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. MANUFACTURING PMI EASES TO 50.7

Markit’s PMI:

May data pointed to another loss of momentum across the U.S. manufacturing sector. New business growth eased to its weakest so far in 2016, which contributed to a decline in production volumes for the first time in over six-and-a-half years. Survey respondents noted that subdued client demand and heightened economic uncertainty had resulted in challenging trading conditions. Manufacturing payroll numbers nonetheless picked up slightly in May, which firms linked to new product launches and sustained optimism regarding the longer-term business outlook.

At 50.7 in May, the seasonally adjusted Markit U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) was down fractionally from 50.8 in April and pointed to the weakest manufacturing performance since September 2009. Lower production levels were the main downward influence on the headline PMI in May. Although only marginal, this was the first overall reduction in manufacturing output recorded by the survey for more than six-and-a-half years. Anecdotal evidence suggested that softer new order growth and efforts to rein in inventory accumulation had exerted negative influences on production schedules.

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The latest survey highlighted only a modest increase in new business intakes, with the pace of expansion easing to a five-month low. Manufacturers cited a range of factors acting to dampen client spending, including weak capital investment across the energy sector, uncertainty related to the presidential election and generally subdued economic conditions. Added to this, a marginal drop in export sales also weighed on overall new business growth in May.

A slower upturn in new orders enabled another reduction in backlogs of work during May. Despite little sign of pressure on operating capacity, the latest survey signalled a marginal rise in payroll numbers and the rate of jobs growth picked up slightly from April’s near three-year low. Additional staff hiring was linked to new product launches and longer-term expansion plans.

Manufacturers continued to report cautious inventory strategies during May, leading to a fall in stocks of purchases for the sixth month running. Post-production inventories rose slightly, but this was partly linked to weaker than expected sales.

Input cost inflation remained modest in comparison to its post-crisis trend, despite accelerating to the fastest since August 2015. There were widespread reports citing higher steel prices in May. At the same time, factory gate charges were broadly unchanged, which ended a three-month period of price discounting.

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The ISM PMI:

The May PMI® registered 51.3 percent, an increase of 0.5 percentage point from the April reading of 50.8 percent. The New Orders Index registered 55.7 percent, a decrease of 0.1 percentage point from the April reading of 55.8 percent. The Production Index registered 52.6 percent, 1.6 percentage points lower than the April reading of 54.2 percent. The Employment Index registered 49.2 percent, the same reading as in April. Inventories of raw materials registered 45 percent, a decrease of 0.5 percentage point from the April reading of 45.5 percent. The Prices Index registered 63.5 percent, an increase of 4.5 percentage points from the April reading of 59 percent, indicating higher raw materials prices for the third consecutive month. Manufacturing registered growth in May for the third consecutive month, as 14 of our 18 industries reported an increase in new orders in May (down from 15 in April), and 12 of our 18 industries reported an increase in production in May (down from 15 in April).

ISM®’s New Export Orders Index registered 52.5 percent in May, the same reading as in April. This month’s reading indicates growth in new export orders for the third consecutive month.

The ISM and Markit PMIs have recoupled in the last 2 months, indicating the superiority of Markit’s survey (chart from Zerohedge)

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NEW$ & VIEW$ (1 JUNE 2016)

U.S. Consumer Spending Climbed at Fastest Pace in Nearly Seven Years Consumer spending advanced at the fastest pace in nearly seven years in April—jumping 1.0%— in the latest sign the economy is improving after a sluggish start to the year.

Consumption had climbed 0.2% in February and was flat in March. (…)

Consumer spending on durable goods was particularly robust in April, likely reflecting healthy auto sales during the month.

Personal income, including earnings from wages and other sources, rose 0.4% in April. (…) The personal saving rate in April was 5.4%, down from March’s 5.9% and the lowest level of the year. (…)

The personal-consumption expenditures price index, the Fed’s preferred inflation measure, rose 0.3% in April from the prior month, the firmest reading since May 2015. From a year earlier, the index climbed 1.1%, undershooting the Fed’s 2% target for the 48th straight month.

So-called “core” prices, which exclude the volatile categories of food and energy, rose 0.2% from the prior month and 1.6% from a year earlier. (…)

Adjusted for inflation, consumer spending rose 0.6% and disposable personal income—income after taxes—rose 0.2%.

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The FT this a.m.:

US consumer spending confirms rebound Buoyant household sentiment adds to case for interest rate rise

Sorry to interrupt the party. Just to warn on a few things:

  • The consumer has yet to show clear trends, away from the on and off patterns of the last 2 years.
  • Car sales were indeed strong in April but that was after a very bad March. Car sales remain in a clear downtrend looking at the last 6 months.
  • April’s 1.0% jump in nominal expenditures is great but public retailers don’t seem to have noticed it.
  • Revisions can be brutal. January was first released as +0.5%. It’s now +0.1%.
  • Easter fell in March this year and there were 5 shopping weekends in April vs 4 in March. I am not sure the seasonal adjustments adjusted well for these anomalies. (Chart from Haver Analytics)

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BTW, re. the “Buoyant household sentiment”:

U.S. Consumer Confidence Continues Lower

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And from Bespoke Investment:

053116 Consumer Confidence Income
U.S. Home Prices Jump as Supply Pinch Plays Out Home prices across the U.S. rose sharply in early spring amid rising demand and supply constraints, a sign that the lopsided housing-market recovery of the past five years is gaining strength.

The S&P/Case-Shiller national home-price index, released Tuesday, has clawed its way back to within 4% of its 2006 peak, a steep rise from the near 30% decline at the bottom in 2012. (…)

The S&P/Case-Shiller national index rose 5.2% in March. But that is mainly because of a lack of inventory, economists said. When adjusted for inflation the S&P/Case-Shiller index remains about 20% below its peak reached in 2006. (…)

The S&P/Case-Shiller index covering the 20 largest U.S. cities rose 5.4% in the 12 months ended in March, outpacing the overall market.

In the hottest regions in the country, primarily on the West Coast, prices rose at a double-digit pace in March, with Portland, Ore., reporting a 12.3% year-over-year gain, Seattle showing a 10.8% gain and Denver logging a 10% increase. (…)

Japan PM delays sales tax hike, puts fiscal reform on back burner
Governments must boost spending to escape ‘low-growth trap’: OECD Ensnared in a “low-growth trap”, the world economy will meander along at its slowest pace since the financial crisis for a second year in a row in 2016, the OECD forecast on Wednesday, urging governments to boost spending.
SENTIMENT WATCH
BlackRock Downgrades Global Stocks, Citing Valuations

BlackRock, the world’s largest asset manager has downgraded U.S. and European stocks to neutral, citing elevated U.S. valuations and the higher probability of a midyear interest-rate increase by the Federal Reserve. (…)

BlackRock would be more bullish if it saw evidence of reflation and an emphasis on expansionary fiscal policy and structural reform over monetary policy globally, Turnill says.