FLASH PMIs

US output growth hits 13-month high in May but divergence widens between manufacturing and services

The headline S&P Global Flash US PMI Composite Output Index registered 54.5 in May, up from 53.4 in April, to signal a solid and faster expansion in private sector business activity. The rise in output was the sharpest since April 2022, but led by service providers, who reported stronger demand conditions.

Although manufacturers registered growth in production, it was only marginal and slowed from the previous survey period. The slight upturn was linked to improvements in capacity amid greater workforce numbers. Some noted the more timely delivery of key inputs, allowing greater processing of unfinished work, but growth was constrained by a lack of new orders.

Total new orders rose for the third month running in May, with the rate of increase quickening to the steepest for a year. Mirroring the trend for output, service providers drove the latest upturn in new business as manufacturers saw a renewed contraction in sales.

The fall in manufacturing new orders was the fastest since February as firms noted challenges securing new business as customers continued to work through their existing stocks.
At the same time, total new export orders decreased further, thereby extending the current sequence of decline to 12 months. Moreover, the rate of contraction was the quickest in 2023 to date despite a renewed expansion in service sector new business from abroad. Issues relating to competitiveness and weak demand from key export S&P Global Flash US PMI Composite Output Index
destinations reportedly weighed on new export sales.

Price pressures across the US private sector diverged during May, as manufacturers recorded a fall in input prices for the first time in three years. Service providers continued to register a marked increase in cost burdens, albeit the rate of increase softening to the slowest for five months. Where a rise in operating expenses was noted, this was often linked to greater wage bills, with some instances of higher supplier prices also mentioned. Lower demand for some inputs and improved supplier performance drove the decrease in costs at goods producers.

Output charges, however, continued to rise midway through the second quarter. The rate of charge inflation eased to the slowest for three months, though remained elevated by historical standards of the survey. Goods producers saw a notable slowdown in selling price inflation, with the rate of increase only marginal and the softest since July 2020, contrasting with resilient strong increases in service sector charges.

Despite challenging demand conditions in the manufacturing sector, employment growth remained solid in May. Total private sector workforce numbers increased at the fastest pace since July 2022 as companies stated that a greater ability to hire and increased availability of candidates supported job creation.
Greater capacity allowed firms to work through their backlogs of work during May, as orders-in-hand fell for the first time in three months. (…)

Nonetheless, business expectations for the coming year improved in May. Goods producers were more upbeat than their service sector counterparts. Optimism stemmed from broad-based hopes of a pick-up in demand conditions and plans to invest in new products and marketing.

At 55.1, the S&P Global Flash US Services Business Activity Index signalled a strong expansion in service sector output midway through the second quarter. The rate of growth in activity was the fastest for just over a year, with firms linking the upturn to greater demand from new and existing clients.

Stronger demand conditions also supported a steeper rise in new business at service providers. New orders rose at the fastest rate since April 2022, with the pace of expansion also exceeding the series average. Contributing to the sharper increase in total new orders was a renewed rise in new business from abroad. New export orders grew for the first time in a year, and at a solid rate.

Inflationary pressures remained historically elevated across the service sector in May. Although easing, rates of increase in input prices and output charges were faster than their respective series averages. Companies often stated that greater wage bills drove inflation, as firms sought to pass-through higher cost burdens to clients.

Service providers noted an increased ability to bring in new staff during May, as employment rose at a quicker pace. The rate of job creation was the fastest for ten months, with firms recording broadly unchanged levels of unfinished business as a result of greater capacity improvements. This followed back-to-back expansions in backlogs of work in March and April.

Service sector firms remained optimistic of an increase in business activity over the coming year. The degree of confidence picked up to the highest in a year amid hopes of sustained increases in client demand.

The S&P Global Flash US Manufacturing PMI posted 48.5 in May, down from 50.2 in April, to signal a renewed deterioration in manufacturing operating conditions. The decline in the health of the sector was only marginal, but stemmed from weak demand conditions and a reduced need to hold inputs following improved delivery times and lower new order inflows.

Although output continued to increase in May, the rate of expansion slowed to only a marginal rate. Production growth was often linked to greater workforce numbers and the timely delivery of inputs which allowed firms to work through backlogs of work.

Demand conditions weakened notably, however. The fall in new orders was solid overall and the quickest for three months. Previous hikes in selling prices, alongside sufficient stocks at clients, reportedly drove the downturn in new orders. Weighing on total sales was a steeper decline in new export orders. Overseas sales decreased at a sharp rate that, with the exception of the initial pandemic period, was the fastest since May 2009.

Nonetheless, firms continued to hire new workers as the availability of candidates improved. Employment growth was solid overall and the quickest since last September. Increased capacity aided firms’ efforts to process incomplete work. Backlogs fell sharply and at the fastest rate in three years.

There was a notable turnaround in inflationary pressures at manufacturers midway through the second quarter, as input prices fell for the first time since May 2020. Supplier delivery times improved further and to the greatest extent on record, as demand for inputs dwindled. The downward adjustment in input buying among goods producers spurred suppliers to reduce some component prices.

Lower cost burdens were reflected in output charges, which increased at the slowest rate since July 2020. Although still passing on some previous hikes in supplier prices to customers, efforts to remain competitive and drive new sales dampened the pace of increase.

Manufacturers signalled stronger optimism regarding the outlook for output over the coming 12 months in May. The degree of confidence was the highest for a year as firms sought to invest in new product development and hoped for an uptick in client demand.

Bloomberg’s Joe Weisenthal:

The Bloomberg Economic Surprise Index is around its highest level in over a year.

Yesterday we got the Philadelphia Fed Non-Manufacturing Survey, and it was very representative of the overall vibe. The headline number was -16.0, so really rough. And yet the employment sub-index actually improved, New Orders improved, and businesses continue to expect pricing power and hot inflation.

(…) on the Urban Outfitters call yesterday, CEO Richard Hayne said in his prepared remarks: “We currently see no signs of change in customer behavior, no indication that customers are shopping less frequently, buying pure items, or trading down. Indeed so far in May, total retail segment comps are in line with the first quarter results, and we believe the total retail segment comps in Q2 could look very similar to Q1 print.”

Eurozone: Flash PMI at three-month low as steepening factory downturn offsets services revival

Eurozone business output grew for a fifth straight month in May, according to the latest HCOB flash PMI survey data produced by S&P Global, pointing to robust economic growth so far in the second quarter. The rate of expansion moderated in response to a near-stalling of new business inflows, however, and the upturn grew increasingly uneven.

Strong service sector growth contrasted with a steepening loss of factory output, linked in turn to a widening divergence in demand growth for goods and services.

Inflation trends also varied by sector. Resurgent post-pandemic demand buoyed pricing power in the services sector, allowing the pass through of higher costs – notably wages – on to customers to result in a steep and accelerating rate of selling price inflation for services. In manufacturing, however, weak demand and lower raw material prices, linked to surplus supply, pushed selling prices lower for the first time since September 2020.

Business confidence in the outlook meanwhile sank to a five-month low, dropping further below the survey’s long-run average amid growing concerns about the economic outlook, albeit still above last year’s lows. Sentiment was especially weak in manufacturing but also cooled in the service sector.

  

Japan: Strongest rise in private sector activity since October 2013

The headline au Jibun Bank Flash Japan Manufacturing Purchasing Managers’ Index™ (PMI)® increased from 49.5 in April to 50.8 in May, signalling the first improvement in operating conditions since October 2022.

There were renewed increases in both output and new orders, with both variables rising at the strongest rate for 13 months. Moreover, manufacturers signalled that supply chain issues that had plagued the sector for the past three years had showed signs of improvement, as suppliers’ delivery times shortened for the first time since January 2020, albeit only fractionally.

There was also reduced, but still strong pressure on the price front during May. Average cost burdens rose at a strong pace, that was nonetheless the softest since February 2021 while output charges increased at the slowest pace for four months.

  

Debt-Limit Talks Stall as Time Runs Short to Avert US Default

• McCarthy, Graves Signal Impasse in White House Debt Talks
• Spending Fight Is Main Event in Debt-Ceiling Talks Conservatives are pushing the House Speaker Kevin McCarthy for deep reductions, while Democrats are offering a spending freeze.

(…) “We are not putting anything on the floor that doesn’t spend less than we spent this year,” McCarthy reiterated on Tuesday. (…)

Democrats say the GOP demand to cut spending is unreasonable, particularly after the White House has signaled it could agree to freeze discretionary spending next year and potentially cap future increases for two years.

House Minority Leader Hakeem Jeffries (D., N.Y.) noted freezing spending was a position many in his party “might even be uncomfortable with.” But he said House Republicans rejected that “because they want to impose draconian cuts.” (…)

Democrats have criticized Republican negotiators for seeking an increase in military spending even as they are insisting on broader spending cuts. The GOP also rejected the White House’s proposal to allow Medicare to negotiate the price of a wider range of drugs, a measure the administration pitched as a way to reduce the deficit. Some in the administration are struggling to see a path forward in the talks, according to people familiar with the matter. (…)

Members of the House Freedom Caucus, founded to use hardball tactics in pursuing conservative goals, say McCarthy shouldn’t accept anything short of the GOP proposal.

“I don’t think these guys are backing off 2022” levels, said Rep. Mark Green (R., Tenn.), speaking of his fellow House Freedom Caucus members. Rep. Bob Good (R., Va.), another caucus member, said he was “wedded to the bill that we passed as it was passed,” adding: “You should not interpret any wiggle room.”

Any spending reduction would mark a rare occurrence. In 2011, Congress cut discretionary spending to $1.059 trillion from $1.085 trillion the year before, according to Office of Management and Budget data, reflecting a debt-ceiling deal during the Obama administration. Discretionary spending has largely marched higher since.

In January, to win the speakership, McCarthy promised conservatives he would seek to return spending to 2022 levels. He also agreed to change House rules to allow any single member to force a vote on ousting him as speaker, part of concessions that empowered rank-and-file members and could leave McCarthy vulnerable. (…)

New Home Sales at 683,000 Annual Rate in April

The previous three months were revised down, combined.

Sales of new single‐family houses in April 2023 were at a seasonally adjusted annual rate of 683,000, (…) 4.1 percent above the revised March rate of 656,000 and is 11.8 percent above the April 2022 estimate of 611,000.

The median price is down 15.3% from the peak in 2022, and the average prices is down 11.9% from the peak. (…)

• You have to fish where the fish are. So, would-be homebuyers are casting their lines in the market for new homes, Axios Matt writes.

Data: U.S. Census Bureau, National Association of Realtors; Chart: Axios Visuals

• Homebuilders also appear more willing to cut prices to move their inventory of houses. So far this year, the median price of a new home is down 12%, compared to a 6% increase for existing homes.
  In the latest survey from the National Association of Home Builders, 30% of respondents said they had cut prices in April.

Inflation Has Peaked—Get Ready for Deflation Price increases would have eased without the Fed’s tightening, which we will soon see was overkill.

By Donald L. Luskin CEO of TrendMacro:

(…) The record increase in the money supply caused by $6 trillion in pandemic relief payments in 2020 and 2021 unleashed the present inflation.

The aggressive tightening regime the Fed has undertaken, including an unprecedented four back-to-back 75-basis-point rate increases, deserves little credit for the recent decrease in inflation. The drop has been caused primarily by the sharp slowing in money-supply growth resulting from the end of federal pandemic stimulus payments. (…

Money-supply growth, driven by stimulus payments, peaked at 27% year-over-year in February 2021, the highest since 1959, when the data began. The payments wound down substantially in the third quarter of 2021 and ended entirely in the fourth. The 1½-year lag between the peak in money growth and the June 2022 peak in inflation is in line with historical experience. (…)

The Fed didn’t really get into inflation-fighting mode until June 2022, with the first 75-basis-point rate increase—the same month inflation peaked at 9.1%. If the historical norm of approximately a 1½-year lag between policy and result holds, then we haven’t begun to see any effects the Fed’s actions have had on inflation since it started hiking rates 14 months ago. (…)

With the cessation of stimulus payments, money-supply growth fell to normal levels—then into a contraction. That is due not only to the end of stimulus payments but also to the sharply higher interest rates engineered by the Fed, which younger generations of savers have never seen before.

Higher rates have caused the largest savers to shift from demand deposits, which are still paying near-zero rates at the large banks most people use, to time deposits, such as certificates of deposit, that pay closer to market rates. There is nothing wrong with a saver locking up his money for a year, but when a large saver does it, it is no longer counted as “money” in M2, the most commonly used measure of money supply, because consumers can’t immediately spend it. When spending slows, all else being equal, so does inflation.

Slowing money growth now is interacting with higher rates, and the result is contraction. M2 has shrunk 4.63% in the past year. This is the only contraction in U.S. history, so there is a lot we can’t predict here, but it would be extraordinary if such a contraction didn’t result in deflation, just as the large money-supply increase two years ago resulted in inflation. (…)

Because policy changes operate with lags, we won’t experience deflation for months. When it arrives, it will be too late for the Fed to act. (…)

The first chart is nominal M2 (left log scale) and its YoY growth:

Next is real M2 and its YoY growth showing several periods of negative growth, two of which rather important (1974-75, 1980):

The third chart plots the YoY changes in CPI and real M2 showing no deflation other than briefly in 2009:

Related, but really unrelated, the Cleveland Fed daily nowcasts of inflation suggests that core inflation is stable in May in the +0.4% MoM range. Core CPI was +0.41% in April. April core PCE is out this Friday.

The monthly +0.4% prints (+5.0% annualized) have been sticky in the past year:

Share Buybacks Continue at Torrid Pace While Investors Sit on Sidelines U.S. companies have announced $600 billion of share repurchases so far this year.

Companies in the Russell 3000 have unveiled plans to buy back more than $600 billion in shares this year, in line with last year’s record pace, according to data from research firm Birinyi Associates. In all, they announced $1.27 trillion of share repurchases and completed $1.05 trillion in buybacks in 2022, both all-time highs, according to Birinyi.

That activity has offered an important source of support for the stock market. Data on fund flows show many of the traditional buyers of stocks have been net sellers of late. Some have moved into less risky investments like money-market funds amid concerns that the economy is on the brink of a recession. (…)

A handful of the biggest companies are responsible for a disproportionate share of total buybacks. Apple, Alphabet, Meta Platforms and Microsoft were the biggest buyers of their own shares in the first quarter, according to S&P Dow Jones Indices Data. Apple led the way, spending $19.1 billion during the period.

Those and other megacap technology stocks are powering the broader market’s gains again as well. Meta shares have more than doubled in 2023; shares of the other three companies have risen at least 30%. (…)

Client-flow data from Bank of America’s equities trading desk underscore the outsize demand from companies compared with other investors this year. Although the bank’s clients have purchased a net $8.5 billion of equities this year in aggregate through mid-May, they actually sold $25.3 billion excluding their buyback activity.

“Corporate client buybacks as a percentage of S&P 500 market cap remain above 2022 highs at this time,” Bank of America analysts wrote in a May 16 report. (…)

Buybacks have been subject to a 1% tax since Jan. 1, which President Biden proposed quadrupling to 4% during his State of the Union address in February. The new tax appears to be doing little to discourage the practice thus far. (…)

Many of the biggest share repurchasers, like Apple and Microsoft, are still sitting on massive cash piles. Other, smaller companies may feel the pinch sooner. The average cash balance of S&P 500 companies has dropped by 13% over the past 12 months, according to the Goldman report. (…)

Ed Yardeni’s chart shows that S&P 500 companies used 90% of their operating earnings on dividends and buybacks in Q4’22. The norm pre-GFC was 60-75% outside of recessions until ZIRP made cash useless…

Xi Jinping calls for deeper ties between China and Russia

Fed Needs to Cool Off Hot Job Market, Ex-Chair Bernanke Says

The Federal Reserve needs to cool off the overheated labor market to tame inflation, though it’s not clear how far unemployment must rise to achieve that, according to former Fed Chair Ben Bernanke and ex-International Monetary Fund Chief economist Olivier Blanchard.

While a steep run-up in goods prices was the main impetus to the surge in inflation over the last 2 1/2 years, the impact of a “very tight” job market is growing and is likely to prove more persistent, they wrote in a paper to be presented at the Brookings Institution on Tuesday. (…)

The argument that Bernanke and Blanchard lay out in their paper about the evolution of inflation jibes with that put forward by Fed Chair Jerome Powell last week.

In a joint appearance with Bernanke at a May 19 Fed conference, Powell played down the significance of the job market in the 2021 inflation spike.

“By contrast, I do think that labor market slack is likely to be an increasingly important factor in inflation going forward,” Powell said.

As he has before, Powell zeroed in on the persistence of inflation in a grab bag of services — everything from health care and education to haircuts and hospitality  — where labor costs are a high proportion of the cost of doing business.

Powell gave a clear signal at the conference that he is inclined to pause interest rate increases next month, saying the Fed has already tightened credit a lot and thus could now afford to look at how the economy evolves. 

The Fed chair has previously voiced hopes that the labor market can be brought into better balance more through a drop in job vacancies than through a big increase in unemployment. (…)

“With labor-market slack still below sustainable levels and inflation expectations modestly higher, we conclude that the Fed is unlikely to be able to avoid slowing the economy to return inflation to target,” Bernanke and Blanchard wrote in their paper.

“The extent of that slowing will depend however on the evolution of certain structural features of the labor market, notably the efficiency of the process of matching workers with jobs,” they added.

If job postings on Indeed are any indication (through May 12), the BLS metric for nonfarm openings will flatten out after its steep drop in Q1.

Retailers Near Restocking as Inventory Paring Winds Down Freight operators are hoping a shift for big store owners fuels a shipping rebound heading into the fall

Big retailers are signaling they are nearly done paring back their excess inventories and are preparing to fill their shelves with new merchandise this fall, potentially brightening prospects for freight carriers looking for revived restocking to drive a shipping rebound.

Target’s inventories at the end of the last quarter were 16% lower than the same period a year ago and Walmart cut inventories in its U.S. store operations by 9% over the past year, slashing hundreds of millions of dollars of goods from their balance sheets and suggesting space is opening up in their jammed supply chains.

Target Chief Operating Officer John Mulligan said on an earnings conference call Wednesday that the overstocking that weighed on the company last year was “in the rearview mirror” and that the retailer was turning toward getting fresh merchandise into stores for the fall.

“In terms of inventory, we’re in good shape,” Walmart Chief Executive Doug McMillon said on a Thursday earnings conference call. “In-stock is improving, and excess inventory keeps coming down. We see it in the numbers, and I’m seeing it on store and [Sam’s Club] visits.”

Inventories at U.S. general merchandise stores expanded 1.2% in March, according to Census Bureau figures, after pulling back over several months from a record high last August. (…)

Before the pandemic, retailers and wholesalers inventories (dash lines) were about equal. It looks like retailers have since put more of the burden on wholesalers which now carry 20% more stock:

Speaking of inventories:

Biden’s Billion-Dollar Oil Trade Faces a Big Test Washington awaits bids to refill crude reserves with modified price proposal

(…) Now the agency is learning that replenishing those stockpiles at the lower rate it wants—between $67 to $72—is more difficult, despite prices sliding near those levels at various points this year. On Monday, benchmark U.S. crude closed at $71.99 a barrel, within Washington’s window to buy. (…)

The Biden administration, which previously said it aims to buy 60 million barrels, has suggested it is in no hurry to refill the SPR without maximizing taxpayer returns. If successful, the new request for proposals could offer a blueprint for additional purchases. (…)

The Energy Department’s second try at buying up to 3 million barrels of sour crude, with proposals due May 31 and contracts expected to be awarded June 9, swaps its previous pricing approach for one based on differentials. That could help suppliers more accurately forecast costs and help limit potential losses.

Government officials asked companies to propose offers on sour-crude differentials. That figure factors in the average spread between West Texas Intermediate, the U.S. crude benchmark, and an American sour crude gauge known as Mars in the three days after notice of the award.

Those benchmarks were separated by 98 cents as of Friday, according to price-reporting agency Argus Media, meaning companies’ financial risk in the event of market choppiness could be in cents, rather than dollars, per barrel.

“In theory, the same problem still remains because dealers have to hold this differential for two weeks while waiting for the decision,” said Bouchouev, a longtime trader. “However, the differential is significantly less volatile than the oil price.”

For now, the more pressing question for Biden’s potential oil trade may be whether prices stay within the Energy Department’s target range.

Wall Street was bullish on oil late last year, but many analysts more recently slashed forecasts as Western economies slowed, Russia continued pumping out crude and China’s appetite for energy failed to push prices higher.

• Saudi Energy Minister Tells Oil Speculators to ‘Watch Out’

(…) “I keep advising them that they will be ouching — they did ouch in April,” Saudi Energy Minister Prince Abdulaziz bin Salman said at the Qatar Economic Forum in Doha on Tuesday. “I would just tell them: Watch out!” (…)

The Organization of Petroleum Exporting Countries and its allies, a 23-nation bloc known as OPEC+, will meet on June 3-4 in Vienna to review production policy for the second half of the year.

While several delegates have said there’s no need for further action now as curbs already in place will help tighten global markets, Prince Abdulaziz has been known for orchestrating surprise interventions.

“We have to be vigilant, we have to be proactive — as we in OPEC+ has been saying for quite some time,” he said. (…

Funds have turned the most bearish in more than a decade across a slew of oil contracts.

“Current speculative positioning is so extreme as to make a response from key OPEC members likely,” analysts Paul Horsnell and Emily Ashford at Standard Chartered Bank Plc said in a report on Monday. “We think the latest data has increased momentum toward a defensive cut.” (…)

From Oilprice.com:

• According to S&P Platts, global air travel has finally returned to pre-pandemic levels this month as total commercial flights per day averaged 105,682 in the first two weeks of May, up 20% year-on-year.
• Global jet fuel demand, however, is expected to remain below 2019 levels for now as efficiency gains and a slower rebound in long-haul travel, especially in Asia, limit the consumption upside for the fuel.
• IATA estimates that new airplanes trigger fuel efficiency gains of around 2% per year and the pandemic has seen a widespread drive to replace older aircraft.
• With international seat capacity now 10% below 2019 same-month levels, attesting to flights being on average shorter than before, a full jet fuel demand recovery to 8 million b/d isn’t expected until 2027.

A Housing Bust Comes for Thousands of Small-Time Investors They were offered the benefits of owning apartment-building rentals without any of the work, in real-estate investments that have already left some people empty-handed.

(…) From 2020 through 2022, real estate syndicators reported raising at least $115 billion from investors, according to a Wall Street Journal analysis of Securities and Exchange Commission filings.

So far, defaults have been rare. But real-estate analysts and property investors anticipate a wave of foreclosures ahead.

Congress in 2012 opened the door to the syndicators with a law that made it easier to market real-estate investments online. The law, intended to open financial opportunities to lower-income people, greatly expanded the reach and audience for syndicator deals.

Syndicators largely favored apartment complexes in the South and Southwest, where real-estate prices were lower, rents were rising and housing regulations were generally looser. Many of these locales had fewer renter protections, which made it easier to evict tenants and raise rents.

The rental-market boom made millions for syndicators and their investors through rising rents and escalating property values. Average rent for a one-bedroom apartment in Phoenix has increased 37% since January 2021, driven by pandemic migration and a limited housing supply, according to the rental listing site Zumper. (…)

Syndicator investors have few legal protections, said Joan MacLeod Heminway, a securities-law professor at the University of Tennessee in Knoxville, Tenn. Unlike public companies, syndicators in many cases aren’t required to give regular updates on their buildings’ financial performance, she said. As limited partners, investors have no say over spending. Some who lost their investment never knew the properties were in trouble until they were near foreclosure. (…)

Many syndicators are racing to either raise funds or sell properties before tipping into foreclosure. Most hold balloon-payment loans that require repayment when they come due this year or next. Those syndicators face large payouts when getting new, more affordable property loans will be difficult. Even firms with multibillion-dollar portfolios have used syndication to buy apartment buildings that no longer make enough money to cover debt payments, bond documents show.

“The bubble is going to start popping if these guys can’t get out of these deals in time,” said Ralls, of Acora Asset. Lenders also risk heavy losses. (…)

IMF says it no longer expects UK recession this year

China Has a Youth Unemployment Problem Because Grads Are Waiting for Nonexistent Jobs Many economists say the problem reflects a jobs mismatch that could defy government solutions for years.

Joblessness among young people aged 16 to 24 rose to a record of 20.4% in April, significantly higher than a few months ago and far above the prepandemic rate of 13% or lower in most of 2019.

The rise was all the more surprising given that urban unemployment overall fell to 5.2% in China as of April, compared with 6.1% a year earlier.

Some economists believe the job market for young people will get worse before it gets better, with a record 11.6 million college students set to graduate this summer. 

A central problem, economists say, is that China isn’t creating enough of the high-wage, high-skill jobs that are sought after by its expanding base of educated young people, many of whom have loftier expectations than previous generations.

Rather than trade down for lower-wage jobs, many young people are opting to wait for more opportunities, even though such opportunities might not be available. (…)

If China fails to supply a generation of young people with work, it could put pressure on wage growth and slow down Beijing’s desire to build an economy driven more by consumption. It could also undermine social stability, if more young people become dissatisfied. (…

The economy overall is becoming more oriented toward services. However, many of the services jobs created during the past decade are lower-end roles, such as delivery drivers and restaurant waiters, which don’t necessarily attract university graduates, said Rory Green, head of China and Asia research at TS Lombard, a research firm. (…)

A survey by Zhaopin.com, an online recruitment platform, shows that around 30% of college students graduating this summer desire to work in the internet, telecommunications and education sectors, despite regulatory crackdowns in recent years that roiled many of those industries and left private employers wary of adding staff. (…)

Many are going back to school for more advanced degrees. A record 4.7 million undergraduate students signed up for exams to compete for 1.2 million spots in graduate schools this year. In 2021, nearly one-third of universities in Shanghai already had more graduate students than undergraduate students, according to a state media report.

Young people who delay entering the workforce or abandon job searches aren’t counted as job seekers in official statistics, according to Nancy Qian, a professor of economics at Northwestern University. If they were counted, the actual jobless rate would be even higher, she said. (…)

Citi Says Buyers Plow $21 Billion Into US Stocks Positioning is increasingly “one-sided,” the bank strategists wrote.

(…) The weekly flow of new longs was one of the largest seen in recent years, it added.

“The momentum is clear, and positioning is increasingly one-sided. Longs outnumber shorts by more than 9 to 1,” said Citi strategists led by Chris Montagu. “The few remaining shorts are all in loss, but a short squeeze is not likely to significantly impact markets.”

That echoed with Goldman Sachs Group Inc.’s prime brokerage unit data: Hedge funds that make both bullish and bearish equity wagers have snapped up US shares for two straight weeks, with total purchases reaching the fastest pace since October. (…)

For the rally to carry on, investors might want to see a broadening of risk taking.

John Authers: Is the S&P FANG’d Out? Debt Isn’t the Only Ceiling A breakout past 4,200 meets resistance as this rally’s dependence on the tech giants makes allocators nervous.

(…) Breakouts from a range can have a big impact on market psychology. So can failed breakouts.This matters. There is a dose of nerves about taking it to those levels. Further, Wall Street’s strategist community is braced for the S&P 500 to fall from here by the end of the year.

My Bloomberg colleague Lu Wang keeps a regular score-sheet of estimates. Her latest poll of 23 strategists, published at the end of last week, found an average end-year prediction of 4,017, with a median of 4,000. Analysts’ forecasts tend to be dragged upward by strong performance, but they are still at this moment predicting a decline of almost 5%. So the flirtation with a new high hasn’t yet created too much optimism among asset allocators. (…)

To be clear, it’s very unusual for smaller caps to trail so badly if stocks have really hit rock bottom and moved on to the first stage of a bull market. Indeed, if last October’s lows for the S&P 500 really were the trough, this is an unprecedentedly narrow recovery, owing almost everything to a small group of stocks. The following statistics are from Jonathan Krinsky of BTIG LLC:

Of the nine meaningful drawdowns since 1995, the average percentage of Russell 3000 stocks trading above their 200-day moving average at the 150-day mark post the bottom was 70% (min 56%, max 88%). As of the 150-day mark following the Oct. ’22 low, it was just 36%. In other words, it would be by far the weakest breadth this far off a major bottom of any new uptrend over the last ~30 years.

Generally, when markets embark on a durable advance, they need far more stocks to join in. (…)

There are lots of other things going on at present, of course, but the current nerves over the 4,200 level stem in large part from a rally that many didn’t expect, focused in a few companies that the active management community had missed out on. It’s rational for them to try to strengthen their competitive position when they’re judged against their peers by piling into those stocks — even though many still believe that they are too expensive, and that the stock market has come too far, too fast.

As investing is often about predicting the actions of others, a decisive close above 4,200 might make it rational to pour even more into the market. It’s common to call the rally after the Global Financial Crisis the most hated in history. This one might well now be running it close, at least among active managers.

Charts from Ed Yardeni, FYI:

• S&P 500 seen dipping between now and year-end – Reuters poll 

The S&P 500 index of U.S. shares will slip marginally between now and year-end as past interest rate hikes, troubled regional banks and weak earnings weigh on sentiment, according to strategists in a Reuters poll.

They see the benchmark index (.SPX) ending the year at 4,150, down slightly from Monday’s close of 4,192.63, but still up about 8% from the end of 2022, based on the median forecast of 43 strategists polled by Reuters during the last two weeks. (…)

The latest poll forecast for the S&P 500 is down slightly from the 4,200 year-end 2023 target in a February Reuters stocks poll. (…)

At the same time, the S&P 500’s forward 12-month price-to-earnings ratio is now at 19 compared with 17 at the end of 2022 and a long-term average of about 16, according to Refinitiv data.

“Historically, when you’ve seen this level of valuation, it’s normally associated with re-acceleration in earnings and also an outlook for double-digit earnings growth going forward. We don’t see that happening,” said Nadia Lovell, senior U.S. equity strategist at UBS Global Wealth Management, which has a 3,800 year-end S&P 500 target. (…)

In 2024, the S&P 500 will end at 4,500.

• PE groups sell stakes at discount on expectations valuations will stay low ‘Follow-on’ share offerings have rebounded even as prices have languished below IPO heights

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