three-month sequence of inflation.

Adjusted for seasonal factors, the Purchasing Managers’ Index™ (PMI™) registered at 48.6 in June, down from 49.2 in May, to signal a further deterioration in the health of China’s manufacturing sector. Furthermore, the rate of deterioration, though moderate, was the fastest seen in four months.

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A faster contraction of manufacturing output weighed on the headline index in June. Furthermore, it was the quickest reduction in production for four months. Panellists widely commented that poor market conditions and a drop in new work had led them to cut output. Weaker client demand was highlighted by a second successive monthly fall in total new work placed at manufacturing firms during June, albeit marginal. Data suggested that part of the weakness stemmed from softer foreign client demand, with new export sales declining for the seventh month in a row and at a moderate pace.

As part of efforts to cut costs and raise efficiency, businesses reduced their staffing levels again in June. Employment in the sector has now fallen in each of the past 32 months. Furthermore, the rate of contraction was similar to those seen in the preceding four months and solid. Meanwhile, backlogs of work rose, with some respondents linking growth to new product developments. Though modest, it was the fastest rise in outstanding workloads for a year-and-a-half.

Fewer new orders contributed to a reduced amount of purchasing activity across China’s manufacturing sector in June, though the rate of reduction was only slight. At the same time, companies maintained tighter inventory policies, with stocks of both pre-production and finished goods falling, albeit at slower rates than in the previous month.

Despite another drop in input buying, lead times for deliveries continued to lengthen in June amid reports of stock shortages at vendors. However, the rate at which supplier performance deteriorated was only slight.

After a three-month sequence of inflation, average cost burdens faced by Chinese goods producers fell in June. Some respondents mentioned that deflationary pressures stemmed from lower raw material costs. That said, the rate of reduction was marginal overall. Meanwhile, prices charged by Chinese manufacturers were broadly unchanged since the previous month.

China’s official PMI:

China’s National Bureau of Statistics reported Friday that the official manufacturing purchasing managers index edged down to 50.0 in June, the level that separates expansion from contraction, from 50.1 in May.

Official subindexes measuring new orders and raw material inventory both declined in June from May, while the official production subindex improved slightly, the statistics bureau said. China’s official nonmanufacturing PMI, which measures activity in the service sector and which was also released Friday, rose to 53.7 in June from 53.1 in May. (WSJ)

NEW$ & VIEW$ (30 JUNE 2016)

China to tolerate weaker yuan, wary of trade partners’ reaction – Reuters’ sources

China’s central bank is willing to let the yuan fall to 6.8 per dollar in 2016 to support the economy, which would mean the currency matching last year’s record decline of 4.5 percent, policy sources said. (…)

“The central bank is willing to see yuan depreciation, as long as depreciation expectations are under control,” said a government economist, who requested anonymity due to the sensitivity of the matter.

“The Brexit vote was a big shock. The market volatility may last for some time.” (…)

GM’s U.S. Market Share Shrinks as Auto Sales Peak U.S. market share for the nation’s largest car maker has tumbled to a more than three decade low amid strong demand as its dealers say they are saddled with too many cars and too few pickups and SUVs.

(…) Its current 16.7% chunk of the domestic market is a more-than-three-decade low for the nation’s largest auto maker. In contrast, No. 2 U.S. auto maker Ford Motor Co. has crept up to 15.3% and should inch closer in June, say analysts.

While GM executives have pinned the decline on a decision to sell fewer low-margin fleet vehicles, its inability to keep up with sizzling demand for pickup trucks and sport-utility vehicles also plays a major role in the decline. (…)

IMF Says Brexit Clouds Germany’s Growth Outlook

(…) The IMF further forecast that German economic growth will slow to 1.5% next year from an estimated 1.7% this year, but cautioned that its estimates are already outdated and that it will release new forecasts as part of its World Economic Outlook in mid-July. (…)

ECB No Closer to Inflation Target After Series of Stimulus Measures

(…) Eurostat said consumer prices were 0.1% higher than in June 2015, having been 0.1% below their year-earlier level in May. (…) In June, core inflation—which excludes items such as food and energy, the prices of which are set mainly in world markets—picked up to 0.9% from 0.8% in May, but remained below the 1.0% rate recorded at the start of the year. (…)

SENTIMENT WATCH
U.S. funds hold portfolios steady, equities near survey lows: Reuters poll

(…) The survey of 13 U.S. fund managers conducted June 15-30 but with all responses coming in after the Brexit vote, showed that global equity allocations accounted for 51.1 percent of the model portfolio in June.

That was unchanged after four months of falls. Bond allocations came to 35.7 percent, according to the survey.

Those allocations have been steady this year but are down considerably compared with early 2013, when they stood above 60 percent for equities and below 35 percent for bonds, suggesting a shift towards assets seen as safer over the past three years. (…)

Soros: Brexit Has ‘Unleashed’ a Financial-Markets Crisis

Britain’s decision to leave the European Union has “unleashed” a crisis in financial markets similar to the global financial crisis of 2007 and 2008, George Soros told the European Parliament in Brussels.

“This has been unfolding in slow motion, but Brexit will accelerate it. It is likely to reinforce the deflationary trends that were already prevalent,” the billionaire investor said on Thursday. (…)

Fed Clears 31 of 33 Big Banks to Boost Returns to Investors The largest U.S. banks got permission from regulators to return profits to investors, but the U.S. units of Deutsche Bank and Banco Santander were held back again.

(…) Overall, the 2016 stress tests reflect the Fed’s view that the banking sector is much stronger than it was leading up to the 2008 bailouts. Bank regulators have steadily raised capital requirements for the largest banks since the crisis to make banks—and the financial system—more resilient and better able to absorb losses. The changes have forced banks to fund themselves with less borrowed money and more investor funds, such as common equity that can’t flee when market turmoil strikes, and many analysts said those changes helped contain the damage from the Brexit market rout. (…)

​Banks that received approval for their capital plans will be able to pay out as much as around two-thirds of projected net income for the coming four quarters, a senior Fed official said. That also means, though, that banks will continue to retain capital, which could also reassure investors worried about their ability to withstand any continuing Brexit-related market tumult. (…)

(…) Gerard Cassidy at RBC said Citigroup was set to distribute $10.4bn in dividends and buybacks, Bank of America $8bn and JPMorgan Chase $17.4bn — each up more than half from a year ago. (…)

From the FT’s Lex column:

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