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

EUROZONE COMPOSITE PMI HANGS ON AT 53.0

The rate of eurozone economic expansion remained only modest in April. Output rose at a pace slightly below the average seen in the opening quarter of the year, with only moderate growth seen in both the manufacturing and service sectors.

The final Markit Eurozone PMI® Composite Output Index posted 53.0 in April. This reading was a pip below March’s 53.1 and unchanged from the earlier flash estimate. The index has now signalled expansion in each of the past 34 months.

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Growth of incoming new business accelerated to a three-month high in April, but remained below the average seen over last year. Higher order inflows led to a slight accumulation in backlogs of work and encouraged firms to take on more staff.

The ‘big-four’ nations all reported expansions of economic activity in April, with Spain seeing the steepest rate of increase. Output growth in Spain accelerated to a three-month high, despite a slower rate of increase for new business. Italy also saw a modest improvement in its rate of output expansion.

Germany posted a further solid increase in economic activity, although the pace of expansion disappointed by easing to an 11-month low. The news on the demand front was slightly more positive, with inflows of new work rising at a mildly stronger pace.

The French economy expanded for the first time in three months in April, although the rate of growth was barely above the stagnation mark. A modest Markit expansion of service sector activity offset a solid contraction in manufacturing production.

Eurozone employment increased for the eighteenth month in a row during April, with jobs growth improving at manufacturers and service providers alike. Faster rates of increase were signalled in both Germany and Italy. Spain saw a further expansion of workforce levels, albeit weaker than in March. Marginal job creation was registered in France following the prior month’s decline.

April data signalled a marginal increase in average input prices for the first time in four months. Service sector cost inflation accelerated while manufacturing purchase prices fell to the least marked extent in the year so far.

In contrast, the survey’s output price gauge moved lower in April, to signal a mildly faster rate of deflation. Only Germany reported an increase in output charges. France, Italy and Spain all reported reduced selling prices, mainly in response to highly competitive market conditions.

The eurozone service sector recorded further steady but modest growth of business activity at the start of the second quarter. At 53.1 in April, unchanged from March, the final Eurozone Services Business Activity Index remained above the 50.0 no-change mark for the thirty-third successive month.

The rate of growth signalled was one of the weakest signalled since the start of last year and a tick below its earlier flash estimate. There was brighter news on the outlook for the sector, however. Growth of new orders and employment both accelerated and business confidence edged up to a three-month high.

All four of the nations for which April data are available (Ireland data are published on May 5) reported higher levels of business activity and new orders.

The sharpest rates of output growth were registered by Spain and Germany, albeit slower than in the previous month in both cases. France returned to expansion following back-to-back contractions in February and March, while growth in Italy improved from March’s low.

However, there were signs that most nations were sustaining growth of new business through price discounting. Euro area service charges fell for the seventh straight month, with Germany the only one of the ‘big-four’ nations to report an increase.

Service sector employment increased in April, extending the current sequence of jobs growth to one-and-a-half years. Staffing levels were raised further in Germany, Italy and Spain, although only Italy registered a steeper pace of expansion.

France saw employment increase following a reduction in the prior month. Although the rate of job creation at French service providers was only marginal, it was still the fastest since June 2015.

The rate of input cost inflation at eurozone service providers was the joint-highest in the year-to-date during April. However, it remained subdued in comparison to its long-run survey average. Rates of increase accelerated in Germany and Italy, but slowed in France and Spain.

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NEW$ & VIEW$ (3 MAY 2016)

ISM Manufacturing Index Signals Expansion in April A closely watched gauge of U.S. factory activity slipped in April but continued to signal growth in the manufacturing sector, which has been battered by low oil prices and a strong dollar.

ISM Manufacturing Index Signals Expansion in April(…) Now, the clouds seem to be lifting. Oil prices have moved higher in recent months and the dollar has weakened against other major currencies as Federal Reserve policy makers signaled a willingness to move slowly on raising short-term interest rates, potentially offering some relief for American manufacturers.

“The worst is behind us,” said Bradley Holcomb, who oversees the ISM survey.

More sectors in April reported increased production and new orders compared with March, Mr. Holcomb said, offering “a broader base of growth across more industries.” The ISM’s export index rose to its highest level since November 2014. (…)

The ISM clouds may be lifting as the WSJ likes to see it but the fog underneath remains heavy. The ISM and Markit surveys diverged strongly in recent months (Zerohedge chart at right) with the ISM getting much weaker at the end of 2015 and bouncing back recently on new order numbers in March that were suspiciously strong given the state of world economies. The overall ISM is now in line with Markit which has a clearly less hopeful view of the same manufacturing sector (my emphasis):

April data indicated that U.S. manufacturers started the second quarter of 2016 with a renewed slowdown in production and new business growth. At the same time, employment levels were close to stagnation and input buying dropped at the fastest pace for two-and-a-half years, amid reports of slower than expected demand during the latest survey period. (…)

The latest reading was weaker than the average seen in Q1 2016 (51.7) and signalled the slowest improvement in overall business conditions for just over six-and-a-half years. (…)

Manufacturers recorded another modest increase in overall new work at the start of the second quarter, but the rate of expansion was the weakest since December 2015. Reduced export demand had a negative influence on manufacturing order books in April, with new work from abroad decreasing at the fastest pace for nearly one-and-a-half years.

A lack of pressure on operating capacity persisted across the manufacturing sector during April, as highlighted by a decline in backlogs of work for the third month running. Moreover, the latest fall in unfinished business was the sharpest since September 2009. This contributed to a near-stalling of payroll numbers in April, with the rate of job creation the weakest for just under three years. (…)

EU Sees Weaker Growth as China Slowdown Weighs

According to the forecasts by the European Commission, the EU’s executive arm, the economy of the 19-country eurozone is expected to grow 1.6% this year. This is slightly below the 1.7% expansion the commission had forecast in February, and the 1.7% it expanded in 2015.

In 2017, the eurozone economy will expand by 1.8%, the commission said, slightly lower than earlier predictions which saw it growing 1.9%.

Growth in the 28-country EU is seen at 1.8% this year, down slightly from the commission’s February forecast and lower than the 2% it recorded in 2015. The EU’s economic output will likely expand 1.9% next year, also below the 2.0% forecast earlier this year.

(…) the commission cautioned that both external and internal risk factors could further curb growth in the coming years. On the external side, a slowdown in emerging markets—especially in China-—could trigger significant spillovers in Europe and the world, the commission said, adding that weaker growth in a number of advanced economies, such as the U.S. and Japan, is further clouding the global outlook. (…)

The commission also warned of downside risks to growth stemming from uncertainty linked to heightened geopolitical tensions and uncertainty surrounding the U.K.’s referendum on its EU membership, set for June 23. (…)

The commission now expects the rate of inflation in the eurozone to be just 0.2% this year, down from the 0.5% previously forecast. In 2017, inflation in the currency union is now seen at 1.4%, down from the 1.5% predicted earlier and still below the close-to-2% targeted by the ECB.

In the EU, consumer prices are expected to grow 0.3% this year and 1.5% next year, both lower than in previous forecasts. (…)

Rocketing yen leaves Tokyo with dilemma Japan under intense pressure to hold fire as yen soars

(…) Given that currency depreciation was the only component of Abenomics to have much impact on the economy, the obdurate appreciation of the yen this year must be a serious concern. And given the size of the current account surplus, the Y10tn-worth of intervention permitted under the US Treasury’s third criterion would be more pea shooter than bazooka.

At the weekend Japanese finance minister Taro Aso made it clear he did not share the US Treasury’s view that the yen market was orderly and suggested that the US initiative would not be a constraint on intervention. So there could be friction ahead.

Yet the “war” is arguably pointless, for as economists Barry Eichengreen and Jeffrey Sachs showed in papers in the mid-1980s, uncoordinated monetary expansion via supposedly beggar-thy-neighbour trade policies was benign in the 1930s because it increased the global money supply. The difference today, as Japan has found, is that monetary expansion is becoming difficult to pull off even with negative interest rates.

EARNINGS WATCH
  • 323 companies (75.0% of the S&P 500’s market cap) have reported. Earnings are beating by 4.2% while revenues have missed by -0.2%.
  • Expectations are for a decline in revenue, earnings, and EPS of -1.7%, -7.9%, and -5.5%.
  • EPS is on pace for -4.5%, assuming the current beat rate for the remainder of the season. This would be +0.5% excluding Energy. (RBC)