Fed Signals Smaller Rises but Ultimately Higher Rates Chairman Jerome Powell says too soon to talk about pausing rate increases

The increase approved Wednesday, the Fed’s fourth consecutive 0.75-point rate rise, lifts the central bank’s benchmark federal-funds to a range between 3.75% and 4%. After the decision, Chairman Jerome Powell said officials would contemplate a smaller hike at their next meeting in December. But he cautioned that they might raise borrowing costs next year more than they have projected.

“The question of when to moderate the pace of increases is now much less important than the question of how high to raise rates and how long to keep monetary policy restrictive,” he said at a news conference Wednesday.

Mr. Powell also warned that reducing the size of rate increases didn’t mean the Fed thought it was close to pivoting away from raising rates.

“It is very premature to be thinking about pausing,” said Mr. Powell. “We think we have a ways to go.” (…)

At their September policy meeting, most Fed officials projected that they would need to raise the benchmark rate to around 4.6% early next year. Officials didn’t release new rate projections Wednesday. Mr. Powell said that if they had, they would have been higher given recent strength in the labor market and high inflation readings. A higher path for interest rates suggests a greater risk of a recession, he said.

“The inflation picture has become more and more challenging over the course of this year, without question,” he said. “To the extent rates have to go higher and stay higher for longer, it becomes harder to see the path” that avoids a recession. (…)

While Mr. Powell said he didn’t think the Fed had raised interest rates too much, he repeated his view that it would be appropriate for the central bank to err on the side of overdoing it rather than underdoing it because he saw a bigger cost for the economy in allowing inflation to become entrenched. (…)

His comments opened the door to slowing rate rises as soon as December, though he said no decisions had been reached. He also said the Fed was not close to stopping rate rises and holding rates steady for a while. “We think there is some ground to cover before we meet that test,” Mr. Powell said. (…)

“I don’t think wages are the principal story of why prices are going up. I also don’t think that we see a wage-price spiral,” said Mr. Powell. “But…once you see it, you’re in trouble. So we don’t want to see it.”

Investors initially thought they had correctly anticipated the pivot. The official statement released at 14:00 was almost identical to the previous one but with some seemingly dovish additions such as “the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”

Mr. Powell’s 14:30 presser started softly, until, at 14:51, he answered a question with “Let me say this”, then went on to say that “it is very premature to think or discuss pausing” and made sure that the message was clear:

• inflation is not slowing as much as expected;
• consumer spending has not been impacted as much as expected by higher interest rates;
• the “very, very strong” labor market plus accumulated savings may require “more patience” before we see inflation recede to the 2% goal. “We will stick with this”.

Near the end of the presser, he said the official statement was important but added that “I control the messaging, that’s my job.”

His key message was this:

“The question of when to moderate the pace of increases is now much less important than the question of how high to raise rates and how long to keep monetary policy restrictive”.

MAXED OUT?

Consumers spend from disposable income and savings (more or less credit). American consumers tend borrow more when their income growth falls below what is deemed necessary for their desired standards of living. Post pandemic, income growth (blue) has slowed to a crawl while spending (black) is growing 3-4 times faster than in 2019 as consumer loans (red, ex-housing related) jumped 19% from their pandemic low and now represent 9.6% of disposable income, a historically high level, particularly considering where interest rates currently stand (back to 2001 on credit cards).

Debt servicing was still very low in Q2 (last data point below) but the recent jump in borrowing costs, applied to very high debt balances will boost debt servicing costs considerably in Q3 and through 2023.

• Qualcomm Sees Smartphone Slump Worsening The company issued a weaker outlook that adds to signs of stress for the semiconductor industry. Its stock fell 7% in after-hours trading.

Eurozone manufacturing output falls at sharpest pace since initial COVID-19 wave as demand for goods plummets

The eurozone manufacturing sector slid further into contraction territory at the start of the fourth quarter as output and new orders fell at rates rarely surpassed across the 25 years of PMI data collection. Export demand also sank sharply as geopolitical uncertainty, high inflation and weaker economic conditions around the world weighed on foreign client spending.

With output requirements rapidly diminishing, eurozone manufacturers reduced their purchases of inputs to the quickest extent since May 2020. A further easing of supply-chain pressures was also recorded as more capacity was freed up at suppliers.

Meanwhile, having accelerated slightly in September, price pressures subsided at the start of the fourth quarter. Nevertheless, output charge and input cost inflation rates remained historically elevated.

The S&P Global Eurozone Manufacturing PMI® recorded in sub-50.0 territory for a fourth month in a row in October, signalling a sustained downturn in manufacturing sector conditions. At 46.4, the headline index fell from 48.4 in September to its lowest level since May 2020.

Of the monitored eurozone constituents, only Ireland saw an improvement during October. The remaining countries registered deeper manufacturing downturns, with the majority recording the fastest deterioration since the initial COVID-19 shock during the first half of 2020. Spain was the worst-performing nation during October, closely followed by Germany.

(…) According to panel comments, falling client demand was a key factor driving lower production volumes. The level of incoming new orders slumped during the latest survey period, reflecting shrinking demand from clients in markets across the eurozone and other parts of the globe. In over 25 years of data collection, the rate of decline seen in new orders during October has only been surpassed during periods of intense economic turbulence such as the global financial crisis period between 2008 and 2009 and the COVID-19 pandemic.

Euro area manufacturers were also faced with another steep increase in their operating costs during October. Energy prices were a major factor that drove expenses higher, according to anecdotal evidence. That said, the rate of input cost inflation eased and was the second-weakest since the start of 2021. (…)

Indeed, lower pressure on suppliers was partly a result of falling input demand. Buying activity fell at the quickest pace since May 2020 during October. Nevertheless, pre-production stocks rose as some companies accumulated safety-stock buffers to protect against price and supply risks.

Meanwhile, October survey data pointed to the fastest reduction in backlogs of work across the eurozone manufacturing sector since May 2020. A deficit of new work relative to output helped companies clear their pending orders. Nonetheless, employment growth was sustained and edged up fractionally.

Looking ahead, eurozone manufacturers continue to expect falling output volumes over the next 12 months. Excluding the months at the start of the pandemic, the Future Output Index registered its lowest reading since the series began in 2012 during October. High inflation, geopolitical uncertainty and worsening economic conditions globally underpinned the pessimistic outlook.

• BOE Set to Deliver Biggest Rate Rise in 33 Years

China Services PMI: October sees sustained slowdown in services activity

October saw a sustained slowdown in activity across the Chinese service sector, as ongoing efforts to stop the spread of COVID-19 disrupted business operations and weighed on demand. Positively, there was arise in services employment for the first time in 2022, with firms showing slightly more optimism towards the outlook.

On the inflation front, October data showed a slight pick-up in the rate of increase in prices charged by service providers to an eight-month high.This was despite a softening of cost pressures across the sector.

(…) At 48.4, down from 49.3, the latest reading was the lowest since May. That said, the rate of decline remained modest and far softer than seen during the much larger outbreak of COVID-19 in the spring.

Containment measures associated with the latest spate of infections acted to suppress demand during October.This was highlighted by a second successive monthly reduction in inflows of new business at Chinese services firms. The rate of decline eased and was only marginal, however. The slower fall in overall inflows of new work came despite a renewed downturn in new business from abroad.

Efforts to expand staffing capacity and enhance sales capabilities contributed to a rise in employment across the Chinese service sector in October. Although only modest, the increase in workforce numbers was nevertheless the most marked since May 2021 and ended a run of job losses stretching back to the start of the year. (…)

Turning to prices, October’s survey data pointed to a slightly faster rise in average fees charged by services companies in China. The rate of inflation was the quickest since February and above the series long-run average. Where output prices increased, this often reflected the pass-through of higher costs to customers, anecdotal evidence showed. Alongside a rise in oil-related prices, firms reported higher wage bills leading to an increase in operating expenses. That said, the overall rate of cost inflation was the second-slowest in the past 14 months.

Looking ahead, October saw a slight uptick in firms’ expectations for activity over the coming year. However, coming off a six-month low in September, the degree of optimism remained relatively subdued, amid ongoing concerns about the pandemic’s impact on growth prospects and challenging global market conditions.

Job Openings Rose in September Demand for workers remains elevated with job postings far outpacing number of unemployed people looking for work

The increase in openings and other figures in the Labor Department’s report on hiring demand and job turnover added to signs of a healthy labor market that has cooled slightly compared with the first half of the year. Payroll growth slowed in September but was still strong. Pay and benefits increases rose rapidly in the third quarter but at a similar pace as the prior quarter. Jobless claims have remained low as employers hold on to workers.

Employers’ total job openings increased 437,000 to a seasonally adjusted 10.7 million in September from an upwardly revised 10.3 million openings the prior month, the Labor Department said Tuesday. September openings were well above the 5.8 million unemployed people seeking work—an imbalance that is putting pressure on wages and overall inflation.

Job openings peaked in March at 11.9 million and have since declined in four of the past six months through September. Openings remain elevated compared with a 7.2 million average in 2019 ahead of the pandemic. (…)

The number of times workers quit their jobs remained elevated in September but fell slightly to 4.1 million, down from a 4.5 million peak in November 2021.

Layoffs edged down to 1.3 million, the department said, a total that was below the 2019 average.

Food services, entertainment, education, healthcare and federal government job openings drove the September increase, the Labor Department said. Manufacturing and financial activities were among a handful of industries that saw a decline. (…)

Indeed estimated that openings totaled around 10 million in mid-October, a decline from September’s level. Indeed data show that roles in the technology industry, such as in software development and marketing, saw postings decline the most this year through the middle of last month. (…)

Haver Analytics adds:

New hires declined 252,000 (-6.5% y/y) in September after rising 96,000 in August, revised from 39,000. The latest decline was widespread across industries including manufacturing (-18.5% y/y), trade, transportation & utilities (-8.7% y/y), professional & business services (-8.6 y/y), education & health services (+2.4% y/y) and leisure & hospitality (-6.0% y/y). Government hiring fell to the lowest level in three months (+3.7% y/y) but the number of construction jobs rose (4.0% y/y). (…)

Quits declined 123,000 (-4.5% y/y), the fifth decline in six months. The quit rate (number of quits as a percent of total employment) held at 2.7% for the third consecutive month. The quits rate fell sharply in manufacturing (1.9%), construction (2.0%) and leisure & hospitality (5.3%). It moved up to 3.2% in professional business services and held steady at 1.7% in financial services.

Layoffs & discharges fell 162,000 (-5.5% y/y) to 1.328 million following a 100,000 August increase. Layoff declines spread across industries including professional & business services (-18.8% y/y), trade, transportation & utilities (+6.4% y/y) and manufacturing (-22.7% y/y). The layoff rate was fairly steady at 0.9% in September.

Private hires (red) are almost back to their pre-pandemic level while private openings remain 53% above but also on a downtrend. The YoY growth in actual private employment (black) is also easing but very slowly.

Private employers are still on the hunt for workers but hires are not rising anymore. How much is due to supply issues and how much to business cautiousness?  

U.S., CANADA EUROZONE MANUFACTURING PMIs

USA: Manufacturing output continues to rise, but weakdemand conditions dampen growth

US manufacturing firms signalled only a slight improvement in operating conditions during October, according to latest PMI^TM data from S&P Global. Despite a further expansion in production, firms recorded a renewed decline in new orders amid greater client hesitancy. Easing supply chain disruption led to the first decrease in backlogs of work since July 2020, and supported a further marginal gain in output. Nevertheless, weaker client demand and more subdued expectations for the year-ahead resulted in one of the slowest upticks in employment in over two years.

Meanwhile, rates of input price and output charge inflation softened again. There were reports that lower demand for inputs had dampened cost pressures, and efforts to stimulate sales had contributed to the softer rise in selling prices.

The seasonally adjusted S&P Global US Manufacturing Purchasing Managers’ Index™ (PMI™) posted 50.4 in October, down from 52.0 in September, but up from the earlier released ‘flash’ estimate of 49.9. Nonetheless, the latest index reading indicated the least marked improvement in the health of the US manufacturing sector in the current 28-month sequence of growth.

Supporting the headline figure was a further rise in output in October. The increase was the second in successive months and reportedly stemmed from easing supplier bottlenecks, which allowed firms to work through backlogs. Although the fastest since May, the rate of production growth was only marginal and slower than the series trend.

Weighing on the upturn in output was a fresh decline in new orders at the start of the final quarter of 2022. Subdued demand conditions were linked by panellists to greater client hesitancy amid marked inflation. The decrease in new orders was solid overall and the quickest in almost two ­and-a-half years. Alongside muted domestic demand, new export orders fell sharply as dollar strength and challenging economic conditions across key export markets dampened foreign demand.

On the price front, average cost burdens continued to rise at a historically elevated rate in October. Hikes in material and transportation costs were often cited as factors driving inflation. That said, less marked disruption across supply chains and reduced demand for inputs led to the slowest uptick in input costs since November 2020.

In an effort to drive sales, firms reportedly passed on cost savings to clients where possible, which resulted in the slowest rise in selling prices since February 2021.

Vendor performance continued to deteriorate in October, but to the least marked extent since August 2020 as supplier capacity improved in some cases. Nonetheless, weak client demand reduced manufacturer’s requirements for inputs. As such, input buying fell sharply and at the quickest rate since May 2020.

Firms instead chose to work through their stocks of purchases and finished goods to supplement production and sales, with both pre- and post-production inventoriescontracting. At the same time, the delivery of delayed materials allowed firms to reduce their backlogs of work for the first time since July 2020. The fall in the level of work-in-hand (but not yet completed) was solid overall.

Cost-cutting measures, uncertainty regarding future demand, and lower production requirements led to only a modest rise in employment. Firms noted that the non-replacement of voluntary leavers weighed on job creation.

Finally, output expectations for the coming 12 months weakened in October. Although still generally upbeat, the degree of confidence was the lowest since May 2020 as firms expressed concerns regarding inflation and overall demand conditions.

• U.S. ISM Manufacturing PMI Falls in October; Lowest Since May ’20

The ISM U.S. manufacturing PMI declined to 50.2 in October from 50.9 in September and 52.8 in August (…).

The new orders index rebounded to a still-contraction-level 49.2 in October from 47.1 in September, registering its fourth contraction in five months. The index was noticeably down from 60.6 last October and a high of 67.4 in December 2020. (…)

The employment index recovered to 50.0 in October from a contraction-level 48.7 in September, but it was slightly down from 52.1 last October. (…)

The prices index fell to 46.6 (NSA) in October from 51.7 in September and 85.7 last October, indicating raw materials prices dropped for the first time since May 2020’s 40.8 reading. (…)

In other ISM series, the new export orders index declined to 46.5 in October from 47.8 in September, registering the third straight contraction to the lowest level since May 2020’s 39.5. (…)

Canadian manufacturing PMI sinks deeper into contraction territory

The start of the fourth quarter of 2022 indicated a third consecutive monthly deterioration in manufacturing business conditions in Canada. The rates of decline in both output and new orders quickened while firms continued to indicate a further shortage of skilled staff. Panel comments alluded to weak demand, while sentiment moderated to the weakest since May 2020 amid growing concerns of a recession and macroeconomic troubles in the months ahead.

Prices data meanwhile revealed a fourth successive slowdown in input cost inflation. However, recent currency weakness led Canadian firms to protect profits by hiking their selling prices.

The seasonally adjusted S&P Global Canada Manufacturing Purchasing Managers’ Index^® (PMI^®) registered at 48.8 in October, down from 49.8 in September. The latest result pointed to a quicker deterioration in operating conditions, and one that was the second-strongest since the tail-end of the first wave of the COVID-19 pandemic in June 2020.

Weak demand conditions were apparent in October’s survey data with firms often mentioning that high prices deterred demand. New orders fell solidly and at one of the quickest rates in the survey’s history. Export conditions were also subdued with international demand for Canadian goods contracting for the fifth month in succession.

Mirroring the trend for new orders, production levels declined at an accelerated pace. The rate of decrease was solid with almost 16% of firms recording a drop in output in October. A number of factors were blamed for the fall including weak demand, labour shortages and supply troubles. (…)

On the jobs front, voluntary resignations, staff retirements and shortages of skilled labour resulted in a modest fall in headcounts. A further decline in backlogs suggested firms were still able to keep-up with inflows of new work, however.

Input prices incurred by manufacturers in Canada increased, but the rate at which costs rose was the weakest for 23 months and only marginally above the long-run trend level. Despite this, firms hiked their selling charges sharply and at a quicker pace amid unfavourable exchange rate movements against the US dollar. (…)

Small Business Employment Watch

• The national index (99.43) is down 0.32 percent from last month and 1.01 percent from last year.
  

• After slowing for eight consecutive months (from 101.33 in February 2022 to 99.43 in October 2022), the national index is at its lowest level since July 2021.
• The pace of hourly earnings growth for U.S. small business workers moderated for the second consecutive month to 5.01 percent [from 5.15%], according to the latest Paychex | IHS Markit Small Business Employment Watch. One-month annualized hourly earnings growth stands below four percent.
• The growth in hours worked is having a positive impact on weekly earnings growth, which increased to 4.88 percent in October.

U.S. Light Vehicle Sales Strengthen in October

The Autodata Corporation reported that light vehicle sales during October rose 11.4% (14.1% y/y) to 15.28 million units (SAAR) from 13.72 million in September. Sales still remain significantly below the April 2021 peak 18.37 million. Vehicle sales comprise about four percent of real consumer expenditures.

Imports’ total share of the U.S. vehicle market eased to 23.8% last month after falling to 24.5% in September. Imports’ share of the passenger car market fell sharply to 26.4% last month and remained down from the September 2021 high of 37.9%. Imports’ share of the light truck market edged lower to 23.1%.

But CalculatedRisk writes that

Wards Auto estimates sales of 14.90 million SAAR in October 2022 (Seasonally Adjusted Annual Rate), up 10.4% from the September sales rate, and up 12.7% from October 2021.

Interesting chart:

Another interesting (intriguing) chart via The Market Ear:

Cheaper used cars have come with cheaper equities…

Nordea/Macrobond

Another one:

Data: FactSet, Department of Energy; Chart: Axios Visuals

Related to most of the above:

Coming soon: A $25,000 solar-powered electric SUV

(…) Germany’s Sono Motors, which went public on the Nasdaq last year, may have cracked the code with a $25,000 electric SUV called the Sion that’s covered pretty much bumper to bumper in solar cells.

• Instead of a solar glass roof, the Sion’s 456 cells are integrated seamlessly into its plastic hood, fenders, sides, roof and rear panels.
• Together, they provide enough energy to extend the car’s 190-mile battery range by an average of 70 miles a week — or up to 150 miles per week in perfect conditions.
• For people with short commutes in sunny locales, that could mean never plugging in again.

I checked out the Sion on a recent blustery, overcast day in Detroit during a stop on the car’s first U.S. tour.

• The conditions were a good reminder of the car’s practical limitations. Sono says the sun can account for about 5,400 miles of range per year — about one-third most drivers’ yearly average — but that all depends on the season, the weather and even how shady your parking spot is.

From a distance, the Sion appears to have one of those trendy black matte paint jobs. Up close, however, you can see the rows of solar cells embedded in the car’s body panels.

Sono spent five years trying to perfect its patented injection molding process, which integrates monocrystalline silicon cells into the Sion’s scratch-resistant, dent-proof polymer panels.

• Depending on the time of day and the angle of the sun, different parts of the car capture the sun’s energy and feed it to the Sion’s 54-kWh lithium-ion phosphate battery.
• Solar aside, the Sion’s battery can charge in about 30 minutes when plugged into a DC fast charger, or in a few hours at an ordinary Level 2 charger.

• Even without solar power, the $25,000 Sion is an affordable EV (although it won’t qualify for U.S. tax incentives because it’s built in Europe).

Sono kept costs low by outsourcing production to Valmet Automotive, a well-known Finnish contract manufacturer — and it only comes in one style, with no optional features.

• “You can have any color you want, as long as it’s black,” quipped chief operating officer Thomas Hausch, paraphrasing Henry Ford’s famous comment about the Model T.
• And the company will sell its cars directly to consumers instead of through dealerships.

“They’ve found, in between the cracks, an opportunity that other automakers were not going after,” said Wedbush Securities analyst Daniel Ives.

A small handful of other companies, including the California-based Aptera and Dutch startup Lightyear, are also trying to crack the solar-powered EV nut.

More than 20,000 Europeans have put down a $2,000 refundable deposit, Sono says, and it has another 22,000 orders from fleet customers, including a subscription car service called FINN.

• The company says it is “actively evaluating American partnership opportunities” to bring the car stateside.
• Meanwhile, it’s already generating revenue from selling solar retrofit kits for heavy trucks and buses.

Chinese Property Bonds Set Record Lows as Investors Lose Faith The bonds from some real-estate companies in China are trading below 10 cents on the dollar, reflecting a loss of investor confidence after a series of defaults that shortchanged foreign investors.

(…) The latest market setback came this week, after a midsize developer, CIFI Holdings (Group) Co., 884 8.97%increase; green up pointing triangle said Tuesday that it was suspending all payments on its offshore debt after failing to strike a deal with creditors. The Shanghai-based company said it was no longer in discussions with those creditors about debt repayments. (…)

Several bonds issued by Country Garden Holdings Co., 2007 13.33%increase; green up pointing triangle China’s largest developer by contracted sales, were being quoted below 8 cents on the dollar Tuesday, Tradeweb showed. The company hasn’t defaulted on any public debt.

The slide in the value of bonds issued by these companies means they are now trading close to the levels of China Evergrande Group EGRNF -15.54%decrease; red down pointing triangle, once a leading developer but now the highest-profile casualty of the sector’s problems. Most bonds issued by Evergrande, which is in the midst of a complex debt workout, were recently quoted at around 4 cents on the dollar, according to FactSet.

Just two months ago, CIFI and Country Garden were among the property companies considered “model developers” by Chinese authorities. They were included in a group of at least six developers that were offered domestic bond guarantees by a government-backed insurer, under a pilot program designed to limit the fallout from defaults by financially troubled companies in China’s property sector.

Longfor Group Holdings Ltd. 960 18.85%increase; green up pointing triangle was also part of that select group. The company’s dollar bonds are now trading at around 20 cents on the dollar. Its shares have fallen more than 70% this year, including a 24% slide at the start of the week after the company’s founder and chairwoman resigned Friday. The shares recovered around 8% on Tuesday. (…)

Sales at the country’s 100 largest property developers fell 28.4% from October 2021 to the equivalent of $76.7 billion, according to data released Monday by China Real Estate Information Corp., an industry data provider.

That marked the 16th consecutive month of year-over-year declines. Sales in October, which is traditionally a busy month for home sales in China, fell 2.6% from September. (…)

Eventually (?), the government will wake up to the reality and show us what a Chinese bail out looks like. They must act before house prices collapse though.

Yesterday, Yi Gang, governor of the People’s Bank of China: “We hope‌‌ the housing market‌‌ can achieve a soft landing‌‌.”

• China Locks Down Area Around ‘iPhone City’ in Blow to Apple China has ordered a seven-day lockdown of the area around Foxconn Technology Group’s main plant in Zhengzhou, a move that will severely curtail shipments in and out of the world’s largest iPhone factory.

Reuters adds:

In the latest fallout, electric vehicle maker NIO said it suspended production in the eastern city of Hefei amid rising COVID-19 cases and Yum China , operator of the KFC and Pizza Hut chains, said it was temporarily closing or reducing services at over 1,000 of its restaurants in China.

Source: Morgan Stanley Research via The Daily Shot

EARNINGS MATTER

Factset:

The Energy sector is the largest contributor to earnings growth for the S&P 500 for Q3 2022. The sector is reporting an aggregate year-over-year increase in earnings of $33.0 billion, while the S&P 500 overall is reporting an aggregate year-over-year increase in earnings of only $10.1 billion.

In fact, if the Energy sector is excluded, the S&P 500 would be reporting a year-over-year decline in earnings of 5.1% rather than a year-over-year increase in earnings of 2.2%. This would mark the second consecutive quarter in which the index would be reporting a year-over-year decline in earnings excluding the Energy sector.

This sector is also expected to be the largest contributor to earnings growth for the S&P 500 for all of CY 2022. If the Energy sector is excluded, the index is expected to report a year-over-year decline in earnings of 0.6% rather than a year-over-year increase in earnings of 6.1%. (…)