Note: I will be travelling in Asia until April 24. Limited equipment and different time zones will limit the frequency and depth of my postings.

US FLASH PMI

Maybe it’s because I am travelling, but I have seen no major media post on this flash PMI. Yet, it may be revealing. The latest FOMC raised the estimated growth rate from 1.4% to 2.1% and the inflation rate from 2.4% to 2.6% but kept 3 rate cuts this year.

The headline S&P Global Flash US PMI Composite Output Index posted 52.2 in March, down slightly from the reading of 52.5 in February but still signalling a solid monthly improvement in business activity at US companies. Output has now risen in each of the past 14 months.

The overall slowdown in the pace of output growth reflected a loss of momentum in the service sector, where activity rose at the weakest pace in three months. While there were some reports of demand improving, anecdotal evidence also suggested that price pressures had restricted the ability of customers to commit to new projects. As a result, the rate of new business growth in the service sector also softened.

More positive was a sharp and accelerated expansion of manufacturing output in March, with the rate of growth the fastest since May 2022 amid a further solid rise in new orders.

Overall, new orders increased at a slower pace than in February. New business from abroad was up marginally as a rise in manufacturing contrasted with a drop in services.

Business confidence jumped to a near two-year high at the end of the first quarter amid signs of a pick-up in the broader US economy. Some service providers also linked confidence to planned marketing activity. While both sectors posted improvements in optimism since February, the jump in confidence was more marked in the service sector than in manufacturing.

While rates of expansion in output and new orders softened in March, this was not the case with regards to employment. The rate of job creation ticked higher and was the fastest in 2024 so far. Staffing levels rose across both sectors, with jobs growth in manufacturing hitting an eight-month high.

Inflationary pressures picked up in March. The rate of input cost inflation quickened to a six-month high amid faster increases across both monitored sectors. Service providers indicated that higher operating expenses generally reflected increasing wages, while rising oil and gasoline costs were often mentioned by manufacturers.

In turn, companies in the US raised their own selling prices at a faster pace. In fact, the rate of inflation was the sharpest in just under a year and stronger than the series average. Respective rates of output price inflation accelerated sharply across both manufacturing and services, quickening to 13- and eight-month highs as companies passed through higher input costs to their customers.

Commenting on the data, Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said:

“Further expansions of both manufacturing and service sector output in March helped close off the US economy’s strongest quarter since the second quarter of last year. The survey data point to another quarter of robust GDP growth accompanied by sustained hiring as companies continue to report new order growth.

“The brightest news came from the manufacturing sector, where production is now growing at the fastest rate since May 2022. Production gains are linked to improving demand for goods both at home and abroad, driving a further upturn in business confidence in the outlook.

“Service providers meanwhile reported a slower pace of expansion than factories, with the rate of increase also moderating slightly compared to February, linked in part to ongoing cost of living pressures. However, service providers have also become increasingly optimistic about the outlook, with confidence striking a 22-month high in March to suggest the broad-based economic expansion seen in March will persist into the summer.

“A steepening rise in costs, combined with strengthened pricing power amid the recent upturn in demand, meant inflationary pressures gathered pace again in March. Costs have increased on the back of further wage growth and rising fuel prices, pushing overall selling price inflation for goods and services up to its highest for nearly a year. The steep jump in prices from the recent low seen in January hints at unwelcome upward pressure on consumer prices in the coming months.”

Ed Yardeni:

During his presser last week, Fed Chair Jerome Powell was asked if he was sticking with what he had told lawmakers two weeks earlier, i.e., “we are not far from …[beginning] to dial back the level of restriction.” That statement was premised on his assumption that incoming data would give the FOMC “more confidence that inflation is moving sustainably to 2.0%.” One week after he said so, February’s CPI and PPI reports were a bit hotter than expected.

Yet Powell chose to blow them off in his presser: “I would say that the story is really essentially the same and that is of inflation coming down gradually toward 2% on a sometimes bumpy path, as I mentioned. I think that’s what you still see. We’ve got nine months of 2-1/2 percent inflation now and we’ve had two months of kind of bumpy inflation.”

In the chart below, the black line is where monthly inflation needs to be to achieve a sustained 2% annual rate. The next debate will be on how to define bumpy!

You have surely noted the sharp improvement in the manufacturing PMI sigalling the end of the goods inventory cycle.

Also that “Respective rates of output price inflation accelerated sharply across both manufacturing and services, quickening to 13- and eight-month highs as companies passed through higher input costs to their customers.”

If goods deflation is about to end …

BTW:Source: BofA Global Research

Surveillance Special: Powell Serves Up Words Rather Than Answers  El-Erian hears a signal of Fed tolerance for higher inflation, and so does the market

In the torrent of words from the Federal Reserve’s statement and Chair Jerome Powell’s press conference, some of the numbers stood out. And underneath the data was an implicit suggestion that the Fed is going to stay quite patient on inflation in order to achieve a soft landing.

“This is a signal and the market is taking it as that, that they will tolerate slightly higher inflation for longer,” Mohamed El-Erian said on the Surveillance Fed special today, unpacking a stand-pat rate decision in which nuance was everything. (…)

“As you see in the equity market today, it’s everybody back in the pool,” BlackRock’s Jeffrey Rosenberg said.

When Powell was asked specifically about recalibrating to something other than the Fed’s 2% inflation target, he offered a lot of words and indicated that this wasn’t the case, but didn’t really address it further. He even suggested that the Fed was going to wait a longer period of time for inflation to get to target.

This, of course, raises a philosophical question: How long can the Fed accept hotter-than-desired inflation before policymakers have de facto adjusted the targeted inflation rate? If you say you’re going to be rich one day but you’re happy only earning a penny a day, is it really your goal to be rich?

William Dudley, the former New York Fed president who is now a Bloomberg Opinion columnist, gently pushed back at Jon’s joking suggestion that Powell’s real message was simply “buy stocks.” But he did detect an important tell in Powell’s response to a question about whether financial conditions were too loose.

“He did not take the bait on financial conditions easing,” Dudley said. “And of course when he doesn’t take the bait on financial conditions easing, what does it do? It causes financial conditions to ease more.”

John Authers:

(…) For context, this is Bloomberg’s measure of financial conditions, and it’s almost as lenient as in 2021 when fed funds were being held at zero:

(…) As it was, the market concluded that the Fed didn’t care about inflation — or was perhaps  surreptitiously giving up on lowering it to the official target of 2%. (…)

Unfortunately, Fed governors are no better at predicting the future than the rest of us. Let’s take “long term” to mean four years into the future. This is what the FOMC predicted from 2012 to 2020, with the actual fed funds rate from four years later:

At no point has the fed funds rate been where the FOMC predicted. It stayed far lower than expected throughout the post-crisis decade, then exploded higher — though the governors can be forgiven for not predicting the pandemic. And 2.5% was as high as the rate ever reached in the pre-Covid years. It’s unlikely to fall very far in the future, no matter what the FOMC now thinks.  

Should we talk about the FOMC’s inflation prediction record?

Note: I am travelling in Asia until April 24. Limited equipment and different time zones will limit the frequency and depth of my postings.

Underlying inflation measures remain sticky, which could delay rate cuts.

Source: MRB Partners

Consensus says the #Fed should cut rates. BUT, a host of inflation and liquidity barometers started signaling more not less #inflation around mid-2023. (Source: Richard Bernstein Advisors)

Canada Inflation Unexpectedly Cools to 2.8% in February Consumer prices rose 2.8% in February from a year earlier, Statistics Canada reported, where economists expected the rate to advance to 3.1%.

It marks a second month running where the consumer-price index has been inside the Bank of Canada’s 1% to 3% target, after it cooled to 2.9% in January.

On a month-over-month basis, inflation climbed 0.3% after no change in the first month of the year. (…)

Excluding food and energy costs, the consumer-price index advanced 2.8% in February from a year earlier.

Two measures of annual core inflation the central bank closely monitors also continued to cool. Weighted median and trimmed mean CPI rose an average 3.15%, the softest level since August 2021 and compared with 3.35% growth in January. (…)

From Goldman Sachs:

(…) Excluding food and energy, CPI inflation declined by 0.3pp to +2.8% yoy, the lowest rate since July 2021. BoC-preferred CPI-Trim and CPI-Median were softer than consensus expectations at +3.2% (vs. +3.4% in January) and +3.1% (vs. +3.3%) on a yoy basis, respectively.

On a three-month average annualized basis, CPI-Trim declined to +2.3% in February from +3.2% in January and CPI-Median edged down to +2.1% from +3.1%. The average of the preferred three-month measures is now at the lowest level since January 2021. On a month-over-month annualized basis, CPI-Trim (+1.2%) and CPI-Median (+1.1%) remained essentially unchanged at low levels in February.

On a seasonally adjusted monthly basis, headline CPI inflation was +0.1% in February, up from -0.1% in January. (…) Seasonally adjusted CPI ex food and energy inflation was unchanged at +0.1% in February.

Sequential core goods inflation remained soft at -0.4% in February (mom GS sa, vs. -0.6% in January) and moderated further for durable goods (-0.3pp to -0.8%). (…)

Monthly inflation for rented accommodation ticked up by one tenth to +0.8%, while sequential inflation for the mortgage interest cost component decelerated further to +1.3%, down from +1.6% last month and a peak of +2.7% in 2023, in line with our expectations. Sequential inflation for most non-shelter wage-sensitive categories—such as food purchased from restaurants, household services, and health care services—was roughly unchanged at moderate levels.

Euro-Area Labor-Cost Growth Slowed at End of 2023

China’s Fiscal Stimulus Plan May Be Bigger Than It Appeared

China kept its official budget deficit target unchanged at 3% of gross domestic product, but that underplays government support because it leaves out a large amount of investment spending.

Using the simplest definition of stimulus — the demand injected into the economy by government spending minus the purchasing power removed via taxes and fees levied — the fiscal package in proportion to the size of the economy is the strongest since 2020, when China moved to shore up growth in the face of the pandemic. (…)

The trouble is that it leaves out China’s other fiscal accounts. The largest of those is the “government-managed funds account,” which covers investment in construction projects, as well as income derived mainly from land sales. This account usually has a large deficit, made up by bond issuance. Combining that with the general budget, the shortfall amounts to 11.1 trillion yuan, or almost triple the size of the official fiscal deficit.

National authorities can also unleash leftover funds from prior years, as well as cash transfers from other fiscal accounts, such as profits submitted by state-owned enterprises. Officials have said that most of the roughly 1 trillion yuan raised from October’s additional sovereign bond issuance will be used in 2024.

“The fiscal numbers are pretty decent, a pretty solid additional impulse from last year” overall, said Andrew Polk, a co-founder of the research consultancy Trivium.

Zooming out, the planned 11.1 trillion yuan figure for the augmented fiscal deficit — an estimate of all the main fiscal resources — is equivalent to 8.2% of GDP this year, according to Bloomberg calculations based on Ministry of Finance data. That would represent the highest deficit-to-GDP ratio since 2020.

And the tally could end up representing even more than 8.2%, thanks to deflation. That’s because that figure is measured against nominal GDP, which includes the growth of prices. If price growth is weak or negative, that 11.1 trillion yuan deficit will represent a bigger slice of the pie. (…)

China’s $55 Billion Loan Surge Points to ‘National Team’ Rescue

China’s loans to non-bank financial institutions surged in February by the most in seven years, prompting speculation that lenders provided a big boost of capital to state funds as they bought shares to help stem a multi-trillion dollar market rout.

Loans to non-bank financial institutions, including brokerages and mutual funds, grew by more than 400 billion yuan ($55.6 billion) last month, according to the latest data from the People’s Bank of China. That was the biggest jump since July 2015, around the last time the so-called national team of state-related bodies bought up equities to stabilize turbulent markets.

“China’s non-bank financial institutions usually don’t have so much borrowing need,” said Xing Zhaopeng, senior China strategist at Australia & New Zealand Banking Group Ltd. He attributed the increase to the national team likely borrowing from a commercial bank.

China took various efforts earlier this year to stem a $7 trillion slide in mainland and Hong Kong stock markets, which became the most acute symbol of depressed confidence in the world’s second-largest economy. There is evidence that state institutions, including sovereign wealth fund Central Huijin Investment Ltd., snapped up shares to bolster market confidence.

Several exchange-traded funds in China saw a surge in turnover after the Lunar New Year holiday last month, a likely sign of that support. In recent weeks, Chinese stocks have rallied, with a number of benchmarks surging 20% from earlier lows.

Private estimates of “national team” buying are broadly in line with the PBOC data on non-bank borrowing. State funds poured more than 410 billion yuan into onshore shares this year, according to estimates by UBS Group AG late last month. Purchases in January and February reached nearly 300 billion yuan, Bloomberg Intelligence projections<?XML:NAMESPACE PREFIX = “[default] http://www.w3.org/2000/svg” NS = “http://www.w3.org/2000/svg” /> show. (…)

SENTIMENT WATCH

Ed Yardeni

Nvidia was up a measly 1% today despite the exciting presentation, after Monday’s close, by CEO Jensen Huang about the company’s future in the AI ecosystem. He announced a new generation of GPU chips and software for running AI models. The first chips in the new Blackwell platform will be shipped later this year. They are more powerful (with a five-fold increase in petaflops) and consume less energy than the current ones. On CNBC today, Huang estimated that one chip will cost $30,000 to $40,000.

Today’s lackluster gain in Nvidia’s stock price suggests that the stock and the overall stock market have discounted a lot of good news. (…)

Meanwhile, we don’t like what we are seeing in the crude oil pits. The price of a barrel of Brent crude oil is up 19.3% since December 12, 2023 to $87.38 today. It might be on the verge of a breakout to $90.00. There is a channel formation in the chart suggesting that the price could rise to $100.00 during the second half of this year. Such a scenario would be all too reminiscent of the 1970s, posing a threat to our Roaring 2020s outlook. We’ll be monitoring Ukrainian attacks on Russia’s oil infrastructure and the ongoing turmoil in the Middle East. (…)

Or, on a happier note, maybe rising oil prices suggest that the global economy is picking up.

• Here is Goldman’s sentiment indicator.

Source: Goldman Sachs; @MikeZaccardi

• Equity fund inflows have been exceptionally strong.

Source: BofA Global Research