U.S. Manufacturing PMIs:

S&P Global: Renewed decline in manufacturing sector conditions as weak demand drags on performance

The seasonally adjusted S&P Global US Manufacturing Purchasing Managers’ Index™ (PMI™) posted 48.4 in May, down from 50.2 in April, but broadly in line with the earlier released ‘flash’ estimate of 48.5. The latest figure indicated the fastest deterioration in operating conditions since February.

Contributing to the latest overall decline was a renewed and solid fall in new orders at manufacturing firms in May. The decrease was the sharpest in three months. Lower new sales were often attributed to sufficient inventory levels at customers and previous hikes in selling prices which served to dampen demand conditions. Foreign client demand also weakened midway through the second quarter, as new export orders fell at a sharp pace that was the quickest in three years.

Nonetheless, output at manufacturers continued to increase, thereby extending the current sequence of expansion to three months. The rate of growth slowed to only a marginal pace, however, as firms linked the rise to greater hiring and the timely delivery of inputs.

Manufacturers noted that the greater availability of candidates for existing vacancies helped boost workforce numbers in May. Employment grew at a solid pace that was among the fastest in two years. The diversion of resources towards the clearing of backlogs of work amid lower new order inflows led to the steepest fall in outstanding work for three years.

Meanwhile, input prices decreased at a modest pace midway through the second quarter, with firms recording a notable turnaround from the sharp uptick in costs seen in April. Shorter lead times for inputs and subdued input demand led to suppliers reducing their costs, according to panellists.

In response to lower operating expenses, goods producers moderated the pace at which output charges rose. Selling prices increased at only a marginal rate that was the slowest since July 2020. Firms attributed the softer pace of inflation to efforts to remain competitive and drive sales, alongside some reports of the pass-through of lower costs to clients.

May data signalled further efforts among manufacturing firms to reduce their inventory holdings as new orders moved into contraction territory. Stocks of both purchases and finished goods fell at the fastest rates for three months. At the same time, input buying was cut for the tenth successive month, and at the sharpest rate since February.

The ISM: Manufacturing PMI at 46.9%

• The May Manufacturing PMI^® registered 46.9 percent, 0.2 percentage point lower than the 47.1 percent recorded in April. 
• The New Orders Index remained in contraction territory at 42.6 percent, 3.1 percentage points lower than the figure of 45.7 percent recorded in April.
• The New Export Orders Index reading of 50 percent is 0.2 percentage point higher than April’s figure of 49.8 percent.
• The Production Index reading of 51.1 percent is a 2.2-percentage point increase compared to April’s figure of 48.9 percent.
• The Backlog of Orders Index registered 37.5 percent, 5.6 percentage points lower than the April reading of 43.1 percent.
• The Employment Index indicated another month of expansion, registering 51.4 percent, up 1.2 percentage points from April’s reading of 50.2 percent.  
• Of the six biggest manufacturing industries, only one — Transportation Equipment — registered growth in May.
• Of the 18 sub-sectors, 4 reported growth in May, 14 reporting contraction.
• Seventy-six percent of manufacturing gross domestic product (GDP) is contracting, up from 73 percent in April.
• A larger number of industries contracted strongly, as the proportion of manufacturing GDP registering a composite PMI calculation at or below 45 percent — a good barometer of overall manufacturing weakness — increasing to 31 percent in May, compared to 12 percent in April.

WHAT RESPONDENTS ARE SAYING

• “Overall impact for our business is mixed. Our scientific instrumentation business continues to be weakened by lending to support capital purchasing, while services and consumables stay on track and continue to increase in some markets. Hiring has slowed in response to continued global uncertainty on inflation and unrest in Europe.” [Computer & Electronic Products]
  

• “Demand continues to gain momentum due to new business pipelines finally yielding billable production. Personal care and home care are drivers.” [Chemical Products]
  

• “We continue to have a strong backlog for our customer orders; however, new orders are slowing. Our supplier on-time delivery continues to be a challenge for us, and we still face price increases on a weekly basis. Labor shortages are getting better within our organization and throughout our supply chain.” [Transportation Equipment]
  

• “Pricing seems to be becoming the primary focus of supply and sourcing teams, as customers and consumers are beginning to push back. While inflation is easing on some discretionary goods, high food costs persist across most categories.” [Food, Beverage & Tobacco Products]
  

• “Business is returning to pre-pandemic levels. There is increased demand in commercial/government markets and reduced demand in residential/consumer markets.” [Machinery]
  

• “Less volatility in customer demand from one month to six months out; seeing signs of slowing in the second half of 2023 and potentially into early 2024. Logistics, particularly from East Asia, continue to return to historical-level transit times; Europe and India remain elevated. Supply shortages are limited to select items only. Suppliers are still seeking price increases but are too late to be asking now.” [Fabricated Metal Products]
  

• “Although sales are slightly lower, they are holding at current rate — soft, not catastrophic.” [Furniture & Related Products]
  

• “Moderate increase in customer orders/demand, supplier deliveries improving, and raw material prices stable to soft.” [Plastics & Rubber Products]
  

• “Business conditions are good, demand remains strong, and we are continuing to ramp up production to keep up.” [Miscellaneous Manufacturing]
  

• “Industrial and high-tech demands are pushing out, as a slowdown is clear. This is stunting growth and currently making 2023 demand look flat to only slightly up, compared to original projections of 10-percent growth.” [Electrical Equipment, Appliances & Components]

Note that of the 18 manufacturing industries tallied, only 5 reported employment growth in May.

Considering weakish production (51.1%), very weak new orders (42.6%) and even weaker backlogs (37.5%), steady positive employment readings indicate labor hoarding. Positive during the weak period but no tailwind when demand recovers.

This chart is up to March 2023. Productivity looks set to get worse in Q2.

U.S. first-quarter productivity revised up; labor costs growth lowered

U.S. worker productivity slumped in the first quarter, though not as steep as initially thought, according to government data on Thursday, which also showed sharp downward revisions to labor costs last quarter and in the final three months of 2022.

Nonfarm productivity, which measures hourly output per worker, dropped at a 2.1% annualized rate last quarter, the Labor Department said. That was revised up from the 2.7% pace of decline estimated last month.

Productivity decreased at a 0.8% pace from a year ago, instead of the previously reported 0.9% rate. That marked the fifth quarter that productivity dropped on a year-on-year basis.

Weaker productivity is putting pressure on profit margins. Corporate profits have declined for three straight quarters.

Unit labor costs – the price of labor per single unit of output – surged at a 4.2% rate in the first quarter. They were revised down from the previously reported 6.3% pace of growth. They dropped at a 2.2% rate in the fourth quarter, rather than growing at a 3.3% pace as previously estimated.

Unit labor costs increased at a 3.8% rate from a year ago, revised down from the previously reported 5.8% pace. Despite the downward revisions, labor costs are rising too quickly to be consistent with the Federal Reserve’s 2% inflation target.

Hourly compensation increased at a 2.1% pace last quarter. It was previously reported to have advanced at a 3.4% pace.

Compensation fell at a 0.7% rate in the October-December quarter instead of growing at a 4.9% pace as previously reported. It rose at a 3.0% rate compared to the first quarter of 2022, revised down from the previously estimated 4.8% pace.

With business sales up 2.3% YoY in Q1, operating margins are being squeezed by labor costs rising 5%.

QoQ, employment costs are rising at a steady 1.2% rate, or 4.8% a.r..

The Fed’s Inflation Fight Faces a New Challenge: A Dry Panama Canal Weight restrictions and surcharges are lifting cargo prices and worrying economists about inflation risks

(…) Just as the world’s delivery bottlenecks are easing, Panama’s drought and worrisome weather patterns elsewhere threaten to revive some of the chaos of 2021, when a surge in shipping costs and consumer demand resulted in shortages of goods, helping to drive US inflation to a four-decade high. (…)

The drought already is making it more expensive to move goods. The canal authority has steadily reduced draft levels – how low a vessel can sit in the water – since February. To comply with lower drafts, large ships must lighten their loads by taking fewer containers overall or by dividing the same amount of cargo among more containers. Either way, the result is higher price tags for consumer and industrial goods that move through the canal. Some ocean carriers also began charging per-box container fees on June 1 in response to the draft limits. (…)

Still, large volumes of cargo are moving, with demand at about the same level as in 2019, according to Peter Sand, who is chief analyst for Oslo-based Xeneta AS, which tracks shipping rates. (…)

The draft limit for the larger vessels is now 44.5 feet, down from the normal 50 feet, and is set to fall again to 44 feet on June 13. That could result in a 40% reduction of cargo, according to Nathan Strang, head of ocean freight at Flexport Inc., a freight forwarder.

If water levels hit 78.2 feet as the canal authority predicts, the maximum draft will decline to 43 feet, reducing cargo capacity even more. (…)

The 2021 bottlenecks, which caused a six-fold spike in shipping costs from pre-Covid levels, increased inflation by more than 2 percentage points in 2022, said Ostry, the Georgetown economist. “Shipping costs can be a canary in the coal mine for future inflation spikes” since it takes 12 to 18 months for those costs to feed through the economy.

His research shows a 20% increase in shipping costs boosts the inflation rate by 0.15 percentage point a year later. (…)

Weather patterns worldwide are off, Zheng said. “If you put Panama’s low water levels into the big picture, actually you see that it’s just one signal and globally you will probably see more and more coming.”

Zheng points to the Rhine River in Europe, where high temperatures and scarce rainfall last year caused delays and increased shipping costs for commodities. Already this year, areas of Southeast Asia have experienced their hottest days ever recorded, and low water levels in the Yangtze River, a vital inland freight route in China, are also impeding shipping, she said. (…)

Goods deflation, supposed to help offset services inflation (black), has not happened just yet in spite of subdued import prices.

On a MoM basis, goods prices stopped deflating in December. They are up 2.4% annualized since with import prices up 1.1% a.r.. The USD is down 8.7% since its October 2022 peak.

Canada: GDP starts 2023 strongly

Canada’s first-quarter GDP surprised economists’ consensus, as the monthly measure understated the rebound in GDP after a weak fourth-quarter performance. For the second consecutive quarter, international trade was a strong contributor to growth, but domestic demand was solid in Q1 whereas it was flat the quarter before.

The performance of consumer spending was eye-catching, with growth of 5.7%, the strongest in 3 quarters. We knew that consumers had assets at their disposal, notably a savings rate that remained above its pre‑pandemic level, and thus an accumulation of excess savings that seems to have been put to good use. Growth in the first quarter was therefore stronger than the Bank of Canada had anticipated in its latest Monetary Policy Report.

However, we need to put things into perspective. Like us, the central bank probably underestimated the economy’s potential GDP, which is currently being boosted by an unprecedented demographic boom. If the unemployment rate and falling job vacancy rates in the economy are any guide, this growth does not seem to be pushing the economy further into excess demand.

In light of this morning’s data, we do not change our view that the economy will slow significantly over the next four quarters as interest rate hikes continue to weigh on the economy. The third consecutive quarter of declines in corporate profits and investment does not suggest that the appetite for hiring will continue in the months ahead.

A softer labour market is also likely to dampen the enthusiasm of consumers, who have been able to afford high levels of consumption despite a decline in disposable income, a situation that will not last much longer with the savings rate now back to pre-pandemic levels.

  

• Real GDP increased by 3.1% annualized in 2023 Q1, above consensus expectations for +2.5% annualized growth.
• Compensation per employee grew +7.2% a.r. but a large decline in net transfers received led to a contraction in household net disposable income.
• The household saving rate declined sharply to 2.9% in Q1.
• Preliminary information indicates that real GDP increased by 0.2% in April.

OPEC+ Challenge Is Overcoming an Internal Squabble Saudi-UAE tension on production quotas could determine fate of the crude market for months.

On the surface, everyone is unified in the OPEC+ family. Listen to the ministers ahead of their meeting on Sunday, and everyone is making the right noises. Don’t be surprised if the cartel doubles down on its production cuts, at the very least on paper, to try to juice flagging oil prices.
Behind closed doors, it isn’t as smooth, however.

While Russia, Iran and Venezuela are pumping more oil than expected right now, despite Western sanctions, the key country to watch going into 2024 is the United Arab Emirates, the fourth-largest producer within the OPEC+ alliance.

For several years, the UAE has fought an unsuccessful campaign for a higher quota, commensurate with its rising production capacity. The Emirati push erupted into public in July 2021, when Riyadh and Abu Dhabi clashed at an OPEC+ meeting, forcing the group to adjourn the gathering. The meeting didn’t re-start until after the UAE several days later backed off from its demands under Saudi pressure.

Almost two years later, the market has largely forgotten about that episode. But the feud hasn’t gone away, and it could become central in the next few months as OPEC+ starts to plot its 2024 production policy. The difference from 2021 is that Riyadh appears to be ready to oblige its neighbor. (…)

If Riyadh allows Abu Dhabi to pump more oil in 2024, as it seems the deal is, I believe the UAE will be happy to stay at OPEC.

With the oil market already in surplus, largely due to Russian production, it’s difficult to see how committing to add supply would be anything but bearish. Oil prices have fallen to nearly $70 a barrel, down almost 30% from late last year. And that decline is even worse when adjusted for inflation. Currently, the purchasing power of a barrel of oil, in real terms, is back to where it was in 2005.

If supply and demand behave in the second half of the year as OPEC currently expects, tightening the market in late 2023 and early 2024, allowing the UAE to boost its production could be easy. The increase would be soaked up by demand for extra oil. But if the market remains loose, any increase could put pressure on prices. (…)

Based on the latest deal among a handful of OPEC nations in late April, the UAE has a “voluntary” production level of 2.875 million barrels a day. But the country says its can produce more than 4 million. (…)

If you believe the chatter of Middle East-based diplomats, Abu Dhabi and Riyadh have already agreed in private to a compromise increase. The midpoint, around 3.5 million barrels a day, is probably a good bet. Both sides could claim victory.

If, as I expect, the UAE wins a higher quota in 2024, it’s likely to be the first step in a series of increases. Last year, Abu Dhabi brought forward its plan to reach a production capacity of 5 million barrels a day to 2027, from an initial target of 2030. (…)

China Mulls New Property Support Package to Boost Economy

Regulators are considering reducing the down payment in some non-core neighborhoods of major cities, lowering agent commissions on transactions, and further relaxing restrictions for residential purchases under the guidance of the State Council, the people said, asking not to be named because the matter is private.

The government may also refine and extend some policies laid out in the sweeping 16-point rescue package it rolled out last year, the people added. The plans have yet to be finalized and may be subject to change, according to the people. (…)

Signs of renewed weakness are emerging in the residential market, with a rebound in home sales slowing in May to just 6.7% from more than 29% in the previous two months. (…)

Despite a broad range of policies last year, a mountain of developer debt — equal to about 12% of China’s GDP — is at risk of default and poses a threat to financial stability, according to Bloomberg Economics. (…)

A number of developers are struggling to get creditor support for their restructuring plans after China’s real estate sector defaulted on more than 100 dollar bonds.

Two of the country’s most high-profile developers Dalian Wanda Group Co. and China Evergrande Group are showing escalated signs of distress.

Wanda is on an asset-selling spree to generate more liquidity, while seeking a loan relief plan that may allow it to extend principal repayments for some borrowings from Chinese banks, people familiar said in May.

Evergrande said this week it faces more than a thousand lawsuits involving 350 billion yuan. The embattled property developer has yet to win enough support from creditors for its overseas debt restructuring plan. (…)

• Investors Zero In on China Local Debt Blowup as Top Risk in Asia

Investors across Asia earmarked China’s ballooning levels of municipal borrowing as the region’s number one financial risk this year in a survey that ranked their biggest concerns. (…)

With a slew of data showing China’s economic rebound is faltering, focus is once again turning to troubled spots in the world’s second largest economy. In one recent example, a last minute bond payment by a local government owned firm highlighted weakening debt serviceability that’s threatening to extend worries beyond the country’s credit traders and into other markets.

The vehicles are a key method of funding China’s public infrastructure as well as its property market. S&P Global Ratings put the total debt of LGFVs at more than 46 trillion yuan ($6.5 trillion) at the end of last year. Of that, onshore bonds due in 2023 are at a record high at about 4.3 trillion yuan. Goldman Sachs Group Inc. estimates China’s total government debt is about $23 trillion, a figure that includes the hidden borrowing of thousands of financing companies set up by provinces, cities and state policy banks.

“We believe any hawkishness by Beijing on local debt would intensify the financial vulnerabilities of local governments, jeopardizing the budding economic recovery,” said Carl Liu, economist at KGI Securities in Taipei. “We think LGFVs’ debt-servicing ability is weak, and it seems that LGFVs rely on new financing to service debt, strengthening the default risk.” (…)

The worry is that defaults of shadow bank instruments could lead to souring of publicly traded bonds, creating financial risks that weigh on an already sluggish economy further down the line. (…)

In China, a property debt crisis has kept the mortgage-backed debt issuance market effectively shut for almost a year and a half. There have been no sales of residential mortgage-backed securities in yuan since February 2022, one of the longest dry spells on record. (…)

Lots of work still being done at home

In May, 30% of U.S. employers had a structured-hybrid plan, where workers come in a minimum number of days per week, Axios’ Emily Peck writes from Flex Index data from the hybrid-work software company Scoop. Back in February, only 20% of firms in the database were doing structured-hybrid.

Data: Flex Index. Chart: Axios Visuals

U.S. Job Openings Rose in April, Reversing Three Months of Decline Employers’ postings topped 10 million and layoffs fell

Employers reported a seasonally adjusted 10.1 million job openings in April, the Labor Department said Wednesday, up from a revised 9.7 million in March. April’s increase reversed three months of declines. Layoffs fell to 1.6 million in April, from 1.8 million in March.

Openings have decreased from the record 12 million recorded in March 2022. But they remained well above the 5.7 million people looking for work in April—pointing to a solid labor market more than a year after the Federal Reserve began aggressively lifting interest rates to cool the economy and tame inflation.

“Demand is still strong and the labor market is very active,” said Dawn Fay, operational president at job recruiting firm Robert Half. “Everyone is still looking to hire, it seems, whether they’re small businesses or large businesses. We’re not really seeing any pockets of weakness.”

Job openings increased for positions at retailers, warehouses, healthcare businesses and transportation. Vacancies declined at factories, real-estate firms, and state and local governments. (…)

Looking at the Indeed Job Postings, the downward trend on Job Openings seems intact, albeit slowing from Q1.

• The Great Resignation is over (Axios)

Even leisure and hospitality workers — once the poster child for the quits boom — are returning to pre-pandemic norms. The quits rate in this segment hit 4.6% in April — close to the January 2020 rate of 4.4%, and well below the peak 5.8% last summer.

Data: Labor Department. Chart: Axios Visuals

US Economy Has Signs of Cooling as Hiring and Inflation Ease, Fed’s Beige Book Shows

“Employment increased in most districts, though at a slower pace than in previous reports.” the Fed said Wednesday in the report, published two weeks before each meeting of the policy-setting Federal Open Market Committee. “Prices rose moderately over the reporting period, though the rate of increase slowed in many districts.”

The survey showed economic activity was little changed overall in April and early May. (…)

“Overall, the labor market continued to be strong, with contacts reporting difficulty finding workers across a wide range of skill levels and industries,” the report stated. “That said, contacts across districts also noted that the labor market had cooled some, highlighting easier hiring in construction, transportation, and finance.” (…)

Most districts in the report said residential real estate activity picked up, though the office market continued to show weakness.

Some districts noted weaker demand for transportation, especially trucking. (…)

Fed Sets Up June Pause, Hike Later Two Federal Reserve officials framed a potential decision to forgo a rate increase as a chance to assess more economic information, then possibly raise rates later this summer.

(…) “A decision to hold our policy rate constant at a coming meeting should not be interpreted to mean that we have reached the peak rate for this cycle,” Fed governor Philip Jefferson said in a speech Wednesday in Washington. “Indeed, skipping a rate hike at a coming meeting would allow the committee to see more data before making decisions about the extent of additional policy firming.”

Jefferson’s comments were notable because President Biden nominated him in May to serve as the Fed’s vice chair, a position that typically aids the Fed chair in shaping the policy agenda ahead of the central bank’s rate-setting Federal Open Market Committee meeting.

Philadelphia Fed President Patrick Harker, a voting member of the FOMC this year, also endorsed holding rates steady in June. “I think we can take a bit of a skip for a meeting and, frankly, if we’re going to go into a period where we need to do more tightening, we can do that every other meeting,” he said Wednesday at a conference in Philadelphia.

Fed Chair Jerome Powell laid the foundation for skipping a rate increase during a public appearance on May 19.

“We’ve come a long way in policy tightening, and the stance of policy is restrictive, and we face uncertainty about the lagged effects of our tightening so far and about the extent of credit tightening from recent banking stresses,” he said. “Having come this far, we can afford to look at the data and the evolving outlook to make careful assessments.”

Some central-bank officials, including two committee voters and two nonvoters, had recently signaled support for continuing to raise rates because inflation and economic activity haven’t slowed sufficiently.

Two other voters had indicated they would be open to either an increase or a skip. “I can make the argument either way,” said Minneapolis Fed President Neel Kashkari in a May 19 interview. “I would object to any kind of declaration that we’re done.” (…)

Investors saw a roughly 35% chance of a June rate increase after Jefferson and Harker spoke Wednesday, down from 70% right before, according to CME Group. (…)

The remarks hinted at potential Fed discomfort with how investors had begun to anticipate a rate rise next month. Forgoing an increase that had become widely anticipated by investors would risk sending a confusing signal about the Fed’s resolve to bring down inflation.

“If a rate increase is priced at 60% or 70% on the day of the meeting, then it would be a bit of a narrative challenge” to not raise rates, said Hatzius. “That’s probably not a comfortable place to be.” (…)

Banking stresses have calmed in recent weeks, and economic activity hasn’t shown much evidence so far of any fallout from tighter lending standards. (…)

On Wednesday, investors saw a 65% chance that the Fed would raise rates at least once by July. (…)

• The case for higher US interest rates is compelling, Bill Dudley writes. The Fed, no longer woefully “behind the curve,” must weigh a deep economic recession against out-of-control inflation. The labor market remains too tight, meaning any pause will probably be short-lived.
• Cooling Eurozone Inflation Opens Path for ECB Rate Pause Consumer prices in the eurozone were 6.1% higher in May than a year earlier. A pause after an expected rate rise in June would give the central bank time to study the impact of its recent tightening.
• Euro-Area Core Inflation Eases But Won’t Stop ECB Hiking Lagarde says “no clear evidence” that it’s peaked and ‘we still have ground to cover’ on rates

MANUFACTURING PMIs

Eurozone: Production and new orders fall at strongest rates in six months, driving factory gate prices lower for first time since September 2020

The HCOB Eurozone Manufacturing PMI®, compiled by S&P Global, fell from 45.8 in April to 44.8 in May. Below the crucial 50.0 threshold which separates improvement from deterioration, the latest results signalled a further decline in the health of the eurozone manufacturing sector, and one that was the steepest in three years.

Of the eight eurozone countries monitored by the survey (which account for an estimated 89% of total manufacturing activity), Greece was once again the only member state to register an improvement in operating conditions since April. That said, the upturn here slowed and was only modest. Elsewhere, with the exception of France, manufacturing sector downturns worsened compared to the prior month. In many cases, rates of deterioration were the sharpest seen since the height of the initial COVID-19 outbreak in May 2020.

May survey data revealed a stronger downturn in factory production volumes across the euro area. The decline in output was solid and the quickest since last November. Falling new sales was a notable headwind to manufacturers midway through the second quarter, with new order inflows dropping sharply and at the quickest pace in six months. Surveyed companies highlighted a growing challenge in enticing new business from foreign clients as the downturn in new export orders accelerated to a steep rate. In fact, May’s deterioration in external demand was among the sharpest on record (since June 1997).

With the decrease in overall new business inflows outpacing that of production yet again in May, eurozone factories worked through their backlogs to help prop up output levels. The amount of orders pending completion fell for the twelfth month in succession during May, with the rate of depletion the fastest since last October. Eurozone manufacturers continued to recruit additional staff, extending the current sequence of job creation to 28 months. However, the rise in workforce numbers was modest and the joint-weakest over this period.

The latest survey results showed a persistence of inventory drawdowns, with stocks of purchases falling for a fourth month running and to the greatest extent since October 2019. Indeed, eurozone manufacturers cut their purchasing activity sharply once again midway through the second quarter as firms showed a preference to use up existing materials where possible. Stocks of finished goods were broadly unchanged since April.

Rapidly improving supply chain conditions also justified businesses’ destocking efforts, with average input lead times shortening drastically once again during May. Subsequently, surveyed firms recorded the strongest decrease in their input costs since February 2016 amid reports of falling supplier charges, as well as decreases in energy prices. Lower operating expenses allowed firms more flexibility over their pricing strategies. For the first time since September 2020, the price of goods leaving the factory gate declined during May.

Looking ahead, despite the prevailing business environment worsening, eurozone manufacturers were optimistic regarding the 12-month outlook. That said, the level of positivity was subdued by historical standards and eased to a five-month low.

China: Manufacturing output growth improves to 11-month high

The headline seasonally adjusted Purchasing Managers’ Index™ (PMI™) picked up from 49.5 in April to 50.9 in May. Crucially, the latest reading was above the neutral 50.0 level to signal the first improvement in the health of the manufacturing sector since February. Though mild, the pace of improvement was stronger than the post-pandemic average.

Helping to push the headline index higher was a strong and accelerated rise in production during May. Notably, the rate of growth picked up from April’s three month low and was the best seen since June 2022.

Greater intakes of new business was central to the latest improvement in output. Though modest, the rate of new order growth was the second-quickest seen over the past two years, with a number of firms noting firmer demand conditions and new customer wins. New export business increased at a slightly faster pace. (…)

The improvement in supply chains led to a further easing of cost pressures in May. In fact, average input costs fell solidly for the second month in a row. Manufacturers noted that prices had fallen for a variety of inputs, notably metals, food and fuel. However, intense market competition often led firms to share cost savings with clients, with companies cutting their selling prices at a solid rate.

Although firms registered improvements in output and demand in May, business confidence regarding the 12-month outlook for production slipped to a seven month low. (…)

Japan: Manufacturing output returns to growth in May

At 50.6 in May, up from 49.5 in April, the headline au Jibun Bank Japan Manufacturing Purchasing Managers’ Index™ (PMI) registered above the neutral 50.0 value for the first time since October 2022. The latest reading was broadly in line with the long-run series average (50.7) and signalled a modest overall improvement in operating conditions.

May data pointed to a rise in output levels for the first time since June 2022 and, although only marginal, the rate of expansion was the fastest for one year. Renewed growth of manufacturing production was attributed to improving domestic economic conditions and a subsequent turnaround in client spending.

Total new work increased at the fastest pace since April 2022, albeit only marginally overall. Greater business and consumer confidence had helped to lift overall customer demand, according to survey respondents. That said, a number of firms noted that overstocked clients had acted as a headwind to new business growth in May. Lower export sales, especially to China, also held back total new order growth during the latest survey period. (…)

An improved balance between demand and supply helped to moderate overall input price inflation across the manufacturing sector. The latest rise in average cost burdens was the slowest since April 2021. Efforts to pass on higher raw material prices, energy bills and staff wages meanwhile led to another robust rise in output charges during May, but the rate of inflation eased to a three-month low.

Bank of Mexico Raises Growth Estimate for 2023 The Bank of Mexico projects the country’s economic output to grow 2.3% in 2023, more than the 1.6% the central bank previously estimated, after a stronger-than-expected start to the year.

Traders Unfazed by Potential OPEC Production Cuts Oil prices have slid to a critical level for Saudi Arabia, setting up a showdown between the cartel and speculators.

Oil traders are betting prices will continue to drop despite the best efforts of producing countries to boost them.

Prices have slid since the Organization of the Petroleum Exporting Countries and its allies, the coalition known as OPEC+, jolted markets in October by cutting production by 2 million barrels a day. A February vow from Moscow to curtail another half-million barrels and a voluntary April move by eight OPEC+ members to cut 1.2 million barrels more haven’t stopped the slide.

Futures for Brent crude oil, the international benchmark, have lost more than 20% since the October cuts, settling at $72.66 a barrel on Wednesday. That is below the estimated $81 that Saudi Arabia—the de facto leader of OPEC—needs to balance its budget.

The cuts have been countered by new petroleum from non-OPEC+ countries, by the prospects of economic slowdown and crisis, and by Russia’s unexpectedly robust oil exports despite Western sanctions. Bullish analysts have repeatedly lowered their forecasts. Bullish traders have been repeatedly burned. (…)

With Russia’s priorities now shifted by war and Western sanctions, some analysts said that OPEC+ is effectively defunct and that Saudi Arabia, the world’s second-largest oil producer behind the U.S., is essentially on its own. (…)

A few surging stocks haven’t helped “average” investors

A couple of times in recent weeks, we’ve looked at the rally’s primary drivers in the world’s most benchmarked index. It’s no secret that a handful of behemoth Technology stocks are a major driving force behind this year’s gains.

So far in 2023, the S&P 500 index that everyone watches is showing a respectable gain. The equal-weighted version of the index, which weights each of the 500+ stocks equally, is struggling to hold any year-to-date gains at all. (…)

The 3-month rate of change in the ratio of the equal-weight to cap-weight versions plunged 8%, among the worst declines since the 1990 inception of the equal-weight index.

A few times, the decline didn’t quite reach the -8% threshold. Two coincided with an imminent turn in the ratio, with the equal-weight version outperforming the cap-weight version for a couple of years afterward.

After big declines in the ratio, the average stock shined

The table below shows returns in the cap-weight version (the standard one that everyone watches) after the few times the ratio declined at least 8% over three months. Two preceded mediocre returns over the next few months, and one was at the low during the pandemic.

The equal-weight version of the index performed better after these signals. The six- and twelve-month returns were excellent, with minimal drawdowns though the volatility in 2008 was uncomfortable. (…) Over the following year, the equal-weight version of the S&P 500 outperformed by more than 10% after each signal. (…)

The hand-wringing over a handful of stocks driving major indexes higher this year doesn’t have a lot of empirical support. It’s hard to find evidence that such behavior is necessarily bad for markets. What it has clearly done, however, is frustrate those who don’t want to have outsized exposure to a handful of stocks. With a relatively short history and the necessary limitation of looking at extremes, it’s hard to place much weight on extremes like we’re seeing now. Still, the history we do have suggests that declines like this in the equal-weight S&P 500 should be reversed in the months ahead. Those betting on 500 stocks performing better than 5 have some support for their view.

This Ed Yardeni chart shows that the S&P 500 P/E ex-IT was 16.4x on May 25:

The red line below is at 16.4:

• BofA’s private clients have been selling stocks.

Source: BofA Global Research (via The Daily Shot)

Profit Numbers Get Spruced Up as Business Slows Reallocate costs. Unwind charges. Delay depreciation. Companies are using nontraditional ways to boost the bottom line as slowing business makes it harder to meet earnings expectations.

Business slowed last year for Google’s parent, Alphabet GOOG -1.02%decrease; red down pointing triangle. The tech giant still beat earnings expectations in this year’s first quarter, in part because it said that its computer servers would last longer than expected.

The company’s filings noted two material changes in its accounting that helped boost the bottom line.

First, the company revised its estimates on the useful life of its server infrastructure, saying it would last up to six years instead of four. The change, the second such extension in two years, added 6 cents a share of earnings, according to the company. The change mirrored similar moves by competitors.

Separately, the company said it was shifting its stock-compensation awards for employees from January to March, resulting in the company recognizing less expense in the first quarter relative to the rest of the year.

The company’s filings didn’t disclose the precise impact of the move on first-quarter earnings but mentioned it several times as a material offset to expenses. In a filing, the company said the move was due to a previously announced change to employee evaluations. (…)

Google isn’t alone in boosting its earnings in surprising ways. When business slows, companies often try to make their numbers look better. That appears to be happening now, from tech giants to used-car dealers. (…)

Businesses’ nontraditional earnings metrics are beating reported earnings by a lot more than last year, and a measure of the likelihood of earnings manipulation is at its highest level in about 40 years. (…)

One way companies are trying to make their results look better is to provide numbers that don’t adhere to accounting standards—what are often referred to as pro forma measures—alongside the official data.

A report published Thursday by research firm Calcbench compared the net income based on accounting standards for 200 randomly selected companies in the S&P 500 with their adjusted net income, which can include or exclude items that would normally be counted. The adjusted numbers were higher by $1.1 billion on average last year, an increase of more than 130% over a similar sample from the year prior.

Another measure used to predict the likelihood of earnings flattery is the Beneish M-score, named for its creator, Indiana University accounting professor Messod Beneish. Recently, academics found the aggregate score of a sample of nearly 2,000 companies was at its highest level in more than 40 years, the most recent data shows. Historically, the aggregate score peaks ahead of a downturn. (…)