U.S. Flash PMI: US private sector expansion accelerates as demand strengthens and supply issues soften
Latest ‘flash’ PMI™ data from S&P Global signalled an uptick in output growth across the US private sector in March, as the pace of expansion quickened to an eight-month high. Manufacturers and service providers registered stronger upturns in activity, largely supported by pent-up demand and the easing of COVID-19 restrictions. Firms also noted that less severe supply chain disruptions and job creation allowed firms to step up production.
The headline Flash US PMI Composite Output Index registered 58.5 in March, up from 55.9 in February, to indicate the fastest rise in private sector output since July 2021. The sharp expansion in activity was broad-based and signalled a further recovery from January’s Omicron-induced slowdown.
March data showed a marked rise in new orders at businesses, as an upturn in client demand strengthened for the second month running to reach a nine-month high. As well as increased interest from existing clients, firms mentioned that a greater availability of inputs allowed them to be more competitive and win new customers. Alongside more favourable domestic demand conditions, new export orders rose at a quicker pace at the end of the first quarter.
Meanwhile, price pressures remained a significant theme in March, as costs increased at one of the fastest rates on record. Firms stated that further hikes in raw material, fuel and energy costs drove inflation, but also highlighted that the war in Ukraine and China’s lockdowns were exacerbating supply chain strain. Manufacturers continued to registered sharper upticks in input costs, but service providers also recorded cost increases at close to survey record rates.
The rate of output charge inflation remained well above the series average at the end of the first quarter. Companies still sought to pass on higher costs to clients, as the rate of increase slowed only slightly, largely reflecting a softer rise at manufacturers.
Despite reports of greater output and easing supply chain woes, backlogs of work grew steeply in March. Although there were still reports of material and labor shortages, there was a shift in factors driving outstanding business up, with many firms highlighting that new order growth was behind the fastest rise in backlogs on record.
Subsequently, companies stepped up their hiring. The rate of overall job creation was the sharpest since April 2021, as manufacturers and service providers alike recorded steeper upturns in employment. Numerous firms noted that investment in recruitment campaigns was starting to show gains.
Private sector businesses remained broadly upbeat regarding the outlook for output over the coming year in March. That said, the degree of confidence slipped to a five-month low amid concerns regarding soaring input costs and the war in Ukraine. Less robust expectations largely stemmed from the service sector, where firms highlighted the potential impact of reduced disposable incomes at customers following hikes in the cost of living.
At 58.9 in March, up from 56.5 In February, the S&P Global Flash US Services Business Activity Index signalled the strongest rise in output for eight months. Greater activity was driven by a marked increase in new business that was the sharpest since June 2021, as demand conditions strengthened.
Inflationary pressures remained substantial, as the rate of cost inflation accelerated to the fastest for three months. Output charges rose at a similar pace to February’s record rate as firms sought to pass-through hikes in input prices to clients.
Stronger demand conditions led to a record-breaking rise in backlogs of work at the end of the first quarter. Pressure on capacity remained despite firms expanding employment at the fastest rate since April 2021.
The S&P Global Flash US Manufacturing PMI posted 58.5 in March, up from 57.3 in February, to indicate a sharp improvement in operating conditions across the
manufacturing sector. Stronger expansions in output, new orders, employment and stocks of purchases helped support the overall uptick. Vendor performance also deteriorated to a lesser extent, with lead times lengthening at the slowest rate since January 2021.
Supplier price hikes led to a faster rise in input costs, as manufacturers noted broad-based increases in prices. Nevertheless, stronger client demand drove input buying up. Purchasing activity rose at the fastest pace since September 2021, amid efforts to stockpile and protect against future surges in costs.
March data signalled a slightly softer increase in selling prices, despite soaring cost burdens. The rate of charge inflation was the second-slowest in almost a year.
Meanwhile, a faster expansion in backlogs of work spurred goods producers to increase their hiring. Pressure on capacity mounted further, despite employment rising at the sharpest pace since July 2021.
U.S. Jobless Claims Fall to 187,000, Lowest Level Since 1969
Mr. Powell at his March 16 presser: “That’s a very, very tight labor market, tight to an unhealthy level, I would say”. Confirmed:
Initial jobless claims, a proxy for layoffs, decreased by 28,000 to a seasonally adjusted 187,000 last week, the Labor Department said Thursday. That was slightly below a level last seen in December, and the lowest level for initial claims in over 52 years, since September 1969. The four-week average, which smooths out volatility in the numbers, decreased by 11,500 to 211,750.
Continuing claims, a measure of the total number of people on the unemployment rolls through regular state programs, moved down to 1.35 million for the week ended March 12 from 1.42 million the previous week. That was the lowest level since January 1970, a time when the labor force was roughly half as large as it is today. Continuing claims are reported with a one-week lag. (…)
This is what happened in the late 1960s: inflation accelerated during the Vietnam war and Lyndon Johnson’s “Great Society” spending (the budget deficit jumped from -1.4B in 1965 to -25.2B in 1968) but the booming economy allowed wages to more than keep pace for 5 years until the sharp 1974-75 recession. Corporate profits peaked in 1968 dropped 16.6% until the end of the very mild 1970 recession.
The latest surge in bond yields has pushed the 10y Treasury yield above the decades-old trend line. Purely from the technical perspective a successful break above the trendline indicates that yields are heading higher from here, but a successful break isn’t always a long lasting event as we saw in 2018.
We expect yields to rise even more in 2023 as highlighted in our financial forecasts and yields may have bottomed permanently. However, we are far from certain to call significantly higher yields in the horizon. For example, weak working age population growth and rather slow productivity indicate that we are not heading towards clearly higher, for example 4 %, yields at least permanently. On the other hand, not all factors point towards low yields. Climate change probably means higher – and more volatile – inflation in the coming years. In addition, there is a need for green investments globally and higher money demand should support higher yields. Also the Covid-19 pandemic is creating uncertainty, and we still do not know how it will affect productivity longer out.
Richard Bernstein Advisors explains why we should not currently focus on the yield curve:
(…) since the Global Financial Crisis (GFC) there have been four main drivers of treasury yields: Inflation, Leading Economic Indicators (LEIs), the Federal Funds Rate, and the size of the Fed’s Balance sheet relative to GDP. All four of those indicators suggest rates today should be closer to 3%. We think the market is finally waking up to this reality.
Further, our work suggests that if the Fed had never engaged in quantitative easing, the 10y would likely be closer to 3.7%. This would suggest that without the artificial depression of long end yields, the 2s10s curve should be more in the 150-200bp range rather than the current 23bp. Though the Fed is likely to maintain a sizeable balance sheet, thereby keeping yields relatively anchored versus what would be expected had they never bought bonds, there is clearly scope for yields to increase in the long end over coming quarters. Whether or not this happens with ever higher 2y yields, time will tell, but for now, we would search for other indicators of recession.
But higher yields ate not inconsequential for equities as LPL Research shows:
High Yield yields are being pulled up in sympathy with Treasuries but yield spreads are not rising, suggesting investors are not overly worried for the economy, like in 1999…
A recession officially began in March 2001 but equity markets peaked in August 2000, 6 months after High Yield spreads started to rise.
Here’s a close up chart:
Also consequential:
Data: Mortgage Bankers Association; Chart: Axios Visuals
Europe’s Economy Slows as Ukraine War Sends Costs Soaring Russian invasion disrupts supply and boosts prices, while pandemic restrictions ease and U.S. business activity picks up, surveys show
(…) The United Nations Conference on Trade and Development Thursday lowered its forecasts for economic growth this year, in response to the invasion. It now expects the global economy to grow by 2.6%, having previously expected to see an expansion of 3.6%. Much of the slowdown will occur in the eurozone, where Unctad now expects to see growth of just 1.7%, half of what it had previously expected. By contrast, it lowered its forecast for U.S. growth to 2.4% from 3%. (…)
Unctad warned that an overly rapid tightening of monetary policy in rich countries could lead to an even sharper slowdown in global growth than it has forecast, and threaten the ability of some developing countries to meet their debt payments. The Geneva-based body said there were few signs that the pickup in inflation is pushing wages sharply higher, and said increased borrowing costs wouldn’t resolve the supply-chain problems that were partly responsible for rising prices.
“We’re not convinced it will work,” said Richard Kozul-Wright, director of Unctad’s globalization division. “You can’t fix those problems by raising interest rates.” (…)
From IHS Markit:
March’s preliminary ‘flash’ PMI data provided the first insights into the impact of the Ukraine war on the world’s major developed economies, and highlighted two opposing forces for which the interplay will be key to determining economic prospects in the coming months.
First, current output growth remained strong across the developed world — with only a marginal slowdown seen even in the eurozone, closest both geographically and economically to the war — linked primarily to the opening up of economies after the pandemic. Measured globally, COVID-19 containment measures were the least restrictive in March than at any time since the pandemic began. A further planned loosening of these restrictions should help boost growth in coming months.
However, the Ukraine war dealt a blow to business expectations about growth in the year ahead, nowhere less so that in the eurozone but also more broadly. Companies reported that the war has exacerbated existing concerns over the impact of rising prices, supply chains and reduced fiscal and monetary stimulus. Price pressures also hit new highs in March, according to the PMIs. (…)
The surveys also revealed widespread reports of higher costs resulting from the war, notably for energy, which added to existing steep input costs pressures resulting from the pandemic. Across the G4, input costs rose at the steepest rate since comparable data were first available in 2009. Near-record highs for input costs were seen in the US, Japan and UK while a new 25-year high was seen in the eurozone. Importantly, while all four economies continued to see strong manufacturing costs pressures, new records were seen for service sector input cost inflation amid rising energy, transport and wage costs.
ING:
(…) Expect inflation to trend higher in the short-run than previously expected, again. The war is causing commodity prices to spike further and disrupt supply chains more. Don’t be surprised if the peak in eurozone inflation reaches double digits in the coming months, before trending back down again. The cumulation of supply shocks makes the economy far more receptive to pass-through effects that can keep inflation trending higher for a longer amount of time.
The question is what effects on inflation from current developments will be dominant in the medium-term. Supply factors have been driving eurozone inflation to record highs, but with real wage growth at a multiple decade low, a marked economic slowdown or even recession would reduce expectations of demand-side inflation for the medium-term.
In fact, our expectations that wage growth will accelerate significantly this year and in 2023 have clearly come under pressure. We do still expect wage growth to trend higher as inflation is a dominant driver of wages which can even drive up wage growth during a recession – look at 2008 for example. However, chances are increasing that companies’ profit margins will come under significant pressure, which is set to lead to a lower peak in wage growth than previously expected.
For the European Central Bank (ECB), this additional inflationary pressure will complicate things even further. Even if headline inflation hits double-digit levels, there is very little the ECB could do to bring imminent relief. Even worse, in a stagflationary scenario, too aggressive tightening could be counterproductive and undermine an increasingly fragile economic recovery.
Therefore, we expect the ECB to continue ending its unconventional measures without engaging in a rate hike cycle like the US Federal Reserve. The ECB will focus on inflation expectations. If these expectations remain anchored, we will only see an end to net asset purchases and an end to the era of negative deposit rates by early 2023 at the latest.
Only if inflation expectations threaten to de-anchor significantly could we see the ECB feeling urged to send a strong signal stressing its inflation fighter credibility. In such a scenario, the ECB might opt for more aggressive rate hikes; always knowing that downside risks to the economic outlook are increasing and surging government debt makes it harder for some eurozone countries to stomach significantly higher rates.
U.S., EU Reach LNG Supply Deal to Cut Dependence on Russia
The U.S. and the European Union announced an agreement to try and boost the supply of liquefied natural gas to European countries by the end of 2022 with at least 15 billion cubic meters.
The aim is to work with international partners to help the continent wean itself off Russian fuel imports. Under the agreement, EU member states will work to ensure demand for 50 billion cubic meters of U.S. liquefied natural gas until at least 2030. (…)
In Berlin, Germany unveiled its own plan to dramatically reduce Russian fossil fuel imports and make the country almost completely independent of Russian gas by the middle of 2024. Currently, European buyers are competing with Asian countries for the world’s limited supply of LNG cargoes.
However, the aspirational pact is light on detail, and the U.S. did not immediately say which partners it would source new shipments from or by when — suggesting that final agreements aren’t yet in place with suppliers. (…)
- Canada Will Boost Oil Exports as World Shuns Russian Supply Canada will increase oil and gas exports by the equivalent of 300,000 barrels a day to help nations that are trying to shift away from Russian supplies, the country’s resources minister said.
Russia Seen Headed for Deep Two-Year Recession Gross domestic product will shrink 9.6% in 2022 and contract 1.5% in 2023, according to Blooomberg’s poll of 24 analysts conducted March 18-23. (…) Inflation is now forecast to average 20% this year, which would be the fastest in about two decades.
- A March 15-22 survey found that a quarter of Russians stocked up for the future in recent days, largely by buying non-perishables like pasta and household chemicals. Weekly numbers compiled by Russia’s biggest lender, Sberbank, show consumer spending has been increasing at an annual pace of as much as 25% this month, compared with single-digit increases before the invasion.
In a flashback to the Soviet era, the panic buying has emptied shelves, increasingly putting supply under pressure. One online seller said the cost of office paper has risen as much as five times since last month.
Medicine prices are meanwhile rising up to 40%, according to Russia’s health watchdog. Russian doctors see shortages of more than 80 drugs including Nurofen for children, according to a survey. (…)
Hygiene products are another case in point, after Always sanitary pads producer Procter & Gamble reduced its business in Russia. It’s hardly making every consumer happy.
“Shop shelves are now full of sanitary napkins from brands I don’t know with names in Chinese characters, sometimes at double the price that Always or Libresse were just weeks ago,” said Larisa, a 46-year-old housewife in Lipetsk south of Moscow. (Bloomberg)
Biden Says to Expect ‘Real’ Food Shortages Due to Ukraine War
For Markets and Ukraine, ‘Good’ Scenarios Are Gone One month into this war, being in risk assets means trusting in luck, not judgment. Even a negotiated settlement will leave a more uncertain world and huge costs for all sides.
John Authers:
(…) There’s no denying that the current situation ensures a far worse outcome for the global economy than was reflected in prices a month ago. Other factors are moving markets as well, of course — but it’s concerning that risk assets at this point have somehow gained (…).
Barring a smooth regime change, Russia will be cut off from the world henceforward, more totally than in the Soviet era. Under communism, diplomatic relations continued, as did trade. Neither can be taken for granted this time. Thus “de-globalization” or “slowbalization,” a retreat from the current model of international capitalism, seems a given. Shortening supply chains and reshoring jobs will gain even greater urgency. All else being equal, this should push upward on inflation, and downward on growth.
Military spending is going to increase, particularly in western Europe. Even if the conflict ends swiftly, Germany and many other countries are going to want a bigger military to deter a possible conventional invasion. That means higher taxes and a bigger state, and pressure on the welfare state, but also more jobs and investments in defense — where big expenditures have contributed to technological progress in the past. In the short term, this will be negative.
Spending on energy (and other commodities) will rise, and stay elevated for years. At present, pressure from investors to maintain capital discipline has stood in the way of extra capital expenditures in energy. Investment in fossil fuels and in alternatives must surely rise now. (…)
The bill for the damage wrought by Russian forces so far will be crippling for someone, and it shouldn’t be the Ukrainian people. There’s also a need to indemnify the nations that have borne the brunt of taking in Ukrainian refugees, much as Germany paid reparations to Israel for the costs imposed by the influx of Jewish survivors of the Holocaust.
This is a nasty sticking point for all relatively positive scenarios in which the bloodshed stops relatively soon. Even if Russia changes regime, any attempt to aid the new rulers by going easy on the bill would divide the world. But if Russia is made to pay for cleaning up the mess it’s made, that will limit its economy and cause humiliation. So, how much? The wealth stolen from the country by the oligarchs could in the end be used to pay for rebuilding Ukraine (and possibly compensating victims of Russian aggression in Syria.) The expansion of NATO after the Cold War has often been likened to the errors made by the victors in the Treaty of Versailles after World War I; there is ample chance to make such a mistake again. (…)
Key investment issues to watch for include the actions of China, and any further imposition of sanctions. Regime change in Russia would change the game, although not in predictable ways. And in any peace negotiations, it will be vital to see what is said about reparations. The issue looks close to insoluble from here. Beyond that, any conceivable outcome will put upward pressure on inflation and downward pressure on growth for the short term — the longer and more intense the conflict, the worse. But even the imminent peace agreement that many now expect would likely lead to years of intensifying economic pressure as a result of the war.
Some people believe in good scenarios:
Retail traders net bought $5.6B this past week, 1.6 standard deviations above the 12M average of $3.3B. ETFs make up about 70% of the order imbalance. Strong inflows were observed in NASDAQ 100 (1Y z-score +3) as well as S&P 500 ETFs (z-score +1.8). With the exception of selling in GLD (-$44MM), there was little activity in commodity ETFs. (The Market Ear)
(JPM)
Here’s a developing bad scenario:
Shanghai Cases Hit Record Shanghai’s Covid cases jumped more than 60% in a single day, topping 1,600 on Friday (including 1,580 without any symptoms), even as authorities escalated restrictions that many feared would plunge the Chinese financial hub into a city-wide lockdown.
FYI:
America’s COVID shuffle
Data: Census Bureau. Chart: Jared Whalen/Axios
U.S. gas demand is showing signs of a slowdown. The weekly demand figure has fallen for two consecutive weeks. (
