CHINA SURVEYS
After today’s poor Caixin PMI, here’s CEBM’s:
CEBM’s July Grassroots Survey results display that industrial sector sales fell below expectations in June while sales sentiment for July showed further M/M deterioration. Consumer sector survey feedback shows a slight M/M improvement in sales relative to expectations and stronger sales expectations for the month ahead.
Construction materials demand (i.e., steel and cement) weakened in June while demand sentiment for July is downbeat. Steel survey respondents reported that order volumes fell month over month, but remained in-line with sales expectations. Looking to July, expected summer heat waves that will likely force a drop in downstream project new starts; maintenance inspections; and general economic sluggishness is expected to lead to a further decline in new order volumes. For cement, both pricing and sales saw a M/M fall in June led by rainy weather conditions that depressed downstream demand. Although sales were down M/M, on an annual basis demand in June was on par with last year. Despite efforts by local governments to restrict high-polluting cement producers, survey respondents reported that excess capacity elimination continues to move at a snail’s pace.
In real estate, survey respondents reported lower expectations for new starts and fixed asset investment growth heading into 2H16. Generally speaking, the June market environment was characterized by falling sales activity but continued price appreciation. First tier cities saw a noticeable drop in market activity; red-hot 2nd tier market activity in April/May cooled slightly in June; and lower tier cities continued to face significant inventory overhang pressures. A seasonal drop in sales activity is anticipated for July, however loose monetary policy conditions are expected to act as a support to pricing.
And from the real world: rail freight volume fell by over 7% year on year during the first five months of 2016.
Meanwhile, as the economy slows and employment declines:
U.K. Signals Rate Cut; Pound Drops Bank of England Gov. Mark Carney said cuts in interest rates will be needed even as he declared his confidence in the U.K.’s ability to successfully adapt to a future outside the EU. The battered pound fell further after the remarks.
Signs of early Brexit worries affecting the economy were provided by official data showing business investment falling in the first quarter of the year. Gross fixed capital investment fell 0.1% in the first three months of the year, according to the Office for National Statistics, revised down from an earlier estimate that showed growth of 0.5%.
The narrower measure of business investment fell 0.6%, worse than the earlier estimate of a 0.5% decline, leaving it 0.8% lower than a year ago. (…)
UK business investment
However, the pace of economic growth looks set to have slowed further in the second quarter, down to 0.2% according to PMI data available up to May, and the downturn in investment is an overriding concern. Rising business investment had been hoped to play a major role in the building a sustainable economic upturn in the UK, with forecasters such as the Office for Budget Responsibility pencilling-in strong growth of capital spending as a key driver of GDP. (…)
Back from Brexit: how to not leave the EU
Might there still be a way to avoid it? Three things could yet conspire to prevent Brexit: time, events and Parliament. The British government must give formal notice, under Article 50 of the European Union’s treaty. It is in no hurry. Some EU leaders aren’t eager to receive it; letting Britain’s mess play out provides a cautionary tale ahead of elections in countries with growing anti-EU sentiment (namely France, Germany and the Netherlands). Legal challenges could block the exit: Scotland is agitating to stay in the EU, and Brexit would violate the EU-backed Good Friday Agreement, part of Northern Ireland’s peace process. Meanwhile, both main parties in Britain are in turmoil: while the dust settles and Brexit’s costs become clearer, new ideas (say, offering EU-wide protection against immigration surges) could gain ground. Parliament could then back a new deal on continued EU membership. Is “Bremain” far-fetched? Yes, but not impossible. (The Economist)
Eurozone Jobless Rate Falls to Near Five-Year Low
(…) The European Union’s statistics agency on Friday said the number of people without jobs in the 19 members of the eurozone fell by 112,000 from April, pushing the jobless rate down to 10.1% from 10.2% to reach its lowest level since July 2011.
Unemployment remains very high compared with other developed economies, and is more than twice the U.S. rate of 4.7%. But with 1.4 million fewer people without jobs than in May 2015, households have more money to spend, and that has helped support economic growth even as eurozone exports have faltered over recent quarters. (…)
German Retail Sales Rebound
“Rebound!” read the finer print.
German retail sales ex-autos rose by 0.8% in May after a skinny gain of 0.1% in April. The three-month growth rate is zero. Over six-months, sales are up at a 0.5% pace. Over 12-months, sales are up at a 0.7% pace. Sales are decelerating on this timeline albeit at a very slow pace of erosion. And real retail sales (ex-autos) also are on a decelerating path with the recent three-month growth rate showing a decline.
Car registrations are falling in each of the last three-months and are decelerating sharply on that 12-month to six-month to three-month timeline.
In the quarter-to-date, German retail sales ex-autos, the same series in real terms and car registration all are contracting. Registrations are contracting at a very rapid pace.
Japanese companies rein in investment plans Big manufacturers show some resilience in BoJ’s latest tankan
Japanese companies were reluctant to invest even before the yen surged in the wake of Brexit, according to the Bank of Japan’s closely watched ‘tankan’ survey of business sentiment.
Companies predicted investment growth of just 0.4 per cent this year and relied on a forecast of ¥111.41 to the dollar. That is much higher than the actual rate of ¥102.76, pointing to trouble ahead.
Confidence at large manufacturers, however, was unexpectedly resilient in the second quarter, with the index — which subtracts the percentage of respondents reporting bad business conditions from those reporting good — unchanged on March at +6. Analysts had forecast a fall to +4. (…)
Although confidence held up at big manufacturers, smaller companies were less cheerful, while the figure for big service companies was down from +22 to +19. For all companies, the index fell from +7 to +4. (…)
Push for higher wages squeezes US corporate profits
(…) Unit labour costs, which measure how much companies need to pay their staff to deliver a unit of output, rose 3 per cent in the 12 months ended in the first quarter of 2016. Business output prices rose only 1.2 per cent in the same period, suggesting companies struggled to hold on to their margins. (…)
Each 100 basis point acceleration in US labour costs above 3 per cent growth drags on earnings across the S&P 500 by 0.7 per cent, according to Goldman Sachs. Companies in the consumer discretionary sector may prove most vulnerable to margin compression because they are labour-intensive and may not be able to sharply lift prices.
Revenue generated by each employee in the consumer discretionary sector is $245,000 as opposed to the $432,000 earned across companies in the S&P 500 index, according to analysis from JPMorgan. Restaurant chains, retailers and leisure businesses are the most sensitive to rising labour costs across the sector. Manufacturing, airlines and healthcare services companies are also vulnerable to higher labour costs. (…)
