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

HSBC CHINA COMPOSITE PMI AT 52.4 IN JUNE

HSBC China Composite PMI™ data (which covers both manufacturing and services) signalled a second successive monthly increase of Chinese business activity in June. Moreover, the rate of expansion accelerated to the strongest in 15 months, as signalled by the HSBC Composite Output Index posting at 52.4 in June, up from 50.2 in May.

June data indicated that a solid rise in activity at service providers and renewed output growth at manufacturers supported the faster expansion of output at the composite level. Furthermore, manufacturing output increased at the strongest pace since last November, while services activity growth was the quickest since March 2013. The latter was signalled by the HSBC China Services Business Activity Index posting at 53.1 in June (up from 50.7 in May).

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Reports from panellists suggested that activity rose in line with stronger inflows of new business.

Total new work expanded at an accelerated and robust pace at service providers in June, while manufacturers saw the first increase in new business for five months. Furthermore, the expansion of new orders at service providers was the strongest since January 2013. As a result, new work rose solidly at the composite level.

Service sector firms increased their payroll numbers for the tenth successive month in June, and at the second-fastest rate in 2014 so far. Reports from panellists suggested that firms hired additional staff to help meet rising new workloads. Meanwhile, staff numbers fell again at manufacturing companies, albeit at the slowest rate in three months. Consequently, employment at the composite level was little-changed from the previous month in June.

Backlogs of work at Chinese service providers rose for the first time since January 2012 in June. Outstanding business also increased at manufacturers and for the first time since January. That said, the rates of accumulation were marginal in both cases. Anecdotal evidence mentioned that unfinished work rose due to increased volumes of new business.

Input costs increased for the first time in six months at manufacturers, but at a modest rate. Cost burdens faced by service providers also increased in June, and at a moderate pace that was the fastest in three months. However, the rates of input price inflation remained weaker than the historical averages for both sectors.
Following a slight increase in May, output charges set by manufacturers were broadly unchanged in June.

Meanwhile, service providers cut their selling prices for the third month running, amid reports of competitive market pressures. That said, the rate of discounting was similar to that recorded in the previous two months and only marginal. Service sector firms were generally optimistic towards the 12-month business outlook in June. That said, the degree of positive sentiment remained historically weak, despite improving upon May’s 11-month low.

NEW$ & VIEW$ (2 JULY 2014)

U.S. Auto Sales Keep Climbing Low interest rates and a brighter economy helped drive U.S. auto sales 1% higher in June. The month’s annualized selling rate reaching nearly 17 million vehicles, positioning the industry for strong second-half sales.

Industry-wide auto sales rose 1.2% to 1.4 million in June, pushing the annualized selling rate to 16.98 million, its highest pace since July 2006, according to market research firm, Autodata Corp.

For the first half of the year, auto makers sold a total of 8.2 million vehicles in the U.S., up 4.3% over the same year-ago period.

(CalculatedRisk)

Vehicle production for 3Q is scheduled to increase at a +10.3% Q/Q a.r.

Cyclical peak?

(Zerohedge)

Private Sector Creates 281,000 Jobs U.S. businesses went on a hiring spree in June, according to a survey of hiring released Wednesday. The higher-than-expected increase in private-sector payrolls could raise expectations for the government’s employment report, due Thursday.

Businesses added 281,000 new jobs in June, according to a national employment report compiled by payroll processor Automatic Data Processing Inc. ADP -0.34% and forecasting firm Moody’s Analytics. (…)

Wednesday’s unexpectedly high ADP result may prompt economists to reconsider their June nonfarm payrolls estimates. Forecasters look at ADP as a guide for payrolls, but the private-sector report has a history of large misses when it comes to anticipating the Labor Department data.

According to ADP, firms employing between 1-49 workers added 117,000 new workers last month. Medium-size businesses with payrolls of 50-499 workers increased payrolls by 115,000 employees. Large firms, businesses with 500 or more employees, hired 49,000 more workers.

Service-sector payrolls increased by 230,000 workers last month. The factory sector added 12,000 positions. Construction payrolls increased by 36,000 slots. (Chart from Zerohedge)

Factories Close Quarter on Solid Note

The Institute for Supply Management said Tuesday that its broad Purchasing Managers Index, in which a reading of more than 50 indicates expansion, fell to 55.3 last month from 55.4 in May. The index had accelerated in each of the previous four months. Some 15 of 18 manufacturing industries grew in June.

The PMI averaged 55.2 for the second quarter, up from the first-quarter level of 52.7. The report signals a “solid but unspectacular expansion in manufacturing activity in the coming months,” said Bricklin Dwyer, an economist at BNP Paribas.

The employment index was unchanged from May, suggesting only a small gain in June factory payrolls, similar to the 10,000 jobs added in May.

(Bespoke Investment)

See also the more detailed Markit’s PMI which, incidentally, sees higher employment levels in June..

Pointing up ISI’s truckers survey, which has the highest correlation with GDP, ticked up +0.6 this week to 63.7, highest level since Dec 2005.

Apartment Rents Continue to Rise Apartment landlords continued to push through hefty rent hikes in the second quarter, squeezing U.S. households that already are struggling financially after four years of steady increases.

The average monthly rent for an apartment rose to $1,099 in the second quarter, up 0.8% from the first quarter, according to data to be released Wednesday by real-estate research firm Reis Inc. REIS -0.87% That was the 18th consecutive quarter of rent increases. For the 12-month period ended in June, rents rose 3.4%.

Effective rents—which tend to be lower than asking rents—were up in all 79 U.S. metro areas tracked in the Reis report. West Coast cities that have been the model of recovery continued to top the list of highest rent growth for the quarter and over the past 12 months. (…)

While apartment vacancies, a barometer of demand, fell in more than half of the 79 metro areas included in the Reis report, they were unchanged nationally at 4.1% in the second quarter. That could mean supply is finally starting to catch up with demand, a sign that rent growth could slow at some point. According to the Reis report, the market is expected to deliver 180,000 new multifamily units this year. (…) (Chart below from CalculatedRisk)

Euro-Zone Producer Prices Slip

Prices of goods leaving the euro zone’s factory gates fell for the fifth straight month in May, an indication that the currency area won’t soon escape a period of low inflation that may hinder its recovery.

The European Union’s statistics agency said Wednesday that producer prices fell 0.1% from April, and 1% from May 2013. (…) The decline in producer prices was largely down to energy suppliers reducing their prices by 0.3% from April. But even excluding energy, factory-gate prices were flat on the month.

EARNINGS WATCH

Factset catches up on a metric I have been highlighting for a while:

  • The percentage of companies issuing negative EPS guidance is 76% (84 out of 111). While this percentage is above the 5-year average (66%), it would also mark the lowest percentage of companies issuing negative EPS guidance for a quarter since Q4 2012 (70%).
  • On average, companies have issued EPS guidance that has been 6.9% below the mean EPS estimate. This percentage decline is smaller than the 5-year average of -10.7%.
  • For the current fiscal year, 168 companies have issued negative EPS guidance and 82 companies have issued positive EPS guidance.

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    • At the sector level, the Consumer Discretionary sector has not only witnessed the largest increase in the number of companies issuing negative EPS guidance (+9) relative to its five-year average, but also has seen the largest decrease in the number of companies issuing positive EPS guidance (-7) for the quarter relative to its five-year average.