Edge and Odds

The enemy of knowledge is not ignorance, it’s the illusion of knowledge (Stephen Hawking)

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so (Mark Twain)

Edge and Odds

Invest with smart knowledge and objective odds

THE DAILY EDGE: 4 AUGUST 2021

COMPOSITE PMIs

Eurozone grows at fastest rate since June 2006

Eurozone business activity rose at its fastest rate in just over 15 years during July, with steep manufacturing output growth complemented by an accelerated expansion of services activity.

After accounting for seasonal factors, the IHS Markit Eurozone PMI® Composite Output Index rose to 60.2, slightly below the preliminary ‘flash’ estimate of 60.6, but still surpassing June’s 15-year record of 59.5. This was the fifth successive month in which private sector output has expanded, the longest uninterrupted sequence since the pandemic began early last year.

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Driving the broad acceleration in output growth was services, where activity increased at its fastest pace since mid-2006. Although manufacturing production rose at its softest rate in five months, the expansion was considerable and still outstripped that seen in the services sector.

image_thumb[22]Among the four largest eurozone economies, the quickest rise was in Germany, where again the rate of expansion accelerated to a record high. In Italy, private sector activity growth jumped to a three-and-a-half year high, while Spain and France registered softer increases in output.

Latest survey data also revealed the quickest rise in demand for euro area goods and services since May 2000 in July. Again, trends in new orders were similar to output, with more rapid demand growth for services contrasting with a slower pick-up for goods.

Nevertheless, increased order book volumes reflected improvements in both domestic and international markets, as indicated by a rise in new export business. Although foreign demand rose at a marginally weaker pace than in June, it was still the second-fastest recorded since comparable data were first published in September 2014.

The consequence of steep month-to-month growth in new business strained operating capacities across the eurozone immensely in July. This was evidenced by a survey-record rise in outstanding business and extended the current period of backlog accumulation to five months.

However, notable efforts to bolster output potential were seen as employment increased at the fastest rate in almost 21 years. Rates of job creation quickened in Germany and Italy, but eased in France and Spain.

Meanwhile, inflationary trends showed some signs of stabilising in July. Input costs rose at the strongest rate since September 2000, although the pace of increase was only fractionally quicker than in June. Output charge inflation was unchanged from June’s record high.

Lastly, businesses remained firmly optimistic that output would grow over the next 12 months, although the degree of confidence slipped from June’s high (since 2012) to a four-month low.

The IHS Markit Eurozone PMI® Services Business Activity Index continued to rise further beyond the 50.0 mark, latest data showed, indicating accelerating growth in services output. At 59.8 in July, compared to 58.3 previously, the latest figure was the highest since June 2006 and consistent with a sharp rate of activity growth.

Of the four largest eurozone economies, Spain registered the sharpest growth, and Italy the weakest.

New business also continued to increase at a considerable pace, boosted by sharper growth in new export orders. Consequently, domestic and international demand combined rose at the quickest rate in 14 years.

However, operating capacities were tested in July, as evidenced by a joint-record increase in backlogs of work. This encouraged the greatest expansion in employment across the eurozone service sector for almost three years.

Surveyed firms retained an exceedingly optimistic view towards future activity prospects in July, although the level of positive sentiment receded to a three-month low.

Lastly, inflationary pressures subsided slightly during the latest survey period, with both output price and input cost inflation slowing since June. Nevertheless, rates of increase remained historically elevated.

Chris Williamson, Chief Business Economist at IHS Markit:

(…) It’s not just the consumer sector that is booming, however, with business and financial service providers also enjoying a growth spurt as broader economic recovery hopes build.

Alongside the sustained elevated growth recorded in the manufacturing sector, the impressive strength of the service sector’s expansion in July means the eurozone should see GDP growth accelerate in the third quarter.

Worries about the Delta variant have become more widespread, however, subduing activity in some instances and raising concerns about the possibility of virus restrictions being tightened again. Hence services growth in July was slightly less marked than the earlier flash estimate and future expectations cooled to the lowest since March, presenting a significant downside risk to the outlook and hinting that growth could begin to slow again as we head toward the autumn.

Furthermore, up to now companies have generally seen little resistance from customers to higher prices, but this could change after the current rebound from lockdown restrictions has passed.

China: Service sector activity rebounds in July

PMI survey data showed a steeper increase in Chinese services activity in July. The stronger upturn coincided with the successful containment of the recent uptick in COVID-19 cases, which in turn led to greater customer numbers and boosted new order intakes. As a result, firms registered a renewed increase in backlogs of work, which led to a slight rise in payroll numbers. Business confidence also strengthened from that seen in June. Finally, prices data showed steep increases in both input costs and output charges.

At 54.9 in July, the headline seasonally adjusted Business Activity Index rebounded from June’s 14-month low of 50.3 and signalled a sharp and accelerated expansion of services activity. Growth was also quicker than that seen on average since the survey’s inception in late-2005 (54.1).

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Underpinning the sharper upturn in activity was a further rise in new business. Notably, the rate of new order growth quickened from June’s recent low and was steep overall. Panel members often mentioned that the containment of the virus domestically and firmer market conditions had helped to boost customer numbers and demand. However, the pandemic continued to weigh on new export business, which was broadly stagnant in the latest survey period.

After a slight reduction in June, outstanding workloads increased at Chinese services companies in July. Though modest, the rate of accumulation was the fastest seen for over a year, with respondent often linking the upturn to greater amounts of new business and insufficient capacity.

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Service sector employment likewise returned to growth at the start of the third quarter. That said, the rate of job creation was only slight, as efforts to expand capacity were partly offset by other firms that looked to control their costs.

After easing to a marginal pace in June, the rate of input cost inflation quickened notably in the latest survey period. Costs rose markedly overall, with the increase exceeding the long-run series average. Companies reported having higher staff, fuel and raw material costs during July.

Consequently, prices charged by services companies also increased during July, as firms looked to alleviate pressure on their operating margins. The rate of inflation was the quickest seen in the year to date and solid overall.

Business confidence regarding the one-year outlook for activity improved during July, picking up from June’s nine-month low.However, optimism remained softer than that seen on average over the series history. A number of firms hoped that an end to the pandemic would boost sales at home and abroad, and lead to stronger global economic conditions, while new product releases were also expected to lift activity levels.

DRY POWDER

Last June 4, after the U.S. savings rate was reported at 14.9% for April, down from March’s 27.7%, David Rosenberg wrote:

We have done the work on this, and the post-pandemic equilibrium savings rate is 10 per cent, whereas it was closer to seven per cent before the pandemic. The widespread consensus view is that there is a ton of dry powder left here, but that fails to take into account that a lot of things are going to change post-COVID-19, and one of them is an elevated precautionary personal savings rate. So much of the money from Uncle Sam has pretty well been spent already — it probably has a shelf life of one or two more months and that’s it. Party’s over.

The so-called dry powder would then have been around $900B at the 10% “equilibrium” savings rate. Well, June’s savings rate was reported at 9.4%, blowing all that remaining dry powder away while questioning the notion of elevated precautionary savings.

The glass half-empty narrative feeds on this and on the recent jump in inflation to conclude that the consumer is not only spent-up but is actually about to meaningfully retrench as real average weekly earnings have contracted in each of the past three months and four of the past five?

True, but average real wages remain 2.9% above their pre-pandemic levels:

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The glass half-full narrative argues that, prior to the pandemic, the savings rate was around 7.5%, suggesting there might be another $400-500B in available dry powder, about 3% of annual expenditures. Add another $150B in borrowing power given that Americans cut their credit card balances by 10% in the last 18 months and you get pent-up demand up to 4%, exclusive of on-going labor income gains which could add another 8-10% assuming the Fed reaches its employment and inflation goals. In all, there could be another 8-14% growth in nominal consumer spending in this post-pandemic recovery.

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Data: New York Fed; Chart: Axios Visuals

The recent Fed’s Senior Loan Officer Opinion Survey suggests that banks will also be very accommodating:

Over the second quarter, a significant net share of banks eased standards for credit card loans, and moderate net shares of banks eased standards for auto loans and for other consumer loans. Consistent with easier lending standards, a significant net share of banks reduced the minimum required credit score on credit card loans, and moderate net shares of banks did so on auto and other consumer loans. Additionally, a significant net share of banks increased credit limits on credit card accounts. (…) Regarding demand for consumer loans, significant net shares of banks reported stronger demand for auto and credit card loans.

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This would be enough to keep the economy humming nicely for a while but now add the significant inventory rebuilding cycle ahead and the domestic seeds are there for a booming economy through 2023.

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But the dry powder may actually be much thicker and long lasting. J.P. Morgan Asset Management developed a model for consumer spending that takes into account taxable income and  transfer payments, but also housing and financial wealth. As can be seen below, their model’s fit with actual consumption growth has been remarkable since 1972. The model currently estimates that Americans’ spending growth could reach 25% compared to its current 5% growth rate. Quite a powder keg!

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A blast seems unlikely, however. This powder will likely be used over a few years given that consumers are troubled by the recent shortages and price spikes in some major spending categories:image_thumb[5]

Bank executives said their business clients have in recent months ramped up requests for credit lines that can be drawn quickly for spending on inventory, labor or expansions.

Companies aren’t actually drawing the money into their bank accounts just yet. Businesses are already stuffed with cash, and supply-chain issues and labor shortages have crimped their ability to spend it. But bankers say the activity in recent months is evidence that businesses are planning to turn on the spending spigot. That could help the economy shoot higher. (…)

“I’ve never seen anything quite like it,” said Jim Glassman, the head economist at JPMorgan’s commercial bank. He said businesses are planning ambitious spending projects, especially on automation and technology. (…)

The lingering memory of the shutdowns may spur businesses to keep their powder dry for some time to come, especially during a surge of new infections from the highly contagious Delta variant. (…)

From the Fed’s Senior Loan Officer Opinion Survey:

Over the second quarter, banks reported having eased standards and terms on C&I loans to firms of all sizes. On net, significant shares of banks reported having eased standards on loans to large and middle-market firms and small firms.3 Banks eased all queried lending terms on loans to large and middle-market firms and eased most their lending terms on loans to small firms.4 Easing was most widely reported for spreads of loan rates over the cost of funds and costs of credit lines, with significant net shares of banks reporting easing these terms for C&I loans to small and large and middle-market firms. Additionally, significant net shares of banks reported easing the following terms on C&I loans to large and middle-market firms: the maximum size of credit lines, loan covenants, the use of interest rate floors, and premiums charged on riskier loans. (…)

Major net shares of banks that reported easing standards or terms cited a more-favorable or less uncertain economic outlook, more-aggressive competition from other banks on nonbank lenders, and improvements in industry-specific problems as important reasons for doing so. Significant net shares of banks also mentioned increased tolerance for risk and improvements in their current or expected liquidity or capital positions as important reasons for easing lending standards and terms. (…)

Furthermore, a significant net share of banks reported a higher number of inquiries from potential borrowers regarding the availability and terms of new credit lines or increases in existing lines over the second quarter. (…)

Major shares of banks that reported stronger demand cited increases in customers’ needs to finance inventory, accounts receivable, investment in plant or equipment, and mergers and acquisitions as important reasons for stronger demand. (…)

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Interestingly, loan officers are not reporting overall demand that strong, at least nothing like “I’ve never seen anything quite like it”.

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However, what may be happening is that American banks are gaining market share from foreign banks. Per the same loan officers survey:

Foreign banks reported having left standards and most of their lending terms on C&I loans unchanged. (…) Meanwhile, a modest net fraction of foreign banks reported stronger demand for C&I loans.

Auto US light vehicle sales at a seasonally adjusted annualized rate (SAAR) were about 14.75 mn per Wards and 14.73 mn per Motor Intelligence. While total unit sales in July declined by less than 1% sequentially to 1.288 mn (from 1.295 mn in June), when factoring in the seasonality adjustment, July US SAAR declined by about 4% sequentially (US SAAR was 15.4 mn in June; per Wards). (…) July’s industry incentive spending per vehicle was down about 37% yoy and down about 7% sequentially to about $2.5k per vehicle (per Motor Intelligence). We expect industry pricing to remain strong as components shortages continue to weigh on production in the short term, and dealer inventory remains low. Inventory at US dealers decreased sequentially to ~1.0 mn from 1.3 mn in June 2021, and was down from 2.5 mn in July 2020. Industry DOI came in at 22 days compared to 25 days in June 2021 and 53 days in July 2020. (…) (Goldman Sachs)

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Auto Toyota Motor Corp (7203.T) posted a record quarterly profit on Wednesday and Honda Motor Co (7267.T) raised its annual profit estimate as pandemic-hit sales rebounded, but the automakers saw no end in sight to the global chip shortage. (…) Toyota has been stockpiling semiconductors, used in everything from engine maintenance to car safety and entertainment systems, amid a global supply shortage that has hit production at rivals such as Hyundai Motor Co (005380.KS) and Ford Motor Co (F.N). (Reuters)

Surprised smile The shares of Clorox yesterday sank 9.4% after reporting EPS 28% below consensus. Gross margins narrowed by 970 bps YoY in Q2 and management said it expects gross margins in the current fiscal first quarter to contract by 1,000 to 1,300 bps YoY due to “significant cost inflation.” To help correct the squeeze, CLX is raising prices on 50% of its products and planning more hikes “at a later date”.

Eurozone retail sales jumped in June as consumers return to high street

Retail sales increased by 1.5% in June as stores reopened. Sales were higher than ever before, which shows that the rebound from lockdown is now stronger than that seen last year. With more restrictions lifted and vaccinations proving to be a gamechanger, this makes sense. The growth in July was mainly seen in non-food products, while internet sales decreased. This is in line with some rebalancing from online to offline shopping as stores reopen and consumers feel safer to visit. (…)

The Delta variant does not seem to have had much impact on behaviour so far, but has provided a warning about the service sector’s performance in the months ahead. Either way, after a weak April due to shops closing again, the third quarter will probably be set for favourable consumption growth. This adds to our positive outlook for GDP growth this quarter as the economic rebound continues.

EARNINGS WATCH

We now have 340 reports in, an 88% beat rate and a +16.3% surprise factor.

Trailing EPS are now $181.56. Full year est: $201.06. 2022e: $221.86.

Pointing up Importantly, Refinitiv published its first tally of pre-announcements for Q3 and, with about half of typical guidance givers, it looks like Q3 results will remain upbeat:

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COVID-19

    (CalculatedRisk)

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    Data: Harris Poll. Chart: Axios Visuals

    • The outbreak of the highly transmissible delta variant has just pushed the threshold for herd immunity higher to more than 80% and possibly almost 90%, according to the Infectious Diseases Society of America. (Bloomberg)

    • Florida Sees Record Covid-19 Hospitalizations

    Crypto ‘Wild West’ Needs Stronger Investor Protection, SEC Chief Says The Securities and Exchange Commission will regulate cryptocurrency markets to the maximum extent possible, Chairman Gary Gensler said, as he called on Congress to grant the agency more authority and resources to regulate the sector.

    Money Shares of Robinhood closed up 24%, closing above its $38 IPO price for the first time since last week’s debut.

    School Only 40% of candidates passed the CFA Institute’s Level II exam in May and June, the first time it was given using computers. The success rate was the lowest since 2010 and down from the 55% of applicants who passed the second level of the chartered financial analyst exam in December 2020, which was a 15-year high. At least it was a better showing than the Level I results.

    Nerd smile Just to show my age, I was part of the highest pass rate on this chart…

    THE DAILY EDGE: 3 AUGUST 2021

    U.S. Manufacturing PMI: July PMI ticks up to record high, but supply delays and price pressures also hit new peaks

    July PMI data from IHS Markit signalled the most substantial improvement in operating conditions across the U.S. manufacturing sector on record. Overall growth was supported by stronger expansions in output and new orders, with the latter increasing at the second-fastest pace since data collection began in May 2007. Unprecedented supplier shortages and delays continued to exert upward pressure on input costs and stymie firms’ ability to process incoming new work. As a result, cost burdens rose at a record breaking rate and the accumulation of backlogs accelerated.

    Nonetheless, output expectations remained upbeat amid hopes of further boosts to client demand over the coming year.

    The seasonally adjusted IHS Markit U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) posted 63.4 in July, up from 62.1 in June and slightly higher than the earlier released ‘flash’ estimate of 63.1. The improvement in the health of the manufacturing sector was the strongest in the 14-year series history.

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    Contributing to the uptick in the headline figure was a sharper expansion in production at the start of the third quarter. The upturn was reportedly linked to stronger client demand and efforts to clear backlogs of work. The rate of growth was the steepest for six months and marked overall.

    New business at manufacturing firms rose at a robust rate, that was close to the record pace set in May. Firms stated that greater new order inflows stemmed from stronger client demand from new and existing customers, as some sought to stockpile. At the same time, foreign client demand rose at one of the fastest rates since data collection began in 2007 amid the reopening of key export markets.

    July data signalled an unprecedented deterioration in vendor performance, as supplier delays were driven by transportation issues and severe raw material shortages.

    Such constraints on component deliveries and greater global demand for inputs reportedly pushed input costs up. The rate of cost inflation was the sharpest on record. Firms were, however, able to continue to raise their selling prices in July as charges also increased at a record-breaking pace. The uptick in output charges was overwhelmingly attributed to efforts to pass-through higher costs where possible.

    Supplier price hikes led to greater stockpiling activity at manufacturers, as growth in input buying accelerated to a fresh series high. Efforts to mitigate against future price rises or material shortages resulted in an unprecedented rise in pre-production inventories. In contrast, stocks of finished goods fell at a strong pace as firms sought to sell from their current holdings.

    At the same time, stronger new order growth led to the second-fastest accumulation in work-in-hand since 2007. To reduce pressure on capacity, firms expanded their workforce numbers at the steepest pace for three months, but some continued to note difficulties filling vacancies.

    Finally, goods producers were markedly upbeat overall regarding the outlook for output over the coming year in July. Optimism was often linked to hopes of stability in future supply chains and further boosts to client demand. Although easing from that seen in June, the degree of confidence was above the long-run series average.

    Chris Williamson, Chief Business Economist at IHS Markit:

    Despite reporting another surge in production, supported by rising payroll numbers, output continued to lag well behind order book growth to one of the greatest extents in the survey’s 14-year history, leading to a near-record build-up of uncompleted orders.

    Capacity is being constrained by yet another unprecedented lengthening of supply chains, with delivery delays reported far more widely in the past two months than at any time prior in the survey’s history. Manufacturers and their customers are consequently striving to maintain adequate inventory levels, often reporting the building of safety stocks where supply permits, to help keep production lines running and satisfy surging sales.

    The result is perhaps the strongest sellers’ market that we’ve seen since the survey began in 2007, with suppliers hiking prices for inputs into factories at the steepest rate yet recorded and manufacturers able to raise their selling prices to an unprecedented extent, as both suppliers and producers often encounter little price resistance from customers.

    From the ISM Manufacturing PMI (my emphasis):

    • “Business levels continue to exhibit strong demand, with no signs of backing down. Purchases continue to have long lead times due to shortages of raw materials and labor force, as well as logistics challenges. Increased costs are being passed to customers.” [Computer & Electronic Products]
    • “Supply chains are slowly, very slowly filling up. Like a water hose, starting upstream and slowly flowing downstream. Rumor is a full return to ‘normal’ may be nearer to year’s end, but the situation is progressing. Transportation (equipment and drivers) is the current pinch point, more so than material shortages.” [Chemical Products]
    • “Strong sales continue, and inventories are low as the chip shortage is keeping production numbers down — we have idled several of our assembly plants to reduce the strain on the chip supply base.” [Transportation Equipment]
    • “Still dealing with price increases from force majeure issues as well as overseas shipping premiums and higher costs of items like fuel. Customer demand still high; pushing plant to max production rates.” [Food, Beverage & Tobacco Products]
    • “Strong operations, (with) new programs, orders and launches. Continue to have hiring difficulties and are unable to fill production and salaried jobs (due to) a lack of candidates. Raw materials are still in short supply, with longer lead times.” [Fabricated Metal Products]
    • “Incoming bookings continue to be strong, and economy continues to return. Still struggling with inflation and availability (of materials, labor and freight).” [Furniture & Related Products]
    • “Sales are above last year by a good percentage, but meeting demand is just not possible due to force majeure situations, logistics, and labor shortages. We don’t anticipate this ending until well into 2022.” [Nonmetallic Mineral Products]
    • “Supply chain continues to be extremely challenging in a variety of categories. Having to place orders months ahead of time just to get a place in line.” [Machinery]
    • “Very busy with new orders. Material costs continue to rise, and supplies are sometimes delayed. Labor issues are still affecting us the most with finding proper labor. Labor— costs are increasing as we are competing locally for top talent.” [Miscellaneous Manufacturing]
    • “Business levels continue to be very strong, but we also continue to struggle finding employees. We can only fill 75 percent of our order requirements due to the labor shortage.” [Primary Metals]

    imageThe ISM data reveal that manufacturers’ inventories remain tight and unstable. Manufacturers’ reading of their customers’ inventories (chart) declined 5.8% to 25% in July, “the lowest since the index was established in January 1997.”

    “Average lead time for production materials in July was 86 days, down two days from the June figure of 88 days, the highest since ISM® began collecting this data in 1987.”

    (…) Out of the 29 nations for which July data were available, 22 saw growth during the latest survey month. The eurozone remained a bright spot, with the three highest-ranked countries based on PMI readings (the Netherlands, Germany and Austria) all located in the currency bloc. The US was in fourth place overall. PMI readings for China (50.3) and Japan (53.0) were well below the global average.

    Emerging markets tended to underperform compared with developed nations in July, continuing a trend observed over the past eight months. The emerging Asia region was especially weak, containing five out of the seven nations seeing contractions (Thailand, Malaysia, Vietnam, Indonesia and Myanmar). (…)

    EARNINGS WATCH

    Two variables drive equity markets, earnings growth and changes in earnings multiples. This is about earnings:

    According to Refinitiv data, S&P 500 earnings will grow 8.5% in 2022 to reach $221.86 per share on a 10.4% gain in revenues. Non-Financials will grow their earnings 12.0% on a 10.7% rise in revenues.

    S&P 500 revenues growth correlates closely with that of total U.S. business sales as Ed Yardeni illustrates:

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    Real business sales growth rarely exceeds 5.0% which would imply inflation exceeding 5% in 2022 for S&P 500 revenues to rise more than 10%. Revenue estimates thus appear stretched, otherwise J. Powell & Co. will get a nasty surprise.

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    Meanwhile, unlike the post-2009 period, corporate input costs are rising much faster than consumer prices. So far, this squeeze is offset by the unusual demand created by the huge rescue moneys sent directly to Americans but many corporate officers are already warning about the challenges ahead when demand and revenues normalize.

    fredgraph - 2021-08-03T055632.916

    Last week, the U.S. Bureau of Labor Statistics released the Employment Cost Index for Q2. Noflationists are quick to note that the ECI came in light, rising 0.7% from Q1, below the consensus view of +0.9% and only 2.8% annualized. Some also point out the “sharp slowing in employment costs in the exact part of the economy that the gurus are saying is in the shortest labor supply situation —services!” where the ECI came in +0.7% QoQ, down from 0.9% in Q1.

    But a deeper, broader analysis is more concerning:

    • Private industry compensation rose 0.8% QoQ in Q2 after +1.0% in Q1. But the total was helped by an awkwardly low +0.3% rise in benefits which masked the +1.0% rise in Wages and Salaries that followed Q1’s +1.1%. Private wages are up 4.2% annualized in the first half.
    • Goods-producing industries saw their total comp jump 1.1% in Q2 after +0.7% in Q1. Service-providers’ total comp slowed from +0.9% to +0.7% partly due to a 2.2% decline in Finance and insurance, “correcting” the 4.3% jump in Q1 likely caused by bonuses. That group’s comp is still up 4.2% annualized in the first half.
    • During the first half, wages for goods producers rose 3.8% a.r., a sharp acceleration from +2.8% in all of 2020. But they jumped 1.3% QoQ (+5.3% a.r.) in Q2 (1.4% in Construction).
    • Private service provider employees saw their wages rise 0.9% in Q2 after 1.3% in Q1, +4.5% annualized in the first half.
    • And as to the “exact part of the economy that the gurus are saying is in the shortest labor supply situation”, leisure and hospitality, private wages exploded +2.8% in Q2 after +1.6% in Q1 for a 9.0% annualized rate in the first half after +3.6% in 2020.

    This next chart plots the growth in business sales minus wages and salaries against nonfinancial profit margins which tend to fluctuate with businesses’ ability to grow revenues faster than wage costs. The chart ends in Q1 because we don’t have Biz sales for June yet. But if we assume 2022 inflation at 2.5% and real revenues up 3.0%, many corporations might be hard pressed to grow their margins in 2022, let alone maintain them.

    fredgraph - 2021-08-02T164133.862

    All this to say that expectations of 12% growth in S&P 500 non-financial earnings in 2022 look set for disappointments, unless inflation is much higher than 2.5%, in which case many other people will be disappointed.

    Pricing power has become a crucial attribute as price makers will grow earnings faster than price takers in coming years. That differentiation will become more obvious when stimulus and reopening demand cools off and revenue growth returns to more normal levels.

    Refinitiv will shortly give us its first tally of corporate guidance for Q3 and the rest of 2021. Rosenberg Research makes its own tally of what comes out of conf. calls. Half way in the reporting season, 34% have guided down for Q3 earnings and 24% have guided down for the upcoming fiscal year. This compares with 39% negative guidance for all of Q2 and 43% for Q1.

    So far, so good, but as costs keep rising while revenues slow down from their current strong pace, guidance could get much less enthusiastic.

    (…) McDonald’s MCD -1.08% reported that comparable sales in the U.S. rose nearly 15% from the 2019 quarter. KFC parent Yum Brands YUM 0.76% said the chain grew comparable sales by 19% over that same period.

    Even restaurants that supposedly benefit from lockdown conditions are thriving in the reopening. Domino’s Pizza said second-quarter sales grew 3.5% from a year earlier in the U.S., when most restaurants were shut due to public-health orders. (…)

    McDonald’s said last week that its U.S. menu prices rose 6% from a year earlier in the second quarter, which did little to dent customer demand. The average second-quarter check size grew due to larger order sizes as well as higher prices, the company said.

    And operators have options as labor costs increase. Digital ordering kiosks can reduce a store’s labor needs while also making it easier to offer extra promotions to a customer. (…)

    TECHNICALS WATCH

    The strongest equity market has some of the weakest breadth on record MS Mike Wilson: “The mid-cycle transition de-rating is advanced but unfinished. Falling earnings revision breadth this fall will likely complete that process.”

    Apartment Rents Increase as Workers Return to Cities

    (…) Median rent has risen more than 10% over the past year, according to homesearch website Apartment List, reflecting how soaring housing prices are forcing many would-be home buyers out of the for-sale market. (…)

    But in nearly every major metro area, rents are now much higher than they were a year ago. New York and San Francisco rents have begun to recover without having to lure tenants with free rent or other incentives so often anymore. (…)

    Camden Property Trust, a Houston-based landlord, reported new lease rents at its properties jumped 19% this July. (…)

    Goldman Sachs Is Giving Entry-Level Bankers a Nearly 30% Raise The Wall Street firm is increasing base pay for its entry-level employees—first-year analysts—to $110,000, a nearly 30% increase from the previous starting salary.
    Fed’s Waller Says September Taper Call May Be Warranted

    Federal Reserve Governor Christopher Waller said that if the next two monthly U.S. employment reports show continued gains, he could back an announcement soon on scaling back the central bank’s bond purchases. (…)

    “If the jobs reports come in as I think they’re going to in the next two reports, then in my view with tapering we should go early and go fast, in order to make sure we’re in position to raise rates in 2022 if we have to. I’m not saying we would.” (…)

    Tapering could begin as soon as October and be completed in around five or six months if the labor market was sufficiently strong, Waller said. That timeline was similar to Bullard’s view, outlined Friday, to begin the taper in the fall and complete it by the end of the first quarter of 2022. (…)

    “My concern is this anecdotal evidence I am hearing from business contacts who are saying they are able to pass prices through, they fully intend to,” he said. “They have got pricing power for the first time in a decade. Those are the sorts of issues that make you concerned that this may not be transitory.” (…)

    “The delta variant is not going to sidetrack the U.S. economy in any way,” Waller said.

    The coronavirus pandemic may have pushed the United States into a volatile era of stronger growth and better productivity, but higher interest rates and faster inflation as well, St. Louis Federal Reserve president James Bullard said, elaborating on why he thinks the U.S. central bank should end its crisis-era policies.

    Bullard, who five years ago said he viewed the United States as mired in an epoch of low growth, low productivity and low inflation, said he is beginning to think a new “regime” may have arrived where the Fed will have to cope with faster change and more frequent shocks.

    (…) the risk is higher inflation that could upend the Fed’s current expectation that price pressures will ease on their own and allow for continued loose monetary policy. (…)

    China Takes Aim at Auto Chip Dealers Top market regulator probes those it suspects are driving up prices

    (…) Chinese authorities have vowed to establish semiconductor supply chains that rely less on imports and have said they are engaging with auto manufacturers and chip makers to match supply and demand. (…)

    Taiwan Semiconductor Manufacturing Co. , the world’s largest contract chip maker, said it expects the auto-chip shortage will begin easing this quarter, as it allocated more capacity to producing parts needed for new cars. The company has also noted that it is seeing more clients stock up on inventory to cushion their supplies. (…)

    However, analysts and company executives expect the broader supply crunch to extend into next year. Intel Corp. Chief Executive Pat Gelsinger said last month that the shortage could stretch into 2023. (…)

    • Stellantis chief financial officer Richard Palmer said on Tuesday the world’s fourth largest carmaker did not expect chip supply to improve before the fourth quarter, with a total projected production loss of around 1.4 million vehicles in 2021. “The rebound of global car markets continues to be hampered by acute supply limitations across the entire value chain,” Infineon CEO Reinhard Ploss told analysts. “All in all, it will take time to get back to a supply-demand equilibrium.” “In our view, this will take until well into 2022, Ploss added. (Reuters)
    Tencent Sinks After China Denounces Online Gaming Shares in Tencent and rivals plummeted after a state-owned newspaper criticized online gaming as “opium for the mind,” fueling concerns that the companies’ games could be swept up into a broader regulatory crackdown.
    China Shuns Ericsson, Nokia as the West Curbs Huawei The U.S. and many of its allies have restricted the use of 5G cellular equipment made by China’s Huawei. Now Beijing is doing the same to Huawei’s Western rivals.
    China quietly sets new ‘buy Chinese’ targets for state companies, U.S. sources say]

    China’s government quietly issued new procurement guidelines in May that require up to 100 per cent local content on hundreds of items including X-ray machines and magnetic resonance imaging equipment, erecting fresh barriers for foreign suppliers, three U.S.-based sources told Reuters. (…)

    The former official said that when China joined the World Trade Organization, it agreed not to issue such internal documents. The document also violated the spirit of the January, 2020, Phase 1 trade deal with the United States, the former official said. “They need to reduce barriers, not create new ones.”

    Sent to Chinese hospitals, companies and other state-owned buyers, the document sets local content requirements of 25 per cent to 100 per cent for 315 items. They include medical equipment, ground-based radar equipment, testing machinery, optical instruments; items used for animal husbandry; seismic instruments, and marine, geological and geophysical equipment, the former official said. (…)

    U.S. trade experts said China’s local content rules differed from planned increases in U.S. “Buy American” thresholds because they were not publicly released, and affect far greater volumes of medical equipment and other goods since China’s state-owned enterprises include hospitals and other entities. (…)

    Also transitory? Florida breaks record for new coronavirus cases as surge of infections rips through state

    Florida reported 21,683 new coronavirus cases on Friday, the state’s highest one-day total since the start of the pandemic, according to data released Saturday by the Centers for Disease Control and Prevention.

    The data shows the severity of the surge in Florida, the epicenter of the U.S. outbreak and now responsible for 1 in 5 new infections nationally. The previous peak in Florida had been on Jan. 7, when the state reported 19,334 cases, according to the CDC — before the widespread availability of coronavirus vaccinations. Florida has reported an average of 15,818 new cases a day over the past seven days, according to data compiled by The Washington Post.

    The Florida Department of Health reported that coronavirus cases in the state had jumped 50 percent in the past week. In that time, the state has reported 409 deaths. (…)

    About 49 percent of Florida’s population has been fully vaccinated as of Sunday.

    State health officials have indicated that hospitals are struggling to keep up with the number of covid-19 patients. The Florida Hospital Association said Friday that covid hospitalizations are approaching last year’s peak. (…)

    “There is no higher risk area in the United States than we’re seeing here,” Aileen Marty, an infectious-disease expert at Florida International University, told CBS Miami. “The numbers that we’re seeing are unbelievable, just unbelievably frightening.” (…)

    More than 2,000 intensive care unit beds in Florida are occupied by covid patients.

    At Jackson Memorial Hospital in Miami, all of the beds at its covid-only intensive care unit are filled with unvaccinated patients. “It just went boom,” Akinkunmi said. (…)

    Lakshmi noted that 83 percent of the [Tampa General] hospital’s covid patients are unvaccinated.

    “It feels like we are getting hit by a train, the pace is so fast and uncontrolled,” she said. “I just don’t have any words anymore. This is awful, just awful, and it is going to be awful.” (…)

    But DeSantis has maintained that the increase is a “seasonal wave” caused by more people being indoors and air-conditioning systems circulating the virus. (…)

    A coronavirus variant discovered in Colombia is also showing up in South Florida. Carlos Migoya, CEO of Jackson Health System, recently told WPLG that the B.1.621 variant has accounted for infections in some coronavirus patients, trailing behind the delta and gamma variants. B.1.621 has yet to receive a Greek-letter designation, as more prominent variants have. (…)