Note: I am travelling (ancient word: “go from one place to another, typically over a distance of some length”) in Europe until August 23rd. Postings will thus be erratic, limited and time-zones impacted.

Strasbourg resembles me: a modern mind within a medieval body . The city is marvellously charming. Our hotel has superbly merged modernism and comfort in a 1528 house. Magnificent!

MANUFACTURING PMIs

USA: PMI at lowest for two years as output and new orders fall in July

The US manufacturing sector registered a further weak improvement in operating conditions during July, according to latest PMI^TM data from S&P Global. Contributing to subdued conditions was the first drop in output since June 2020 which reflected weaker demand conditions, as new orders fell at the fastest pace for over two years. Nonetheless, backlogs of work continued to increase as labor and material shortages hampered efforts to process incoming new work.

On the price front, rates of input cost and output charge inflation softened again in July. Although still substantial in the context of their respective series histories, the increases were the slowest for over a year.

The seasonally adjusted S&P Global US Manufacturing Purchasing Managers’ Index™ (PMI™) posted 52.2 in July, down from 52.7 in June and broadly in line with the earlier released ‘flash’ estimate of 52.3.The latest index reading was the lowest for two years and signalled a muted improvement in the health of the manufacturing sector.

The decrease in the headline figure was in part linked to a renewed drop in production during July. Output fell for the first time in just over two years, albeit only fractionally. Lower production levels were often attributed to weak client demand and a further fall in new orders. Companies also noted that challenges finding suitable candidates for vacancies and raw material shortages also hampered production.

New orders fell for the second month running in July,with the pace of decline modest but the steepest seen since 2009 with the exception of pandemic lockdown months. Panellists stated that further supply chain disruption and hikes in prices weighed on customer spending. Similarly, foreign client demand weakened at the start of the third quarter. New export orders fell at the fastest rate since May 2020.

Meanwhile, input prices paid by manufacturers rose markedly again in July. The increase in cost burdens was attributed to greater transportation, fuel and raw material prices. That said, the pace of cost inflation softened to the slowest since March 2021 as some components reportedly fell in price.

Firms continued to pass-through higher costs to clients, as output charges rose at an historically elevated pace. In line with the trend for input costs, however, the rate of inflation eased and was the softest since February 2021.

The decrease in new order inflows was accompanied by a weakening of payroll growth to the lowest for six months, albeit with some firms continuing to hire additional staff to fill
long-held vacancies. Challenges finding suitable candidates hampered the overall pace of job creation, however.

Pressure on staff capacity was met by further reports of material shortages. Although lead times lengthened to the least marked extent since November 2020, supplier delays and material shortages remained substantial. As a result, firms recorded another monthly rise in backlogs of work.

Difficulties sourcing raw materials led firms to expand their input buying, following broadly unchanged levels of purchasing in June. Efforts to secure stock were reflected in a further rise in pre-production inventories, albeit only fractional. Stocks of finished goods were broadly unchanged on the month amid supplier and shipping delays, but also in part reflecting lower than expected sales to customers.

Finally, firms’ expectations regarding the outlook for output over the coming 12 months remained at their lowest since October 2020 amid inflation and supply chain concerns, as well as a gloomier global economic outlook.

From the ISM survey (here):

• The New Orders Index registered 48 percent, 1.2 percentage points lower than the 49.2 percent recorded in June.
• The Employment Index contracted for a third straight month at 49.9 percent, 2.6 percentage points higher than the 47.3 percent recorded in June.
• Many customers appear to be pulling back on orders in an effort to reduce inventories.

Eurozone manufacturing downturn worsens in July as recession risks intensify

(…) Another major drag on output was demand, with new orders falling sharply. In fact, excluding declines seen throughout the pandemic, manufacturing order book volumes decreased at the strongest rate since the eurozone sovereign debt crisis in 2012. Survey respondents frequently highlighted the destructive impact that inflation was having on their new business receipts.

Sufficient inventory levels at clients due to past stockpiling efforts also weighed on demand conditions, according to some companies. New export orders similarly fell, and at a sharper rate during July.

Meanwhile, latest survey data highlighted stronger stockpiling at the start of the third quarter, with both pre- and post-production inventory levels rising at faster rates. In fact, stocks of finished goods rose at the fastest rate in 25 years of data collection during July. However, anecdotal evidence suggests these increases were not fully intentional, with firms mentioning order cancellations from clients and the delivery of items with long lead times.

Purchasing activity was subsequently reduced, marking the first decrease in input buying in just under two years. (…)

China: Business conditions improve marginally in July

(…) Weighing on the headline index was a softer rise in overall new business in July. Total new orders rose only slightly, following a mild increase in June. While a number of firms mentioned that the ongoing recovery from the latest wave of the pandemic had supported higher sales, others commented that demand conditions were relatively subdued. New export business likewise expanded only marginally in July.

Japan: Manufacturing PMI slips to ten-month low in July

(…) There were renewed declines in both production and new order volumes at the start of the third quarter. Firms often attributed this to rising inflationary pressures and raw material shortages, which led to both output and demand falling for the first time in five and ten months, respectively.

At the same time, new export sales continued to fall in July, extending the current sequence of decline to five months. That said, the latest contraction was the softest in the current sequence and only modest. Foreign sales were reportedly hindered by weakened demand in key export markets across the Asia-Pacific region, particularly China and South Korea.

Demand is clearly waning. Corporate execs are focusing on margins: “There are real concerns that our productivity as a whole is not where it needs to be for the head count we have.” (Alphabet CEO Sundar Pichai to Google employees in an internal meeting, according to CNBC.)

German retail sales fall by largest rate on record Retail sales volumes dropped 8.8% YoY in June. Inflation in Germany is at a multi-decade high of 8.5 per cent.

US to Stop TSMC, Intel From Adding Advanced Chip Fabs in China

Manchin Spending Deal Includes Billions in Taxes on Oil Sector

The climate and tax spending deal announced last week by Senate Majority Leader Chuck Schumer and Senator Joe Manchin could cost the oil industry $25 billion in new taxes.

The legislation, which may get a Senate vote as soon as next week, would reinstate and increase a long-lapsed tax on crude and imported petroleum products to 16.4 cents per gallon, according to a summary of the plan released Sunday by the Senate’s tax-writing committee. (…)

The Superfund tax, which previously stood at 9.7 cents per barrel until it lapsed at the end of 1995, is paid by refiners and other importers to help fund the clean-up of hazardous waste sites. In addition to increasing the tax, the Senate proposal would index the fee to inflation. (…)

It remains to be seen whether the legislation will be backed by the full Democratic caucus in the 50-50 Senate. It would also have to pass the House, where progressives sought a much more expansive plan.

John Authers: It’s Far Too Risky to Assume That the Bottom Is In

Great article. Some extracts:

(…) The following chart maps the S&P 500 after its recent high in January, and after the peaks before the great bear markets that started in 2000 and 2007. Even after the hot July, this selloff is still somewhat more intense than either of those:

(…) As I covered yesterday, forward earnings estimates tend to have come down a lot from their peak by the time the market can make a navigable low. That absolutely hasn’t happened yet, and the process of downgrading appears only to have just started. These charts from Societe Generale’s chief quantitative strategist Andrew Lapthorne tell the story.

Nasdaq profit forecasts for every quarter out to the second quarter of next year have been cut, and suffered a particularly sharp cut in the last few days, while the buoyancy of the energy sector hides the fact that for the rest of the S&P 500, the earnings growth forecast for this year is teetering close to zero. As it would be unusual to suffer an economic recession or equity bear market without an outright fall in profits, this suggests more to come:

(…) There is at least one very promising item in the regular data download that accompanies the beginning of the month. The ISM Manufacturing survey for the US regularly asks purchasing managers about prices paid. That number topped 90 at one point last year. Now, after a sharp and unexpected fall last month, it’s back to 60. That’s encouraging for inflationistas because over time it’s been a pretty good leading indicator of producer price inflation. The following chart shows the Prices Paid index, with the year-on-year producer price index lagged by six months:

(…) Looking at the yield curve, it suggests growing conviction that a recession is imminent (and also by extension belief that inflation will soon be licked). (…)

Then there is the strange behavior of inflation breakevens. The five-year/five-year breakeven, much beloved of the Fed and measuring the market’s judgment of the likely average inflation rate for the five years that start five years hence, has risen sharply in the US in the last few days. It’s still below its peak from earlier in the year, but it’s heading in a direction that suggests the Fed will be outright lenient. And judging by the equivalent breakeven for Germany, where the possibility of a return of inflation suddenly took hold of the imagination a few months ago and receded as soon as forecasts managed to exceed those for the US, it looks as though this is an American phenomenon. While much of the market is positioned for a hawkish mistake by the Fed, breakevens suggest there’s more of a risk of a dovish one:

(…) To contradict the bond market, it’s now time to pour gasoline on the fire. The generic gasoline future contract moved over to a new month today, so the sharpness of Monday’s fall could be overstated — but somehow the futures price of gasoline is back where it was on the eve of the Ukraine invasion. Prices at the pump tend to follow with not much lag:

• Speculation the Fed will soon get inflation under control is unfounded and counterproductive, Bill Dudley writes. Inflation is too high, the labor market is too tight and the Fed must respond—most likely by pushing the economy into a recession. Wishful thinking in markets makes the job harder.

ANALYSTS MAKING LARGER CUTS THAN AVERAGE TO EPS ESTIMATES FOR S&P 500 COMPANIES FOR Q3

Beijing Bets the House on Infrastructure As Chinese factories and the housing market stumble again, the silence from Beijing is deafening.

• Evergrande Told to Cough Up $1.1 Billion for Previously Undisclosed Guarantees The world’s most indebted property developer said it has been told to honor the financial obligation, adding to creditors’ woes.

  Note: I will be travelling (ancient word: “go from one place to another, typically over a distance of some length”) in Europe until August 23rd. Postings will thus be erratic and time-zones impacted.

Consumer Spending Grew Much Faster in June Spending rose 1.1% as inflation accelerated, curbing purchasing power

Wow! What a deceptive, misleading headline from none other than the WSJ! And the reporters don’t bother to inform the reader that, in real terms, spending actually stalled, +0.1% after -0.3% in May.

Last 5 months: +0.8% annualized; last 3 months: +0.17% annualized; last 2 months; -1.3% annualized. Much faster?

There was much hope that services would take over from goods but it’s not happening: they both rose 0.1% MoM in June

There were 2 surprises in this report:

1. spending on goods held up, particularly real durable goods which rose 0.9% MoM after -3.2% MoM in May; a negative trend but better than feared.
2. the personal savings rate declined from 5.5% in May to 5.1%, explaining #1. The savings rate averaged 5.6% in Q1 and 5.3% in Q2. It was 7.4% in Q4’19.

Americans are keeping the economy afloat, but only barely, with their pandemic savings. Real disposable income declined 0.3% MoM in June, after being unchanged in May and up 0.2% in April. Year-to-date, real DPI is down 4.4% annualized. On a YoY basis, it is down 3.2%. How much excess savings are left, inflation adjusted?

Wages and Salaries rose 0.5% MoM in June and 6.5% annualized in Q2. But inflation per the PCE deflator was +1.0% in June and +7.4% annualized in Q2.

The core price index rose by 4.8% YoY in June, up slightly from 4.7% in May. On a MoM basis, core prices rose 0.6% in June, up sharply from the 0.3% increase in each of the prior four months.

Services prices rose 0.6% MoM (4.9% YoY). Housing cost rose 0.7% MoM (5.5% YoY) in June, the largest monthly gain since June 1990. Housing cost is 15% of the headline PCE price index and 17% of the core index.

Much has been said of the boosts in minimum wages during the pandemic. Spinning wheels going nowhere.

(The Daily Shot)

More broadly, the BLS Friday published the Employment cost index (see below) with this chart of YoY growth in real comp:

U.S. Employment Costs Advance 5.1% Over a Year Ago

The employment cost index (ECI) for civilian workers increased 1.3% in 2Q’22 after rising 1.4% in 1Q’22. This latest quarterly move produced 5.1% growth in employment costs over a year ago. This is the largest year/year advance since 3Q’1990. The Action Economics Forecast Survey expected a 1.2% quarterly gain.

Wages & salaries advanced 1.4% in Q2 (5.3% y/y), up from 1.2% in Q1. Benefits growth slowed to 1.2% in Q2 (4.8% y/y), but they had surged by 1.8% in Q1.

Private-sector compensation picked up to a 1.5% advance in Q2 (5.5% y/y) following 1.4% (4.8% y/y) in Q1. Wages & salaries in the private sector were up 1.6% in Q2, yielding an advance of 5.7% over a year ago. This followed a 1.3% quarterly rise in Q1. Benefit costs moderated somewhat in Q2, increasing 1.3% (5.3% y/y) following their 1.9% surge in Q1.

Compensation in goods-producing industries slowed somewhat in Q2, rising 1.2% (4.7% y/y) after 1.5% in Q1. Compensation in service-providing industries repeated its 1.4% Q1 advance in Q2 and that yielded a 5.2% rise over Q2’2021.

We will get unit labor cost and productivity data on August 9 but David Rosenberg has a preview:

Real private sector output contracted at a 0.7% annual rate. At the same time, total labor input (aggregate hours worked) expanded at a +2.7% annual rate. This means we likely saw productivity decay once again, and this time at a -3.4% annual rate. This would mean three declines in the past four quarters and place the YoY trend at a woeful -2% pace. This tells us that not only did the business sector over-stockpile this past year on a faulty set of domestic demand assumptions, but they over-hired as well.

We have already seen the workweek decline, and this is a leading indicator — hours always lead bodies. We have only seen productivity recede like it is today just three other times in the past sixty years — 1974Q2, 1979Q4 and 1982Q1 and not once did we see any employment growth the following year. In fact, the average here was a -1.3% rightsizing of staff levels in the ensuing four quarters.

The question is — to turn the productivity situation around, absent a revival in output, what sort of job loss would we be talking about over the coming year? Try 2 million. That would retrace one-third of the gains over the past twelve months — which may be an attempt to sugar-coat the situation, except for the fact that this would end up taking the unemployment rate back up towards 5% from today’s 3.6% level and far above the Fed’s forecast of closer to 4%.

China’s Manufacturing Sector Unexpectedly Contracts Amid Weak Demand, Covid Lockdowns Just 10 of the 21 sectors tracked by China’s statistics bureau expanded in July, versus 13 in June

The official manufacturing purchasing managers index pulled back to 49.0 in July from 50.2 in June, China’s National Bureau of Statistics said Sunday. The result pointed to a surprise contraction in economic activity, dropping below the 50 line that separates expansion from contraction and falling short of the median forecast of 50.3 among economists polled by The Wall Street Journal. (…)

Only 10 out of the 21 industries surveyed by the statistics bureau showed expansion in July, versus 13 in June. June’s PMI reading of 50.2 had been the expansionary reading after three straight months in which the strict lockdown of Shanghai, China’s most prosperous city and a key manufacturing hub, had kept the gauge below the 50 mark.

China’s export sector, a key growth engine for the country’s initial postpandemic recovery, continued to disappoint, serving as a headwind for the overall manufacturing industry. In July, the PMI subindex tracking export orders remained in contractionary territory for a 15th consecutive month. (…)

Separately on Sunday, China’s official nonmanufacturing PMI eased to 53.8 in July, compared with a reading of 54.7 in June, the statistics bureau said. The subindex measuring service-sector activity pulled back to 52.8 in July, compared with 54.3 in June, while the subindex tracking construction activity rose to 59.2, from 56.6 in June. (…)

Joblessness among workers age 16 to 24 has also soared, rising to a record 19.3% in June, up from 18.4% in May. The manufacturing subindex tracking employment edged down to 48.6 from 48.7 in June, the statistics bureau said Sunday.

More details:

• The decrease was broad-based and all five major sub-indexes declined in July.
• The new orders sub-index decreased to 48.5 from 50.4.
• The new export order sub-index fell to 47.4 in July (49.5 in June).
• The import sub-index fell to 46.9 in July (49.2 in June).
• The input cost sub-index plunged to 40.4 (52.0 in June), the lowest reading since 2013.
• The output prices sub-index also dropped significantly to 40.1 (46.3 in June).
• The construction PMI rose to 59.2 (56.6 in June). NBS said that construction activity improved on acceleration of construction of infrastructure projects.

China Home Sales Plunge as Mortgage Revolt Deters Buyers Sales at the country’s top 100 property developers fell 39.7% in July from the same period last year, ending a budding recovery.

Sales at the country’s top 100 property developers fell 39.7% in July from the same period last year to the equivalent of $77.6 billion, or 523.14 billion yuan, according to data released Sunday by CRIC, a Chinese real-estate data provider.

July sales were down 28.6% from June, ending a two-month recovery in month-to-month sales growth. Apartment sales showed increases in May and June from the previous months, as activity picked up following Covid lockdowns in Shanghai and other Chinese cities earlier this year. (…)

Week-over-week data put together earlier by CRIC to study the impact of the mortgage revolt had signaled the July decline. In 30 cities CRIC determined to have been seriously affected by the revolt, new home sales dropped by 12% in the week ended July 10 from the week before, then fell 41% in the week ended July 17.

More home buyers are choosing second-hand homes or new ones built by state-owned developers, which are typically in a stronger financial position. (…)

The Politburo, China’s top policy-making body, made clear recently that local governments are ultimately responsible for fixing the property woes in their markets. (…)

“But the sector won’t stabilize if developers’ liquidity crunch is not relieved,” said Song Hongwei, a research director of Tongce Research Institute, which tracks and analyzes China’s real-estate market.

On Friday, troubled property developer China Evergrande Group sketched out the contours of a plan to restructure its billions of dollars in debt and said its contracted apartment sales in the first six months of the year had fallen about 97% from the same period a year earlier.

• Evergrande misses deadline for $300bn debt restructuring plan Last month, it told creditors it was on track to meet the deadline and urged patience amid threats of legal action.

EARNINGS WATCH

From Refinitiv/IBES:

Through July 29, 279 companies in the S&P 500 Index have reported earnings for Q2 2022. Of these companies, 77.8% reported earnings above analyst expectations and 18.6% reported earnings below analyst expectations. In a typical quarter (since 1994), 66% of companies beat estimates and 20% miss estimates. Over the past four quarters, 81% of companies beat the estimates and 16% missed estimates.

In aggregate, companies are reporting earnings that are 5.2% above estimates, which compares to a long-term (since 1994) average surprise factor of 4.1% and the average surprise factor over the prior four quarters of 9.5%.

Of these companies, 66.7% reported revenue above analyst expectations and 33.3% reported revenue below analyst expectations. In a typical quarter (since 2002), 62% of companies beat estimates and 38% miss estimates. Over the past four quarters, 78% of companies beat the estimates and 22% missed estimates.

In aggregate, companies are reporting revenues that are 1.6% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.2% and the average surprise factor over the prior four quarters of 3.4%.

The estimated earnings growth rate for the S&P 500 for 22Q2 is 7.7%. If the energy sector is excluded, the growth rate declines to -2.6%.

The estimated revenue growth rate for the S&P 500 for 22Q2 is 12.1%. If the energy sector is excluded, the growth rate declines to 7.4%.

The estimated earnings growth rate for the S&P 500 for 22Q3 is 8.2%. If the energy sector is excluded, the growth rate declines to 1.8%.

Trailing EPS are now $218.55. Full year 2022e: $227.02. 12-m forward: $236.83e.

The buzz word last week was “better than feared”.

In reality, Q2 is kind of a barbell: 4 strong growth (commodities, industrials), 4 negative growth (consumer, financials) and 3 midway (tech, HC, Staples). Typically, the weaker consumer/financials will soon impact fabrication.

But that’s not in analysts’ playbook yet:

Still, analysts are a little more cautious across the board:

Guidance:

At this point in time, 45 companies in the index have issued EPS guidance for Q3 2022. Of these 45 companies, 28 have issued negative EPS guidance and 17 have issued positive EPS guidance. The percentage of companies issuing negative EPS guidance for Q3 2022 is 62% (28 out of 45), which is above the 5-year average of 60% but below the 10-year average of 67%.

At this point in time, 243 companies in the index have issued EPS guidance for their current fiscal year (FY 2022 or FY 2023). Of these 243 companies, 134 have issued negative EPS guidance and 109 have issued positive EPS guidance
The percentage of companies issuing negative EPS guidance for their current fiscal year is 55% (134 out of 243). (Factset)

There may be more hope than reality in some of these estimates. For example, AMZN sees Q3 revenues up 13-17% after 7% in the last 6 months. True, Prime day falls in Q3 this year but the likes of WMT and TGT are aggressively clearing inventory amid weakening demand for goods. These 3 behemoths are certainly not in a strong buying mode approaching the holidays season. How will all this filter through producers and finance companies?

FYI: Monthly Seasonality Statistics Table: August is a mixed bag, can be very good or very bad (September is where it gets a bit messy though).

Source:  @topdowncharts