New feature: EDGE AND ODDS’ DaiLY CHAT.

Most days, I will provide a link to an AI generated chat on the day’s post courtesy of Google’s NotebookLM. Not totally satisfying but worth offering to readers on the go. No support charts however and some AI generated conclusions not really mine….

And there is much more on the blog itself.

And if you sense hallucinations, I will totally fault AI .

October 4, 2024

October 7, 2024

September Employment: Some Sizzle in a Cooling Trend

Nonfarm payroll growth in September blew past expectations, expanding by 254K compared to a consensus forecast of 150K. Perhaps even more encouragingly, job growth in August and July was revised higher, reversing a string of reports when the revisions to job growth in prior months were negative.

Coming into today, the three-month moving average on monthly nonfarm payroll growth was 116K. Today’s print, when paired with the upward revisions, pushes the three-month moving average up to a much more robust 186K.

The sectors that have led the charge on employment growth in recent months once again posted strong gains. Leisure & hospitality (+78K), healthcare (+45K), government (+31K) and social assistance (+27K) accounted for 71% of the job growth in September despite only accounting for roughly 40% of total employment.

Overall hiring was more widespread in September, with the diffusion index of industries adding jobs rising to 57.6. However, the amount of jobs added by various other industries was still somewhat underwhelming. For example, professional & business services were up by 17K, finance up 5K and information up 4K. Manufacturers continued to shed jobs last month (-7K), while hiring at temporary staffing agencies fell for the 28th time in 30 months.

The household survey offered a further hint of the jobs market stabilizing in September. The unemployment rate edged down to 4.1%, its second consecutive monthly drop. Although still up from 3.7% at the start of the year, the jobless rate has been in the 4.1%-4.3% range since June in a sign that the negative effects associated with job loss (e.g., weaker income, spending) are not building on themselves and that employers are still able to absorb entrants to the labor force.

To that end, September’s dip in the unemployment rate was driven by a sizable increase in the household measure of employment (+430K) and decline in unemployed workers (-281K). The labor force participation rate remained unchanged at 62.7% (…).

Average hourly earnings rose more than expected, posting an increase of 0.4%. After an upward revision to August, average hourly earnings are up 4.0% over the past year. Although still noticeably above the pace that prevailed over the past cycle, we do not see the firming in September as a risk to derailing the current downward trend in inflation.

The underlying trend in the labor market still seems to be toward gradual cooling, and a pickup in productivity growth further tempers the inflationary pressures emanating from the labor market. The Fed will be looking more closely at its preferred gauge of compensation pressures, the Employment Cost Index, which is due on October 31.

The September jobs report offers an encouraging sign that labor market conditions are stabilizing, but we are not quite ready to declare victory over the shaky labor market data that pushed the FOMC to cut the fed funds rate by 50 bps two weeks ago.

Demand for new workers has turned to merely lukewarm, as indicated by the downward trend in job openings, contractionary PMI employment readings, drop in small business hiring plans and faltering consumer perceptions of job availability. Fortunately, layoffs remain low, but an upturn could lead to a further downshift in net payroll growth with firms reluctant to take on new workers.

For now, the gradual, rather than sudden, cooling in the jobs market appears supportive of the FOMC easing by 25 bps instead of a second-straight 50 bps rate cut at its next meeting on November 7. However, prior to the Committee’s next gathering, there will be one more employment report released on November 1, in addition to a key read on labor costs (the Q3 Employment Cost Index on Oct. 31) and another month’s worth of inflation data  that could alter our expectations for the FOMC’s next move.

There are more important details to the employment story:

• The trailing 3-month job gain is 186k vs the 6-month average of 167k and the 12-month average of 203k. The average monthly gain was 167k in 2019 and 190k each in 2018 and 2017. My black arrow shows a clearly slowing trend. My dashed arrow suggests a possible reacceleration since last April.

Monthly change in non-farm payrolls (000s)

Source: Macrobond, ING

• Since these numbers will be revised three more times, one would be justified to think the reality is much more modest growth. But the last 2 months were actually revised up, after 5 consecutive markdowns!
• Private employment has clearly slowed in Q3 but not as much as public employment. The diminishing fiscal impulse is now showing in the jobs numbers.

• That said, September private payrolls gains (+223k) followed 3 months of very weak growth (June – August averaged +103k). Was the aberration those unusually weak 3 months or September? Strong corporate profits support continued private jobs growth.

• The drop in the average workweek to 34.2 matches the lowest other than well into a recession, mostly due to service-providers. But both series being at normal times absolute lows, the optimist would say we’ve seen the lows.

• Indeed, “the seasonally adjusted S&P Global US Services PMI Business Activity Index posted 55.2 in September, signaling a marked monthly increase in service sector output at the end of the third quarter, and one that was among the strongest in the past two-and-a-half years. New order growth was recorded for the fifth month running, with the latest solid expansion only slightly softer than the 14-month high seen in August.” Private services employment rose 202k in September after +109k in August and +78 in July. Private service-providing jobs account for 72% of all jobs in the USA.
• The unemployment rate actually declined to 4.05%. What’s the Sahm rule saying now? The Sahm Rule holds that a slowdown will result if the unemployment rate rises by 0.5 percentage points above its low for the previous 12 months. The big August selloff was driven in part by the triggering of the Sahm Rule. Two months later, we’re back to the 0.5% threshold; it’s still not at all clear that the economy is tipping into recession.” (John Authers)
• WARN data point to declining unemployment claims:

• Average hourly earnings rose 0.37% MoM after +0.46% in August (revised up) and +0.23% in July. On a quarterly basis, +1.0% QoQ in Q3 after +0.83% in Q2 and +1.06% in Q1. That’s a stable +4.0% YoY. Pre-Covid: +3.2%. The composition adjusted Atlanta Fed’s Wage Growth Tracker is still clocking at +4.6%.
• The participation rate at 62.7% was unchanged for the 3rd straight month after having risen from 62.5% in December 2023. The labor supply is not rising anymore.

Goldman Sachs now estimates the underlying pace of job growth now stands at 196k after adjusting for the undercounting of immigration in the official statistics and a small overstatement from the birth-death model. That compares with +167k on average in 2019 and 190k in 2018.

• Ed Yardeni Sees Fed Pausing Rate Cuts for 2024 After Jobs Report Market veteran says September’s rate move was ‘not necessary’
• ING thinks that “the Fed should be hiking rates with these sorts of figures, not cutting rates.” Recall that Fed officials told us they were committed to keeping the unemployment rate from rising. It fell to 4.05% in September from 4.3% in July. Goldman Sachs reckons that “the earlier increase was largely caused by the temporary challenge of absorbing a surge in immigrant labor supply, which is now slowing.”
  

This ING chart made the rounds last week but people only looked at the right side of the chart, oblivious to the cycles in the middle when the series decoupled:

Unemployment rate vs Conference Board measure of jobs plentiful less jobs hard to get

Source: Macrobond, ING

The reality is that the sharp deceleration in the labor market in 2023 and H1’24 has stabilized since June. Most economists were surprised by the uptick in the July JOLTS data but the more current Indeed Job Postings show that labor demand has steadied 12% above pre-pandemic levels through the end of September.

Also steady is the growth in aggregate weekly payrolls (employment x hours x wages), still above 5% YoY. suggesting similar growth in consumer spending amid slowing inflation now close to 2%.

The consumer is in great shape entering the final and most important stretch of the year. Strong holiday sales would clear any excess inventories that may still exist, setting the stage for better manufacturing demand. Manufacturing jobs declined 44k since June (-11k/month) while service-providing jobs rose 626k (+156k/month).

EARNINGS WATCH

Early reporters from LSEG IBES:

21 companies in the S&P 500 Index have reported earnings for Q3 2024. Of these companies, 76.2% reported earnings above analyst expectations and 23.8% reported earnings below analyst expectations. In a typical quarter (since 1994), 67% of companies beat estimates and 20% miss estimates. Over the past four quarters, 79% of companies beat the estimates and 16% missed estimates.

In aggregate, companies are reporting earnings that are 3.5% above estimates, which compares to a long-term (since 1994) average surprise factor of 4.2% and the average surprise factor over the prior four quarters of 6.5%.

Of these companies, 71.4% reported revenue above analyst expectations and 28.6% reported revenue below analyst expectations. In a typical quarter (since 2002), 62% of companies beat estimates and 38% miss estimates. Over the past four quarters, 62% of companies beat the estimates and 39% missed estimates.

In aggregate, companies are reporting revenues that are 0.1% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.3% and the average surprise factor over the prior four quarters of 1.1%. The estimated earnings growth rate for the S&P 500 for 24Q3 is 5.0%. If the energy sector is excluded, the growth rate improves to 7.1%.

The estimated revenue growth rate for the S&P 500 for 24Q3 is 4.0%. If the energy sector is excluded, the growth rate improves to 4.8%.

The estimated earnings growth rate for the S&P 500 for 24Q4 is 12.5%. If the energy sector is excluded, the growth rate improves to 14.8%.

Note that the actual Q3 earnings growth for these 21 companies is +23.8% on revenues up 2.7%! Twelve of the 21 are consumer centric, 5 tech.

Only 3 sectors are expected to report above average earnings growth in Q3 but there is a meaningful broadening starting in Q4.

Trailing EPS are now $234.91. Full year 2024e: $241.28. Forward 12m: $266.66e. Full year 2025e: $276.45 (Goldman Sachs is at $268).

Goldman Sachs’ “equal-weight S&P 500 P/E” model (real yields, the distance of forward inflation from 2%, the tightness of the labor market, demographics, and the change in EPS growth) suggests the equal-weight S&P 500 should trade at 15x, below the current level of 17x.

Our aggregate vs. equal-weight P/E model is a function of the difference in consensus long-term EPS growth and return on equity between the aggregate index and the median stock, as well as CEO confidence. This model suggests the premium should equal 45%, above the current level of 25%. Taken together, the current aggregate P/E of 22x is in line with “fair value.

The Rule of 20 P/E, which says fair P/E is 20 minus inflation (16.8, the current equal-weight P/E) is at 27.7.

Nothing is really cheap but:

• no recession in sight
• rising profits
• stable/declining inflation

Goldman says the current period resembles the 1998 cycle of positive economic growth and a Fed cutting rates. “In that episode, the P/E overshot our modeled fair value by 40%.” At 27.7, the R20 P/E is 38.5% above fair value.

In April 1999, the R20 P/E was 32.0, 60% above fair value. It took 4 years, a recession and a 32% decline in the Rule of 20 Fair Value (yellow line above) before the market retreated to the “20” fair P/E.

FYI via Callum Thomas:

• October Surprise? Seasonality is generally bad during October in election years. We are heading into the peak period of uncertainty, and no doubt many twists and turns into the final stretch of the election campaign (not to mention the various macro/geopolitical risks lurking in the background).

Source:  @callieabost

Corporate Insiders Are Sitting Out the 2024 Stock-Market Rally Warren Buffett, Jamie Dimon and Jeff Bezos are among the business leaders exhibiting caution

(…) Of all U.S. companies with a transaction by an officer or director in July, only 15.7% reported net buying of company shares, according to InsiderSentiment.com. That was the lowest level in the past 10 years. The figure ticked up to 25.7% in August before falling to 21.9% in September, well below the 10-year average of 26.3%. (…)

This year, the largest insider trades have been sales by leaders of big tech companies.

Bezos, the founder and executive chair of Amazon, has sold stock valued at about $10.3 billion, while Michael Dell, chairman and chief executive officer of Dell Technologies, has sold $5.6 billion, and Zuckerberg, chairman and CEO of Meta, has sold $2.1 billion, according to Washington Service data. Shares of all three companies are up by double-digit percentages this year.

Palantir Technologies Chairman Peter Thiel and Nvidia CEO Jensen Huang are also among the top sellers. Both stocks have more than doubled in 2024. (…)

A review of insider purchases, leaving aside sales, also appears to show little enthusiasm lately. Officers and directors of U.S. companies bought $2.3 billion of their companies’ stock this year through September, the lowest amount over such a period since 2014, according to data from the Washington Service. Last year, they bought $3 billion in the first nine months.

• The INK Insider Sentiment Indicator:

As we head into October, the INK US Indicator remains frozen around 30% at which point there are only three stocks with key insider buying for every 10 with key selling over the past 60 days. Insiders continue to signal that stocks are overvalued in relation to the risks. On the positive side, the fact that the indicator has not dropped further in reaction to recent broad market gains suggests there remains a significant number of stocks in the market that continue to offer potential opportunity.

• Gurufocus’ longer term chart shows that insiders are better buyers than sellers:

VALUE INVESTORS?

Fifty-two years of experience and still amazed by financial creativity. Ben Graham and Cohen & Zinbarg taught me how to look for value. Net cash, net working capital, book value, particularly tangible book value. Pretty simple.

What did they know? We’re lucky to have Bloomberg in our time, aren’t we?

In this week’s Drill Down on Bloomberg Television’s ETF IQ, Andrea Eisfeldt of the Anderson School of Management at UCLA stopped by to talk about the Simplify NEXT Intangible Value Index ETF (NXTV). Intangible assets, as Eric Balchunas described, are all the things you can’t measure on a balance sheet — brand names, ideas, patents, goodwill… you get the idea.

NXTV is a value-oriented tilt on that idea, and as such, is light on tech stocks but heavy on telecom. As Eisfeldt said: “Those companies that are intangible-heavy, they have a lot of knowledge-capital, brand-capital, organization-capital, data-, people-, customer-capital, they can be value companies.”

We can now invest in unmeasurable “value”!

Well, professor Eisfeld says she actually can measure intangibles, looking for specific items in P&Ls and balance sheets such as expenses for “R&D, advertising, marketing, team-work building exercises, compensation for top employees, etc.” or assessing the value of “patents, data, code, trade secrets, customer capital, trademarks, logos, social media accounts, corporate identity, best practices, corporate culture, etc.”.

I have analyzed thousands of companies in my life and I do not recall having seen most of these items in financial statements, let alone the “etc.”.

But even if one can track and actually measure these items, how do we measure their efficacy, which is what we should ultimately be aiming at?

The NXTV ETF is sponsored by a company named Simplify. Here’s a hint for them: return on capital.

That might simplify the investment exercise and, perhaps, help them reduce the number of stocks in their Intangible Value ETF from its current 186 names.

Two of those 186 names (average weight 0.5%) each carry a 4.9% weight in the fund. AT&T and Verizon achieved ROC of 5.1% and 6.8% respectively during the 12 months ended last June. Their only value for investors might be in their dividend yield, 5.1% and 6.1% respectively.

But even their dividends may not prove tangible for long: T’s payout ratio is 64% while VZ’s is 99%.

U.S. Services PMIs: Service sector reports strong growth and steeper price pressures in September

The seasonally adjusted S&P Global US Services PMI^® Business Activity Index posted 55.2 in September, down from 55.7 in August but still signaling a marked monthly increase in service sector output at the end of the third quarter, and one that was among the strongest in the past two-and-a-half years.

The latest rise was often linked to success in securing new work, while there were a number of reports that the recent reduction in interest rates had boosted demand in the service sector.

A boost from lower interest rates was also mentioned by those companies that saw new orders increase in September as clients became more willing to commit to new projects.

New order growth was recorded for the fifth month running, with the latest solid expansion only slightly softer than the 14-month high seen in August. Total new business was supported by a modest increase in new business from abroad.

Despite marked expansions of both activity and new business, confidence in the year-ahead outlook dropped sharply during September and was the lowest since October 2022. While lower interest rates and an expected improvement in demand following the Presidential Election supported optimism, sentiment waned amid concerns about a potential slowdown in the economy.

Meanwhile, employment dropped for the second month running, albeit only marginally. Some companies reported lowering staffing levels in a bid to save costs but others reported staff shortages.

Input prices increased rapidly in September, with the rate of inflation the joint-fastest in the past year. Higher input costs were often linked to salary pressures.

Alongside higher staff pay, rising prices paid for manufactured goods led some companies to increase their selling prices markedly during the month. The rate of inflation of prices charged for services quickened to a six-month high.

Rates of increase in both input costs and selling prices were well above the respective pre-pandemic averages.

The aforementioned reduction in staffing levels at a time of solid growth of new orders meant that outstanding business was accumulated during September. Backlogs of work rose for the third time in the past four months, and at the fastest pace since January.

The S&P Global US Composite PMI Output Index posted 54.0 in September, down from 54.6 in August but still signaling a solid monthly improvement in business activity at the end of the third quarter.

Meanwhile, inflationary pressures strengthened, with the increases in input costs and output prices hitting 12- and six month highs respectively.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence

“US service sector businesses reported a strong end to the third quarter, with output continuing to grow at one of the fastest rates seen over the past two-and-a-half years. After GDP rose at a 3.0% rate in the second quarter, a similar strong performance looks likely in the three months to September.

“Encouragingly, inflows of new business in the service sector grew at a rate only marginally shy of August’s 27-month high. Lower interest rates have already been reported by survey contributors as having buoyed demand, notably for financial services which, alongside healthcare, remains an especially strong performing sector. (…)

The ISM:

• In September, the Services PMI registered 54.9 percent, 3.4 percentage points higher than August’s figure of 51.5 percent.
• The Business Activity Index registered 59.9 percent in September, 6.6 percentage points higher than the 53.3 percent recorded in August, indicating a third month of expansion after a contraction in June.
• The New Orders Index expanded to 59.4 percent in September, 6.4 percentage points higher than August’s figure of 53 percent.
• The Employment Index contracted for the first time in three months; the reading of 48.1 percent is a 2.1-percentage point decrease compared to the 50.2 percent recorded in August.
• The Prices Index registered 59.4 percent in September, a 2.1-percentage point increase from August’s reading of 57.3 percent.
• The Backlog of Orders Index remained in contraction territory for its second consecutive month, registering 48.3 percent in September, a 4.6-percentage point increase from the August reading of 43.7 percent.
• Twelve industries reported growth in September, up two from the 10 industries reporting growth in August.

Few Signs of Slowing Activity in the Services Sector

Wells Fargo’s economists “few signs of slowing” are limited to “increased mention of uncertainty over the upcoming U.S. presidential election in November”. Whatever uncertainty there actually is has zero impact on the willingness to place additional orders:

The strength of the sizable U.S. services sector is keeping the economy humming amid the manufacturing near recession readings:

But S&P Global data says that further manufacturing weakness would normally start to impact services with a 6-month lag.

Lower interest rates and the passage of the U.S. elections should help revive manufacturing demand.

Similarly, strong corporate profits should keep employment reasonably solid as the Ed Yardeni chart suggests:

Ed also illustrates the turnaround in the Citigroup Economic Surprise Index as forecasted here a few weeks ago. Ed thinks the 10Y yield “could rise back to 4.00%–particularly now that oil prices are rebounding and import prices are likely to rise the longer that the dockworkers’ strike lasts.”

Amid all these somewhat conflicting trends, the PMI data wants to drag core inflation right on the Fed’s target;

U.S. Port Workers Agree to End Their Strike Companies sweeten contract offer to a 62% wage increase over 6 years to reopen ports from Maine to Texas

Eurozone industry outlook: the perfect storm continues

There is no sugarcoating it. European industry is going through a deep correction, and it does not look like the end is here yet. Since mid-2022, industrial production has been in steady decline. This represents the strongest downturn in production in more than 30 years without the eurozone economy entering a recession. A strong service sector is keeping the economy afloat, while the manufacturing sector is shrinking.

There is little light at the end of the tunnel right now. Looking at recent data, we hardly find any evidence that a rebound is imminent. Inventories built up during times of high demand and supply-chain disruptions have barely come down. And new orders are not yet picking up, with demand both from within the eurozone and without remaining weak.

Source: Eurostat, ING Research

The perfect storm for manufacturing has multiple drivers. Over the past few years, we have seen that supply-side problems have faded and that (the lack of) demand has quickly become the largest worry for European manufacturers.

Note: the supply category consists of industrial businesses indicating labour and equipment are a factor limiting production.
Source: European Commission DG ECFIN, ING Research calculations

Going through the drivers of weakness, we find that consumer demand for goods remains sluggish due to the real income shock that Europeans experienced when inflation surged. And the economy seems to be stuck in a weak growth environment, which limits the outlook for consumer demand despite a decent recovery in real wages.

Furthermore, weak fixed investment plans are impacting manufacturing significantly. In the eurozone, investment is well below its pre-pandemic trend. This is due to weak domestic demand as well as high interest rates after years of negative rates. And policy uncertainty plays a major role, too.

More structurally perhaps, the energy shock is still keeping energy-intensive production muted, while weak demand outside of the eurozone – think of China for example – is impacting new orders in the manufacturing sector. Chinese export growth to the eurozone, meanwhile, is a sign of additional competition for local producers.

Finally, geopolitical tensions in the Middle East have contributed to longer-than-expected disruption in shipping. As a result, input costs for producers have started to increase again. This makes production more challenging in a weak demand environment in the eurozone.

The eurozone is quite alone in this. Other major economies are not experiencing a similar downturn. Looking at China and the US for example, we see that the US has experienced flatlining production over the past 18 months, while China saw production grow by about 6%.

The eurozone saw production decline by a similar amount. With weak domestic demand in China, it is no surprise that exports surged by 15% over the same period. For the eurozone, exports contracted by close to 5%. So, China has been able to mask weak domestic demand by producing for the rest of the world, which has gained a lot of attention recently as Western economies struggle with China’s excess capacity.

Germany is most often described as the sick man of Europe in terms of manufacturing. But the reality is that while Germany may have experienced a larger contraction in industrial production than most other markets, there are very few shining lights within the eurozone. None of the major eurozone economies now produce more than at the start of 2023. France has performed best but is down 0.4%, while Germany has experienced a downturn of 8.4% based on comparable data from Eurostat.

The inventory cycle is key to the recovery in production. National accounts data has shown a sharp inventory reduction in the first and second quarters of this year. But this comes on the back of far greater increases in the years before. The large buildups raise doubts about how much stocks will have to fall before production picks back up. It could very well be that some sectors will simply maintain higher inventory levels than in the past as a result of supply chain disruptions during the pandemic and the first phase of the war in Ukraine. Currently, a large number of eurozone businesses are still indicating that the stock of finished products is continuing to rise though, leaving us sceptical about an imminent turnaround. (…)

Source: Eurostat

Before the summer, the destocking seemed to coincide with an increase in new orders but since then, overall order books have been deteriorating and that has also been the case for some of the sectors that already dealt with destocking. The transport equipment sector stands out as a prime example of an industry that has not experienced rapid destocking and is seeing a rise in new orders. This is a sector that includes defence equipment. (…)

As a result, new production could return to the eurozone even if inventories remain higher than in previous times. This is because the production process is changing from a “just in time” to a “just in case” model where businesses hold onto larger amounts of inventory than in the 2010s when the world was much more predictable. This could result in a quicker turnaround for eurozone manufacturing than currently expected. (…)

The changing growth model in China is adding to concerns about a structural decline of European industry in certain markets. Exports from China have soared as domestic demand disappoints and production capacity is large. This puts pressure on certain industrial sectors in Europe, the car sector most notably. It is too early to draw conclusions about how much of an existential threat this poses to European industry, because of possible European policy responses or a recovery of Chinese domestic demand for example. But for the foreseeable future, this is piling pressure on eurozone industry. (…)

More competition in the global LNG market or a cold winter could bring back higher prices than before. This limits the recovery that can be expected from energy-intensive sectors. (…)

All in all, it looks like green shoots in the manufacturing outlook are emerging. But eurozone industry continues to be plagued by enough longer-lasting concerns that it would be too optimistic to expect a vibrant recovery in 2025. There is light at the end of the tunnel, but it is very faint right now.

EU to Impose Tariffs Up to 45% on Electric Vehicles From China

The European Union voted on Friday to impose tariffs as high as 45% on electric vehicles from China in a move set to increase trade tensions with Beijing, according to people familiar with the process.

The European Commission, the bloc’s executive arm, can now proceed with implementing the duties, which would last for five years, said the people, who spoke on the condition of anonymity. Ten member states voted in favor of the measure, while Germany and four others voted against and 12 abstained. (…)

The EU and China will continue negotiations to find an alternative to the tariffs. The two sides are exploring whether an agreement can be reached on a mechanism to control prices and volumes of exports in place of the duties. (…)

The new tariff rates will be as high as 35% for EV manufacturers exporting from China. The new duties would be on top of the existing 10% rate.

Chinese EV makers will have to decide whether to absorb the tariffs or raise prices, at a time when slowing demand at home is squeezing their profit margins. The prospect of duties has prompted some Chinese automakers to consider investing in factories in Europe, which might help them dodge tariffs. (…)

The share of electric cars sold in the EU that were made in China climbed from around 3% to more than 20% in the past three years. Chinese brands accounted for around 8% of that market share, as international companies that export from China including Tesla Inc. taking up the rest.

Still, Europe’s tariff hike will have a “minor impact” on Chinese manufacturers because the region accounts for only a fraction of their total sales, according to Daiwa Securities analyst Kevin Lau. Europe contributed between 1% to 3% of overall sales for BYD Co., Zhejiang Geely Holding Group Co. and SAIC Motor Corp. in the first four months of this year, he estimated. (…)

German automakers including Volkswagen AG, Mercedes and BMW would be hit hardest in a trade spat as China accounted for roughly a third of their car sales in 2023.

Elsewhere on Bloomberg:

• Chinese producers have gained an upper hand in EV technology and are overtaking European brands in China, the world’s biggest EV market.
• China’s pricing advantage is striking: The cost of batteries there has dropped to $126 per kilowatt hour on a volume-weighted average basis, while packs are priced 11% higher in the US and 20% higher in Europe, according to BloombergNEF. In the meantime, Chinese manufacturers are already unveiling a new generation of batteries that rely on sodium, which is more abundant than the lithium now used in EV batteries, and less prone to catching fire.

• In Europe, seven new electric models costing less than €25,000 ($27,810) could hit the market this year and next, including a new Renault 5 and Stellantis NV’s Citroën e-C3, according to the Transport & Environment lobby group.
• In that optimistic scenario, EVs could grab as much as 24% of the European market next year, according to T&E, which advocates for clean transport and energy. That would be a big leap from the 12.5% market share for EVs in EU countries over the first seven months of 2024, as measured by the European Automobile Manufacturers’ Association.

What Israel’s potential response could mean for the oil market

ICE Brent is trading more than 8% higher than it was before Iran’s missile attack on Israel. However, the bulk of this move occurred on Thursday after President Biden, when asked if he would support an Israeli strike on Iranian oil infrastructure, responded, “We’re discussing that.”

Depending on the scale of such a response, it could potentially be significant for oil markets. Not only due to the immediate impact of losing Iranian barrels but also due to the fact that this scenario risks spilling over into something more extreme, which could potentially lead to a disruption in Persian Gulf oil and LNG flows through the Strait of Hormuz.

While an attack on downstream oil assets would be significant for the Iranian domestic market, fundamentally, it would be less so for the world market with Iran still able to export. In fact, depending on the nature of the strike, such a move could potentially lead to even stronger crude oil exports. If domestic refining capacity is affected, it would leave more crude oil available to export. Iran might struggle to find willing buyers because of US sanctions. However, this would still likely be bullish for oil prices as it is a step closer to impacting global oil supplies and escalating tensions.

The bigger concern for the global oil market would be strikes that target midstream and upstream assets, as this would impact Iran’s ability to export crude. Under such a scenario, we could see as much as 1.7m b/d of oil supply lost.

The loss of 1.7m b/d of crude oil supply would be enough to push the global market back into a sizeable deficit from 4Q24 through 2025, even when considering that OPEC+ will gradually unwind 2.2m b/d of additional voluntary cuts as currently planned. Such a scenario could see Brent averaging a little over $90/bbl in 2025. 

(…) the key concern, while still extreme, would be that these disruptions spill over to the Strait of Hormuz, affecting Persian Gulf oil flows. Almost a third of global seaborne oil trade moves through the Strait of Hormuz and while some pipeline infrastructure means that a portion of oil flows could be diverted to avoid the Strait, it still leaves in the region of 14m b/d of oil supply at risk. A significant disruption to these flows would be enough to push oil prices to new record highs, surpassing the record high of close to $150/bbl in 2008. (…)

Disruptions would not be isolated to the oil market. It could also potentially lead to disruptions in LNG flows from Qatar, which makes up more than 20% of global LNG trade. This would be a shock to global gas markets, particularly as we move into the northern hemisphere winter, where we see stronger gas demand for heating purposes.

While we are seeing a ramp-up in new LNG export capacity, this still falls well short of Qatari export volumes. Qatar exports a little over 100bcm of LNG annually, while in 2025, roughly 30bcm of new LNG export capacity is expected to start. In addition, a lot of this capacity is slated to start up later in 2025, too late to help with any shortfalls over the 2024/25 winter. (…)

The hope would be that emergency releases would give OPEC+ members time to ramp up supply. While we believe the group would go ahead with unwinding its 2.2m b/d of additional voluntary supply cuts (possibly bringing this supply back quicker than currently planned), there is no guarantee that the group will be quick to respond with increasing supplies beyond this. Saudi Arabia has a fiscal breakeven oil price of above $90/bbl and so would be happy to see prices trading up to these levels. We would likely only see the group start to bring further supply back online if prices move above $100/bbl.

The other issue is that the bulk of spare OPEC production capacity sits within the Persian Gulf. Therefore, in an event where there is a blockade of the Strait of Hormuz or at least a significant disruption to flows via the strait, this spare capacity may be of little help.

AI CORNER

Texas Regulator Wants Data Centers to Build Power Plants New AI centers need their own generation, official says

(…) Gleeson said his agency is telling data center developers they will need to supply some of their own power if they want to connect to the Texas grid within 12 to 15 months. Many of the corporations involved, he said, have among the biggest balance sheets in the world and can afford to fund construction of new power plants.

“We have to look at really the co-location issue as being a new facility coming with its own new generation,” Gleeson said.

Developers, he said, could even opt to “over build” — creating power plants that generate more electricity than their data centers need and selling the rest to the grid. “We’re happy to take it,” Gleeson said.

More on this in Power Play

• AI adoption tracker (Goldman Sachs)

AI adoption by firms remains modest, with only 5.9% of US firms currently using AI to produce goods or services (vs. 4.6% in Q2). Within industries, education and information firms reported the largest increases in adoption rates while transportation, recreation, and manufacturing firms reported a decline. Broadcasting and financial-related firms report the highest expected increase in AI adoption over the next six months. Industry surveys released over the past quarter suggest that a large share of businesses are planning to increase investment in AI and related infrastructure, but many still have concerns over technological infrastructure and ethics and governance.