Yesterday’s U.S. Flash PMI is quite significant, yet I found no mention of it anywhere this morning.

U.S. FLASH PMI Output growth fastest for seven months at start of 2024, prices charged rise at slowest rate since May 2020

At 52.3, the headline S&P Global Flash US PMI Composite Output Index was up from 50.9 in December and signalled the fastest rise in business activity since June 2023. The expansion in output indicated a notable uptick in performance at the start of the year.

Output growth was led by service providers, as manufacturing firms continued to see a moderate drop in activity in January. The rate of decline in production at goods producers eased from that seen in December, however, linked to improved order inflows. Manufacturers also mentioned that delivery delays following severe storms and shipping disruptions at times hampered production. Suppliers’ delivery times at goods producers lengthened on average for the first time in 13 months.

New business expanded for the third successive month at US companies in January, with the rate of growth quickening to the sharpest since June 2023. The upturn in new orders was broad-based, as manufacturers registered the first rise in new sales since October 2023, and the fastest uptick since May 2022.

Service providers reported the strongest gain for seven months. More robust demand conditions were linked to greater client referrals and emerging reports of customers having worked through their buffer stocks.

Stronger demand was domestically focused, however, as new export orders fell for the second month running in January. The decrease was the quickest since October 2023 amid a faster drop in manufacturing new export sales and another marginal decline in the service sector.

Businesses were more upbeat in their expectations regarding the outlook for output at the start of 2024, as the degree of confidence reached the highest since May 2022. Increased optimism reportedly stemmed from hopes of improving demand conditions, investment in new machinery and the release of new service lines.

Companies in the US recorded another rise in employment during January, albeit slightly slower than seen in December. The increase in staffing numbers was only marginal overall and the second-softest since last August. Panellists highlighted that greater workforce numbers were due to increased business requirements and the hiring of skilled workers for long-held vacancies, but that hiring was often constrained by labor shortages.

The upturn in employment was also linked to efforts to clear backlogs of work amid a renewed accumulation of incomplete business in January. The level of outstanding work grew for the first time since last April, with the expansion driven by service providers. Manufacturers, meanwhile, recorded a slower but still marked drop in work-in-hand.

Inflationary pressures cooled at the start of the year, as input prices rose at a softer pace. The rate of increase was slower than the series average and the second-weakest since October 2020. That said, goods producers saw a sharper uptick in cost burdens. The pace of manufacturing input cost inflation picked up to the steepest since April 2023 amid challenges sourcing materials, higher prices for transportation and increased fuel costs.

A sectoral divergence was also evident for selling prices in January, as service providers signalled the slowest rise in output charges in the current sequence of inflation which began in June 2020 amid efforts to price competitively and drive new orders.

Manufacturers, meanwhile, raised their output prices at the steepest rate since April 2023 as firms sought to pass through higher costs to customers.

Measured overall, average prices charged for goods and services rose at a much-reduced rate in January, posting the smallest monthly rise since May 2020.

At 50.3, the S&P Global Flash US Manufacturing PMI was up from 47.9 in December, to signal the first improvement in operating conditions at goods producers in nine months. The upturn was only fractional, however, amid a further drop in production.

Although firms noted broadly sufficient availability of materials at suppliers, challenging trucking conditions due to storms and transportation delays reportedly weighed on vendor performance. Lead times lengthened for the first time in over a year and to the greatest extent since October 2022.

Purchasing activity at manufacturers continued to contract, with firms also depleting pre-production inventories further, but both rates of decline eased on the month. Stocks of finished goods saw a renewed expansion, indicating the fastest rise in post-production inventories since November 2022 as companies anticipate greater new orders in the coming months.

This preview of month-end PMIs indicates:

• Broadly accelerating demand (new orders) overall, including goods, suggesting that the inventory cycle might be complete after the strong year-end retail sales.
• Soft but growing employment, potentially easing wage demand/offers.
• Slowing inflation overall, the “smallest monthly rise since May 2020”. Remember the spring of 2020?

Look at the teal line below. Services prices charged rarely flirt with the 50 line:

The PMI Composite Output Prices Index has abruptly dropped lately, potentially dragging the CPI downward in coming months.

Ed Yardeni today warns of a “quite weak” ISM PMI in January, “rekindling recession fears”.

January’s average of the general business indexes that are compiled by three regional Fed surveys took a dive during January. This suggests that January’s national M-PMI might be quite weak, rekindling recession fears. It’s hard to believe that the rolling recession for goods producers and distributors isn’t bottoming given the recent strength in retail sales. We’ll be watching to see what January’s M-PMI report shows next Thursday.

Conflicting PMI reports happen. History suggests to put much more weight on S&P Global’s surveys.

Bank of Canada keeps key rate at 5%, says talks have shifted away from more hikes

The Bank of Canada held its policy interest rate steady for the fourth consecutive time on Wednesday, but dialled back its threat of further rate hikes in a notable shift in language that opens the door to possible rate cuts in the first half of this year.

While the bank remained on hold, it said that Canada’s sluggish economy has now entered a state of “excess supply,” which should help drag inflation down over time. And it effectively confirmed what financial markets have assumed for months: that interest rates have peaked for this business cycle.

“With overall demand in the economy no longer running ahead of supply, Governing Council’s discussion of monetary policy is shifting from whether our policy rate is restrictive enough to restore price stability, to how long it needs to stay at the current level,” Bank of Canada Governor Tiff Macklem said at a news conference after the rate announcement.

He did not rule out further rate hikes altogether, but suggested they were unlikely if inflation and economic activity developed in line with the bank’s projection. (…)

Despite broad-based progress, however, Mr. Macklem and his team remain concerned about “underlying” price pressures, as well as pockets of high inflation, notably fast-rising shelter and food prices.

Core measures of inflation, which strip out the most volatile components of the CPI, have been stuck in the 3.5-per-cent to 4-per-cent range for the better part of a year. Mr. Macklem said the bank needs to see “further and sustained easing of core inflation” before considering rate cuts. (…)

CHINA

I have considered China uninvestable for many years, mainly for political and governance reasons. Those concerns remain but seem increasingly priced in.

In some ways, China is where the U.S. was in 2008-09 after its real estate crisis, economically and “sentimentally”. Beijing (i.e. The Party) now clearly understands the problems and the urgency to address them with potent monetary and fiscal measures.

If the U.S. inventory cycle is effectively complete, Chinese manufacturing new orders should soon improve. When people feel that real estate is stabilizing, overall demand should gradually pick up. The Chinese consumer is in much better shape than Americans were in 2007-09 and Chinese politics are “much simpler”…

• LGFV in China’s Shandong Province Extends Debt Payment Deadline

A local government financing vehicle in China’s Shandong province reached an agreement with creditors to partially repay and extend the payment deadline for nearly all of its 479 million yuan ($66.8 million) non-bond debts, highlighting the sector’s liquidity challenges despite government support.

Weifang Binhai Investment Development Co., which raises off-balance-sheet debt financing for the province’s infrastructure projects, hadn’t made payments as of Dec. 31, 2023, past the original deadline, according to the LGFV’s filing this month that was posted on Shanghai Stock Exchange’s private disclosure forum but seen by Bloomberg. (…)

In a news briefing earlier this week, People’s Bank of China Governor Pan Gongsheng vowed to provide financial support for local government debt. (…)

• German Firms in China Say Economy Is on ‘Downward Trajectory’ Survey respondents expect recovery to take up to three years

Some 83% of the 566 respondents in the survey conducted from early September to early October said China “is facing a downward trajectory” economically. Nearly two-thirds said they expected a recovery to take one to three years. (…)

The German chamber’s survey also found that some 54% of firms thought China’s investment appeal was falling compared to other markets, though just as many plan to boost their spending in the Asian nation over the next two years. (…)

Survey respondents also said their main reason for investment now was countering competition, with the poll finding that German firms were becoming more concerned about their Chinese rivals. While just 5% of respondents viewed China’s companies as top innovators in their industry, 46% predicted they’d be leaders in the next five years. (…)

• China Stocks Are World’s ‘Best Value Proposition’ to Gavekal

The country is set for a boom in corporate profits and investors should be piling into shares of companies in sectors like health care, tourism and luxury goods, according to Charles Gave.

“The Chinese stock market is undervalued against cash, Chinese bonds, gold, and other world stock markets — and it is in a state of total panic,” Gave, whose group runs the Hong Kong-based asset-allocation consultancy Gavekal Research and some global funds, wrote in a note Wednesday. “It has to be the best value proposition in the world.”

He said China is at a stage where companies’ profit growth has started exceeding their cost of capital, implying earnings will boom and companies will resume investing and hiring. (…)

Some other fund houses are also turning a bit optimistic once again. Andrew Lapping, chief investment officer at Ranmore Fund Management, said the current setup is an “exciting opportunity” for investors. Alice Shen, a portfolio manager at VanEck, said China is at an “inflection point” and can become “the opportunistic buy of the year.”

Still, skepticism about China exposure is far from over. Remi Olu-Pitan, head of multi-asset growth and income at Schroders, said in a media briefing on Wednesday that China’s recent move may provide only a “tactical lift” to the country’s assets, but more is needed for a “structural” climb.

“The incentive to reduce exposure is pretty powerful and so we think this provides a pause, but we worry any recovery will be an opportunity to derisk,” she said.

To be sure, Gave made a similar bullish recommendation on China stocks in August — and that didn’t fare so well. The CSI 300 fell 8.7% from there into the end of the year.

Still, he has some wins to his name. He was bullish on Japan in May 2020, and since then the Topix Index has gained 71%. He said in June 2018 that world’s bear market will likely start in Europe, following which the MSCI Europe Index fell about 16% to a low in December of that year. (…)

• Bridgewater Says China Stock Selloff Made Valuations Attractive

White House science chief signals US-China co-operation on AI safety

Speaking of AI, interesting keynote video about this new gadget. (David, maybe you could take occasional space on this blog, “David’s Corner”?)

Forrester offers a review of R1: rabbit’s r1 Personal AI Device (PAD): Exciting Technology With An Underwhelming Experience

Here’s what it shows us about the future:

1. Devices will someday learn by watching us, not being programmed. While the r1 will be too complex for most consumers, it illustrates the possibilities — at least for digital tasks. In the future, devices will wield just the right balance of natural language and agent capabilities that learn what we do, need, and want without programming. Their ability to converse in language and emulate empathy will lead us to trust them; we hope that the PAD makers are trustworthy.
2. These devices challenge the assumption that brands need piles of consumer data. With cameras + edge computing/intelligence, devices can simply watch and listen to consumers, learn, and then tell brands what consumers want. When you think about this, this trend will unwind marketing as we know it. Fortunately, that is still some way off, but it’s something to watch for.
3. These virtual assistants will serve some purposes — not all. They’ll do simple, tedious tasks that we don’t want to do. They will learn what we want and engage brands that we trust to get these things. They may even someday do work for us. They will still leave the heavy mental lifting — literal and figurative — to humans. I hope this lets us be less into the details and more creative and innovative as a species. Who knows where that will lead?

Questions we should be asking:

1. Is society or human beings ready or not to have agents learn from us and perhaps give them some training? Are we ready to trust them to act on our behalf? How good will these personal agents get at understanding the nuances of human behavior, having values, and not harming others while they seek to serve us? AI safety is a hot topic today to answer precisely these types of questions.
2. Are LAMs a real thing? The other term we hear is world model. Agents will need models of our physical world and the actions that we humans take in both the physical and digital realms. Today’s large language models are a start, but the AI community has much work to do.
3. Who is ultimately responsible for the actions that a model takes? If you allow your car to drive itself and it hurts someone, who is at fault? What if you train a model to spend money or communicate on your behalf? Are humans ready to assume the risks of letting an agent order groceries? Move money? Communicate with friends?

FLASH PMIs

Eurozone downturn moderates at start of 2024, but price pressures intensify

The seasonally adjusted HCOB Flash Eurozone Composite PMI Output Index, based on approximately 85% of usual survey responses and compiled by S&P Global, rose from 47.6 in December to 47.9 in January. Although signalling an eighth successive month of falling output, January’s decline was the smallest registered since last July. The reading nevertheless suggests that the eurozone’s deepest contraction since 2013 (if early pandemic months are excluded) has persisted into the new year.

  

Although goods producers continued to lead the downturn, with manufacturing output falling for a tenth consecutive month in January, the fall in factory production was the smallest witnessed since last April. New orders for goods likewise showed the smallest decline for nine months.

Although services activity fell for a sixth straight month, the pace of decline gathering momentum slightly to register the steepest fall since last October, new business placed at service providers fell at the slowest rate since last July, providing a further hint of a cooling in the demand downturn.

January also saw the region’s export decline easing, with overall new export orders dropping at the slowest rate for nine months thanks to reduced losses for both goods and services.

Despite rising in January, the seasonally adjusted New Orders Index was below that of output for a twenty-third successive month, meaning companies relied on backlogs of work to help sustain current operating levels. Backlogs of orders consequently fell for the eighteenth time in the past 19 months, the rate of decline unchanged on the marked pace seen in December to point to a further depletion of the order book pipeline. Manufacturing backlogs continued to fall especially sharply, albeit less steeply than in December, while service sector backlogs were eroded at the fastest pace since February 2021.

Employment increased fractionally in January as a slight upturn in net hiring in the service sector offset an eighth successive monthly fall in manufacturing payroll numbers. Although the marginal overall rise in employment signalled by the flash PMI represented a modest improvement on the minor declines seen in the closing two months of 2023, the largely unchanged picture continues to reflect a reluctance to add to headcounts amid a weak demand environment.

As well as reducing employment, manufacturers cut their purchasing activity for a nineteenth successive month in response to lower production needs in the months ahead, resulting in a twelfth consecutive monthly fall in inventories of inputs. However, inventories were also impacted by delays in the supply of inputs. Supplier delivery times lengthened on average for the first time in a year in January, widely linked to shipping delays caused by disruptions in the Red Sea. The extent to which supplier lead times lengthened on average nevertheless remained far less severe than recorded throughout much of the 2020-2022 pandemic period.

Despite additional costs associated with shipping delays, manufacturers’ average input costs fell sharply in January for an eleventh successive month, albeit with the rate of decline easing slightly to register the smallest fall since last April. Eurozone service providers meanwhile reported an increased rate of cost growth, to the highest in eight months, causing overall cost growth across goods and services to accelerate to the fastest recorded since last May.

Faster input cost inflation was matched by an upturn in selling price inflation in January. Average prices charged for goods and services also rose at the steepest rate since last May. Having fallen to a 32-month low last October, the rate of selling price inflation has now ticked higher for three successive months to therefore remain elevated by the historical standards of the survey. Although goods prices fell at a slightly increased rate, down for a ninth straight month, charges for services rose in January at a rate not seen since last June. (…)

UK: Recovery in private sector output gains momentum in January, but Red Sea crisis hits manufacturing supply chains and pushes up input costs

  

Japan: Strongest rise in private sector activity for four months

The Japanese private sector economy signalled a renewed expansion in output at the start of 2024 following the stagnation seen at the end of last year. While only modest, the rate of growth was the strongest seen since September. Service providers continued to lead the way with a steeper increase in business activity, with the expansion strengthening to a four-month high.

Manufacturers meanwhile signalled an eighth consecutive deterioration in operating conditions that nonetheless eased from that seen in December.

Forward-looking indicators from the survey suggest the potential for demand and activity to rise over the coming months. Composite new orders rose for the first time in four months, albeit only marginally. There was a further rise among services firms, while Japanese manufacturers indicated a sustained and sharp decrease in new order inflows. Backlogs of work broadly stabilised in January, providing an early sign that output was starting to be supported by improved demand rather than the fulfilling of prior orders

On the price front, the rate of input price inflation remained elevated by historical standards, with the latest rise in operating expenses little-changed from the marked uptick seen in December. That said, Japanese private sector firms looked to absorb some of these costs, as the rate of output charge inflation eased to the softest since February 2022.

  

The US flash PMI is out later today.

China’s Stock-Market Rout Has Become a Political Problem The country’s cabinet has urged action, and state firms have started buying

(…) The State Council, the country’s top government body, said Monday that authorities should take stronger and more effective measures to stabilize markets and boost confidence. It called for better regulations, more transparency and an attempt to improve the quality of listed companies.

The cabinet meeting, which analysts said was a direct response to the stock market selloff, was chaired by Chinese Premier Li Qiang—the country’s No. 2 leader. It led to speculation that China is planning a big stimulus package to boost the stock market, although market participants said the details are murky. (…)

The meeting came days after stock analysts noticed another sign of strong government support: a rash of buying by the so-called national team, a group of state-linked firms that Beijing sometimes pushes to buy shares and other assets. The national team is typically defined by analysts to include insurers, pension funds and China’s sovereign-wealth fund.

These investors started scooping up exchange-traded funds as early as last week, according to people familiar with the matter. Five of China’s biggest ETFs got a combined $5 billion of net inflows on Monday, the biggest on record, data from research firm Z-Ben Advisors shows. (…)

• China Boosts Stimulus by Allowing Banks to Keep Smaller Reserves
• China Earnings to Deepen Woes of Worst-Performing Stock Market

(…) “The upcoming 2023 annual report/4Q 2023 result season will be another miss,” Morgan Stanley strategists Laura Wang and Catherine Chen in Hong Kong wrote this week in a research note. “Major downward earnings estimates revisions are likely, which will cap valuation re-rating opportunities.” (…)

Compiling profit forecasts for China’s companies is relatively difficult given a general lack of transparency and the reluctance of the firms to provide accurate earnings guidance. The nation’s listed enterprises are expected to say earnings rose 5.8% in the fourth quarter from a year earlier when the nation was largely under a lockdown, according to an analysis by China Merchants Securities based on the CSI 300 Index. (…)

Earnings from the financial sector are set to remain tepid given the shrinking net interest margin and weak capital market, while property will for sure be “very weak,” Chen said. Consumer companies may also underperform considering the sentiment and macro outlook, he said.

• China May Need a Bigger Bazooka

(…) The order from Premier Li Qiang, meant to calm investors, seems to have done the opposite. China’s history of botched market rescue efforts contributed to that, fueled by uncertainties over Beijing’s long-term policy roadmap. For a metric of how much shares have slumped, consider this: The value of China’s equity market has never been this far behind the US. (…)

Ed Yardeni:

China’s recession is hiding in plain sight. It is the result of a major negative wealth effect on consumers caused by plunging real estate and stock prices. (…)

For starters, the Shenzhen Real Estate stock price index is down a whopping 58% since July 9, 2020. The China MSCI stock price index has plunged 62% since February 17, 2021.

How bad is it? More than $6 trillion has been wiped out from the market value of Chinese and Hong Kong stocks since the 2021 peak, a January 23 Bloomberg article reports. Furthermore: “Policymakers are seeking to mobilize about 2 trillion yuan ($278 billion), mainly from the offshore accounts of Chinese state-owned enterprises, as part of a stabilization fund to buy shares onshore through the Hong Kong exchange link, said the people, asking not to be identified discussing a private matter.”

THE ROBOTS ARE COMING!

Following yesterday’s Humanoid robots will join BMW’s production line:

A restaurant robot might mix your next cocktail

He can make 65-70 drinks an hour, never needs a bathroom break and doesn’t ask for a tip — and soon, he’ll be able to make conversation and take your order.

• Adam the robotic bartender is an example of a new breed of restaurant robots that are moving from novelty items to hospitality mainstays.
• A dozen Adam robots have been deployed nationwide so far, in venues such as the Courtyard by Marriott in downtown Los Angeles, the Cloutea boba shop at Caesar’s Palace in Las Vegas, and the Botbar Coffee chain.
• Adam also gets rented out for parties and conferences.
• A complete Adam with a custom setup table and equipment sells for $180,000, though Casella says they’re experimenting with other pricing models and partnerships.

• Robot servers and bartenders interact with customers, while kitchen robots shoot kale into salads, fry tortilla chips and cook burgers.
• Chipotle, for one, is investing in a “digital makeline” where robots prepare salads and bowls. (It already uses a machine named Chippy to make tortilla chips and a contraption called the Autocado to mash up the green stuff.)
• Sweetgreen’s new automated chop-and-prep system “can produce up to 100 salads in 15 minutes, with improved accuracy,” per Restaurant Business.
• Chipotle’s founder, Steve Ells, is opening a chain of robot-run vegetarian fast-casual restaurants in New York City called Kernel, Eater reports.

Yesterday, my son David sent me this link to a Jim Fan Ted Talk with this note:

This morning you had a section on humanoid robots. This year, many humanoid robot companies will reach landmarks. And yet, so far, the only use-case of economic value is manipulating totes in a warehouse. This is about to change massively – not only for humanoid robots but for any form of digital or physical “agent”.

In this video Jim Fan recounts his personal achievements from 2023 and dreams of a foundational universal AGI model. He is quite exceptional, and I had heard of all his projects before, but his are of course only a fraction of the work being done.

Note once again that he is another Chinese (or Taiwanese) researcher trained in the USA. To add even more water to the wheel, there is something stunning about AI conferences. At any other academic conference, English is spoken overwhelmingly. But at an AI conference, language heard was about 50/50, Chinese/English, and that only around 20% were native English speakers.

MORE FOOD FOR THOUGHT

(Sponsored by Ozempic manufacturers)

The restaurant industry has a heartbeat after years on life support

• Nearly 53,800 restaurants opened their doors last year, up 10% from 2022, based on new Yelp listings.
• Some of the fastest-growing restaurant categories include dessert shops (up 66% in 2023 compared to 2022), creperies (+63%) and hot pot joints (+53%).

McDonald’s doubles down with Double Big Mac

• The nutrition for the Double Big Mac is not yet available. But the regular Big Mac has 590 calories.
• The Double Big Mac arrives two days after Subway released a trio of footlong snacks and follows Costco’s new giant cookie that packs 750 calories.

  Alaska Air CEO says loose bolts found in ‘many’ Boeing jets.