MANUFACTURING PMIs

Eurozone manufacturing sector expands at survey record rate in March

The eurozone’s manufacturing economy performed extremely strongly during March, with operating conditions improving to the greatest degree in nearly 24 years of data collection. After accounting for seasonal factors, the headline PMI® surged to 62.5, up from February’s 57.9 and indicative of a considerable strengthening of sector performance. The index has now registered above the 50.0 no-change mark that separates growth from contraction for nine months in succession.

Once again, all three broad market groups recorded a month-on-month strengthening of operating conditions. Growth rates were also higher in all instances, although gains were especially strong amongst investment and intermediate goods producers with series record highs seen in each case during March.

Growth was broad-based across the region, with Germany and the Netherlands leading the way. Both nations recorded their highest ever PMI levels in March. Austria also performed exceptionally strongly, whilst Italy and France both recorded levels amongst the highest in their respective survey histories. Ireland saw growth hit an eight-month high, whilst Spain registered its best performance since late 2006. Greece, in contrast, recorded only modest growth, despite enjoying its best PMI reading for over a year.

Underpinning the headline Eurozone PMI were record rises in both output and new orders in March. A general strengthening in demand, on the back of increasing confidence about future economic conditions, helped to drive the record increases in production and output. Latest data showed that new export orders rose for a ninth successive month and at a series record pace.

The further strengthening of trade, orders and production placed further strain on already stretched supply chains. According to the latest data, average lead times for the delivery of inputs lengthened at an unprecedented rate as challenges in sourcing inputs due to product shortages, stronger global demand and ongoing logistical challenges linked to COVID-19 continued in March.

This all served to add to inflationary pressures. Input costs were reported to have risen in March to the greatest degree for a decade. Whilst all nations recorded an increase in costs, the most extreme rises were seen in Austria, Germany, and the Netherlands.

Faced with a considerable rise in operating expenses, and with stronger market demand bolstering pricing power, average prices charged by eurozone manufacturers also increased sharply in March. The rate of inflation was historically strong, reaching its highest since April 2011.

With firms looking to bolster production activities, purchasing activity increased sharply (and adding further pressure to supply-chains). According to the latest data, the rate of increase in buying was the strongest ever recorded by the survey, although with continued delays in delivery, firms sought to utilise their existing stocks wherever possible. Whilst falling at a slightly slower rate, input stocks declined in March for a twenty-sixth successive month.

Rising workloads as evidenced not only by increased new orders, but a series record increase in backlogs of work, encouraged manufacturers to take on additional workers. Marking a second successive monthly rise in employment, the latest survey indicated that jobs growth was the strongest seen since August 2018.

Finally, confidence about output over the next 12 months held broadly steady on February’s record high. Of the nations covered by the survey, optimism was highest in the Netherlands and Ireland.

China: Manufacturing output continues to expand modestly in March

Chinese manufacturing companies signalled a further improvement in operating conditions in March. Production and new orders continued to expand, albeit at mild rates, while employment moved closer to stabilisation. New export business meanwhile returned to growth, as global economic conditions continued to recover from the coronavirus disease 2019 (COVID-19) outbreak. At the same time, inflationary pressures intensified, with both input costs and output charges rising at steeper rates.

At 50.6 in March, the headline seasonally adjusted Purchasing Managers’ Index ™ (PMI ™ ) signalled a sustained improvement in the health of China’s manufacturing sector. The reading was down from 50.9 in February, however, to indicate a marginal rate of improvement that was the softest seen in the current 11-month period of expansion.

As has been the case in each of the past 13 months, Chinese manufacturers increased production during March. The rate of growth edged down to an 11-month low and remained modest overall. Firms frequently mentioned that a further recovery from the pandemic and rising customer orders had supported the latest upturn.

Total new work likewise expanded at a fractionally weaker pace than in February, and only slightly overall. Underlying data suggested that a softening of domestic demand was largely offset by increased foreign sales, which rose for the first time in three months. Companies often mentioned that overseas demand had picked up as global economic conditions continued to recover from the COVID-19 outbreak.

The sustained upturn in new orders led to renewed pressure on capacities, with backlogs of work rising modestly after a marginal drop in February. Concurrently, the rate of job shedding eased to a marginal pace. Where lower staff numbers were reported, it was often linked to the non-replacement of voluntary leavers.

After a solid deterioration in February, average vendor performance deteriorated only marginally during March. Notably, the degree to which delivery times lengthened was the softest since last June.

Although supply chain disruption eased, firms reported a sharp and accelerated rise in input costs during March amid reports of greater raw material prices. Notably, the rate of cost inflation was the steepest recorded for 40 months. Consequently, firms raised their selling prices and at the most marked rate since November 2016. Surveyed companies said that rising prices also suppressed any further recovery of demand.

Input buying fell for the first time in 11 months in March, albeit only fractionally. A number of firms commented on having sufficient stocks in the latest survey period. On the inventories front, stocks of inputs fell marginally, while stocks of finished items were broadly stable.

Looking ahead, manufacturers were highly confident that output would continue to rise over the next year, with the level of positive sentiment among the highest seen over the past seven years. Growth projections were heavily linked to expectations that the pandemic will end, and that global demand will recover.

Japan: Further expansion in manufacturing in March

Japanese manufacturers signalled a second successive improvement in operating conditions in March. Survey respondents registered quicker expansions in production and new order volumes, with the fastest growth rates in 27 and 35 months respectively. At the same time, businesses reported that employment had stabilised for the first time in three months as manufacturers required additional capacity in order to meet rising order volumes. As a result, firms in the Japanese manufacturing sector remained optimistic of a rise in output over the coming 12 months.

The headline au Jibun Bank Japan Manufacturing Purchasing Managers’ Index™ (PMI) rose from 51.4 in February to 52.7 in March. This signalled the strongest improvement in the health of the sector since October 2018, reflecting a sustained recovery from the impact of the coronavirus disease 2019 (COVID-19) pandemic.

The improvement in operating conditions was partly due to a second successive rise in production volumes in March. Output levels rose at a quicker pace than the previous survey period, with the latest increase the fastest since December 2018. Firms often attributed this to improved orders in key manufacturing industries in Japan, notably automotive and semiconductors.

Similarly, Japanese manufacturers indicated further expansion in new order inflows in the latest survey period. This extended the current sequence of growth to three months, with the rise in March the sharpest registered since April 2018. Businesses reported that client demand had continued to recover as the impact of the pandemic began to dissipate, both domestically and in international markets. That said, new export orders increased only marginally, with anecdotal evidence suggesting that external demand was concentrated in key Asian economies including China.

As additional pressure built on capacity among Japanese manufacturers, employment levels stabilised for the first time in three months in March. The seasonally adjusted Employment Index registered at the neutral 50.0 threshold as firms required additional staff to fulfil orders. However, this was partially offset by an ongoing number of voluntary retirements. Moreover, backlogs of work increased for the first time in 27 months, in line with rising demand, providing further evidence of pressure on existing capacity during March.

Input cost inflation strengthened further in March. The pace of inflation was robust overall and the strongest since November 2018. Manufacturers widely linked a rise in average input prices with higher raw material costs. Concurrently, average prices charged for Japanese manufactured goods rose at the quickest pace since April 2019, as firms sought to partially pass through increased input costs to customers.

Supply chain disruption continued to build during March with average lead times lengthening to the most marked extent since May 2020. Delays in receiving shipments led Japanese manufacturers to increase purchasing activity for the first time since December 2018. At the same time firms continued to draw down existing stocks of pre- and post-production inventories to fulfil orders.

Looking forward, business confidence regarding output over the year ahead remained positive, with sentiment underpinned by hopes that a successful vaccine rollout would trigger a broad economic recovery.

Biden Infrastructure Plan Largely as Expected (GS)

The White House infrastructure proposal was mostly as expected, proposing around $1.7 trillion/10 years in investment in physical capital and R&D. Another $500bn would go to workforce incentives and Medicaid benefits. The proposed corporate tax increases were also largely as expected and would cover around half of the spending over the next ten years. We still believe the White House will propose increasing capital gains and individual top marginal rates even though these were not in today’s plan. We expect the spending from this plan to take a few years to ramp up, and our forecast already assumes a spending path similar to what we believe would occur under this proposal.

(…) This appears to be mostly new money (…). (…) a rule of thumb being that an increase in federal funding of $1 in one year increases federal spending by only about $0.40 the following year. (…) Taking the White House description at face value, the plan would average around $275bn (1.25% of GDP) over the next 8 years. Using the rule of thumb just noted, this would suggest that it could boost federal spending by a little over $100bn (0.5% of GDP) next year, and perhaps $150-200bn (0.7%) in 2023. (…)

• A 28% corporate rate. (…) Each percentage point of corporate tax rate increase raises a little over $100bn over ten years in tax revenue, so this proposal would raise between $700-800bn/10 years. We think Congress can raise the rate to 24-25%, but might start to run into resistance among centrist Democrats between 26% and 28%.
• (…)
  the White House proposes to raise the effective tax rate on Global Intangible Low Tax Income (GILTI) to 21% from an effective rate of 10.5% today, move the system to a country-by-country basis that would keep companies from using tax credits from high tax jurisdictions to offset GILTI earnings in low tax jurisdictions, and rescind the policy that applies the tax to income only above a 10% return on physical capital. This would mean that the GILTI regime would apply to most companies with foreign income rather than just to IP-intensive industries like healthcare and technology, and would likely also raise taxes for companies that currently have little to no GILTI exposure. The Tax Policy Center estimated the campaign proposal would raise $442bn over ten years. (…)
• It also proposes to eliminate Foreign Derived Intangible Income (FDII), which encouraged US-based companies to hold their IP in the US by setting an effective tax rate on that income similar to the effective tax rate on IP held abroad and taxed through the GILTI regime.
• The proposal would also establish a 15% minimum tax on corporate book income reported to investors, which would serve as a check against companies that report large profits to shareholders but no profits to the IRS. The campaign proposal would have applied this globally on a country-by-country basis, but the White House release indicates only that it would apply this only to “the very largest corporations.”
• New restrictions on inversions. The White House does not define what this would be, but inversions are likely to play a larger role in tax policy if the rest of the proposal were to pass, as the US would then have a high tax on the foreign earnings of multinationals compared with most other developed countries that rely on mainly territorial tax systems.
• (…) we still expect the White House to propose other tax increases, like an increase in the long-term capital gains rate and a higher top marginal rate for individuals.
• This proposal is likely to pass through the reconciliation process. This would allow the package to pass with only 51 votes (and probably only Democratic votes) in the Senate. (…) we believe it is more likely that Democratic leaders will decide to pass a single reconciliation bill [including personal taxes] to avoid forcing their members to take two separate votes to raise taxes.
• (…) it looks unlikely that the next major fiscal legislation will reach the President’s desk before late July or early August, and there is a good chance it could take until September, after Congress returns from the August recess.
  Alec Phillips

• Here Come the Biden Taxes The middle class will pay for the largest tax increase since 1968. (WSJ Editorial Board)

Mr. Biden’s corporate tax increase alone is more than $1.5 trillion over 10 years, with another $1.5 trillion coming soon on individual income and investment. That’s about $300 billion a year, or 1.36% of GDP each year, assuming U.S. GDP of $22 trillion. Dan Clifton of Strategas Research Partners compares that to Bill Clinton’s 1993 tax increase of 0.4% of GDP, making the Biden increase the largest since 1968. (…)

Mr. Biden wants to raise the corporate rate back up to 28%, but that’s the least of his proposals. He also wants to add penalties that would make inversions punitive, and he’d impose a global minimum corporate tax of 21%. This would shoot the tax burden on U.S. companies back toward the top of the developed world list. At least nine major countries have cut their corporate tax rate since 2017, including France, Sweden and the Netherlands. (…)

“The United States can lead the world to end the race to the bottom on corporate tax rates,” says the White House fact sheet. Mr. Biden says he wants “other countries to adopt strong minimum taxes on corporations” so nations like Ireland can no longer compete for capital with lower tax rates.

(…) even the OECD has been discussing a global minimum tax of about 12%, while Mr. Biden wants 21%. (…)

All of this is in addition to the looming Biden tax increases on dividends, capital gains and other investment income. The lower 2017 corporate rate was intended to reduce the double taxation of corporate income that is built into the U.S. code. Mr. Clifton calculates that if the Biden plan becomes law the U.S. would have the highest overall tax burden on corporate income—62.7%—in the OECD. (…)

(Bloomberg, John Authers)

Ford Says Chip Shortage Forcing Production Halt at Several Plants The auto maker is scheduling more downtime at some U.S. factories, including its two major truck sites.

The company said Wednesday that it would halt production for two weeks in April at its truck plant in Dearborn, Mich., and take a week of downtime on the truck side of its Kansas City, Mo., assembly plant, starting Monday. It also plans to suspend work temporarily and cancel planned overtime at several other factories in North America, attributing the work stoppages to tight chip supplies. (…)

Stellantis NV, the maker of Ram, Jeep and Chrysler, said Friday that it would halt production at five North American plants through mid-April because of the lack of semiconductors. Honda Motor Co. and Toyota Motor Corp. idled some U.S. factories in March, citing the chip shortage, as well as freak weather and port backups.

General Motors Co. also has been hit by the semiconductor shortage, leading it to close some North American plants for several weeks. GM has said the lost production could hurt pretax profits by as much as $2 billion this year.

For months, GM and Ford have been able to sustain pickup-truck production by diverting computer chips away from other, less-profitable vehicles. But more recently, they said they have started building some trucks without the chips and parking them as they await new shipments of the parts.

• Taiwan Semi to Spend $100 Billion to Combat Chip Shortage

Taiwan Semiconductor Manufacturing Co. plans to spend $100 billion over the next three years to expand its chip fabrication capacity, a staggering financial commitment to address booming demand for new technologies.

TSMC, the world’s leading manufacturer of advanced semiconductors, already planned a record capital expenditure of as much as $28 billion this year, but recent trends and developments have pushed for even more capacity. Now at the center of a global chip supply crunch, Taiwan’s biggest company has pledged to work with customers across industries to overcome a deluge of demand. (…)

U.S. rival Intel Corp. in March announced plans to directly compete with TSMC for the business of manufacturing chips for other companies, with a $20 billion investment in two new factories in Arizona. South Korea’s Samsung Electronics Co. is also spending in excess of $100 billion over a decade to expand its semiconductor business.

• Congress Weighs Countering China on Chips, GOP Wary of Cost

TECHNICALS WATCH

CHART OF THE DECADE?

Steve Blumenthal (CMG Wealth) posts this NDR chart: The dotted orange line tracks the actual return achieved 10 years later. It stops in 2011 because we don’t yet have the 10-year number (we’ll know that 10-year annualized return number at the end of 2021.) Note the inverted right scale.

Steve’s bottom line: “Probabilities point to a -0.50% annualized coming 10-year annualized return.”

But there are no cracks in the technical trends so far:

• 13/34–Week EMA Trend

• Volume Demand vs. Volume Supply

• S&P 500 Index vs. 50-Day & 200-Day Moving Average Cross

• The NDX is trying to escape from its tightening vise grip…

…with a little help from tech buybacks near record size in each of the past 6 weeks. (The Market Ear)

Technology stocks rarely trail the rest of the S&P 500 Index’s main industry groups for a quarter. It’s even less common for the index to rise when tech ranks last out of the 11 sectors. Yet both are poised to happen this quarter. The S&P 500 Information Technology Index is in position for its second last-place finish since 2008, according to data compiled by Bloomberg for the first quarter. During the same period, the S&P 500 rose 5.4%. Any advance would be the first since 2004 for a quarter when tech, which has the S&P 500’s highest weight at 26%, was the biggest laggard. (Bloomberg’s David Wilson)

Meanwhile:

Spac boom fuels strongest start for global M&A since 1980 Deals worth $1.3tn in first quarter surpass levels of dotcom boom at turn of millennium

Otherwise, Chine is manoeuvering:

• China manoeuvres near Taiwan fuel concerns of potential attack Beijing has stepped up military posturing in recent days, raising worries it could invade

The FT reports that “ten Chinese military aircraft, including fighters and an anti-submarine warfare aircraft, had flown into [Taiwan’s] ADIZ, while Japan recorded an ASW plane inside its zone just east of Taiwan. (…) According to the FT, “people familiar with Taipei’s military strategy said if the PLA expanded a regular presence to the airspace east of Taiwan, it would undermine the island’s security in a much more drastic manner.”

• China Approves Merger of Chemical Giants, Creating $150 Billion Company The move paves the way for another supersize state-run enterprise that Beijing hopes will become a dominant global player.

Sinochem Group Co. and China National Chemical Corp., also known as ChemChina, will be placed under a new holding company funded and overseen by a government body that holds state enterprises, according to a Sinochem statement Wednesday, confirming a Wall Street Journal article in December. The Chinese body, called the State-Owned Assets Supervision and Administration Commission controls both enterprises. (…) The new holding-company structure was designed to avoid triggering a U.S. national-security review of Sinochem’s ownership of Swiss agro-giant Syngenta AG, the Journal reported. (…)

COVID-19

• Roughly 63,000 Americans per day were diagnosed with COVID over the past week. That’s a 17% increase from the week before, and echoes the rising caseloads of the second wave last summer. (Axios)

Data: CSSE Johns Hopkins University. Map: Andrew Witherspoon/Axios

• A more contagious strain of the coronavirus is now predominant in five U.S. regions and accounts for a quarter of new cases nationally, according to the head of the CDC. (Bloomberg)
• Macron extends lockdown across France to combat Covid surge President orders school closures to limit infections from third wave of pandemic
• Canada’s Ontario Returns to Lockdown to Slow Virus, CBC Says