U.S. Manufacturing PMI: Steepest improvement in operating conditions since September 2014

November PMI^TM data from IHS Markit signalled a notable improvement in the health of the U.S. manufacturing sector. Overall growth was supported by faster upturns in output and new orders amid stronger domestic and foreign client demand. Employment rose only marginally, however, and pressure on capacity was exacerbated by near-survey record supply chain delays and input shortages. Despite short-term uncertainty reflected in slower hiring, firms were the most confident regarding the outlook for output over the coming year in almost six years.

On the price front, input prices increased markedly and output charges rose at the fastest pace for over two years as firms sought to pass these higher costs on to customers.

The seasonally adjusted IHS Markit final U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) posted 56.7 in November, up notably from 53.4 in October and matching the earlier released ‘flash’ estimate. The improvement in operating conditions was the sharpest since September 2014, as the headline PMI rose for the seventh successive month.

Contributing to the uptick in the headline index was a substantial increase in output at manufacturing firms in November. The rise in production was the steepest in over six years, amid stronger new order inflows.

Goods producers registered a steep rise in new orders midway through the fourth quarter. The upturn was the quickest since May 2018, as growth of demand gained momentum. Anecdotal evidence stated that greater sales were due to more robust demand conditions, with some firms noting that clients were less hesitant to place orders. Meanwhile, foreign client demand picked up, as goods producers indicated a renewed rise in new export orders, albeit only marginal.

Most encouraging was the breakdown of the rise in new orders which underpinned the expansion. Although demand for consumer goods remained somewhat subdued, mainly reflecting rising virus infection rates, demand for investment goods such as business equipment and machinery rose especially sharply.

The rise in investment spending sends a welcome signal that companies have become more optimistic about longer term prospects, something that was reinforced by a surge in firms’ expectations about production in the year ahead – even in consumer-facing sectors – to the highest since early-2015.

Despite a faster upturn in new orders, manufacturers registered a softer increase in employment. The rate of job creation was only marginal overall, with some firms stating that short-term uncertainty over demand and efforts to rein in spending weighed on workforce numbers.

Nonetheless, supply delays led to the strongest rise in backlogs of work for over six years. In fact, vendor performance deteriorated to the greatest extent since May. As a result of longer wait times for inputs, stocks were depleted in November. Post-production inventories saw a renewed decrease, after a slight rise in October, while the rate of decline in stocks of purchases quickened despite a rise in purchasing activity.

Finally, expectations regarding output over the coming year improved to the strongest since February 2015. Hopes of a vaccine and sustained increases in client demand reportedly drove optimism.

The ISM’s Manufacturing index edged down from 59.3 to 57.5 but new orders remained very strong as Bespoke explains:

Although the index was lower this month, meaning new order growth decelerated, it remains in the top decile of historical readings. As new orders have continued to grow, so too have backlogs. The index for Backlog Orders has continued to press higher, rising to 56.9 from 55.7. That is in the 88th percentile of all months and is now at the highest level since August of 2018.  Demand continues to improve with new orders coming in at a historically strong pace, even though it is slower than last month, and order backlogs have once again risen as a result.

Note: Unbelievable that a news media such as the WSJ this morning has no mention of neither Markit’s nor the ISM’s PMIs.

Global manufacturing expands at one of fastest rates in almost a decade during November

U.S. Light Vehicle Sales Weaken During November

Buyers of light vehicles pared back spending last month and added to October’s weakness. The Autodata Corporation reported that sales of light vehicles fell 3.1% during November (-7.6% y/y) to 15.88 million units (SAAR) from 16.38 million in October, revised from 16.41 million. (…)

Sales of light trucks fell 4.0% (-4.9% y/y) during November to 11.96 million units, the lowest level in three months. (…) Auto sales eased 0.3% (-14.8% y/y) last month to 3.92 million units, well below their peak level of 7.71 million unit sales reached in 2014. (…)

Imports’ share of the U.S. vehicle market rose last month to 24.1%, continuing the upward trend of the last four months. Imports’ share of the passenger car market was little changed at 27.8%. Imports share of the light truck market improved to 22.8% and has been trending up from 14.7% in 2014.

  

Shoppers Spent Less Over Black Friday Weekend Gains in online customers were offset by far fewer people visiting stores during the coronavirus pandemic.

People spent an average of just under $312 on holiday-related purchases from Thanksgiving to Cyber Monday, down 14% from 2019 though on par with 2018, according to a survey by the National Retail Federation and Prosper Insights & Analytics. (…)

NRF President and Chief Executive Matthew Shay attributed the spending decline to consumers starting their shopping earlier. More than half of holiday shoppers indicated they had participated in early sales, he said. (…)

Note that real spending on goods was only up 0.2% MoM in October, although real spending on durable goods was up 0.8% (clothing was down 0.8%).

U.S. employment data is out this Friday. Yesterday:

The latest Paychex | IHS Markit Small Business Employment Watch shows that small business hiring remained largely consistent with the prior month, moderating slightly, down 0.03 percent nationally to 94.29. The Paychex | IHS Markit Small Business Employment Watch draws from the payroll data of approximately 350,000 Paychex clients to gauge small business wage and employment trends.

Pelosi, McConnell Offer New Stimulus Plans as Rebound Slows McConnell said there was no point in Congress passing legislation that Trump won’t sign before he leaves office on Jan. 20 and that additional help for the economy was needed now.

• Bipartisan Senate Group Pitching $908 Billion Stimulus Plan But neither Republican nor Democratic leaders have signed on to the plan.

• Powell, Mnuchin Embrace New Stimulus After Fed Lending Rift

• Yellen calls for action to prevent US economic ‘devastation’

Treasury Yield Spike Risks Spreading Across Markets Investors map out the impact of rising rates on markets ranging from stocks to corporate bonds.

Renewed optimism about U.S. stimulus talks pushed the benchmark 10-year yield to a high of 0.94% on Tuesday, a move which if continued could spark a domino effect across risk assets trading at all-time highs thanks to low interest rates. At issue is whether the jump in yields is accompanied by an economic recovery and moderate levels of inflation that would allow the Federal Reserve to keep rates low. (…)

But key to the bullish outlook for stocks is inflation remaining under control and economic growth returning. A return to the dreaded stagflation of the 1970s for example, would quickly derail any rally in risk assets.

“You cannot rule out inflation returning — it could creep up on us through 2021, 2022,” said Stephen Miller, an adviser at GSFM, a unit of Canada’s CI Financial Group. “Yields will climb further and make it harder for central banks to control their yield curves, which will certainly create headwinds for equities and make them vulnerable to a reasonably significant correction.” (…)

Should the U.S. yield curve steepen as inflation expectations rise, “this will incentivize investors to currency hedge,” Citigroup Inc. strategists including Calvin Tse wrote in a recent note. Moves by investors to shield from currency fluctuations in U.S. investments could see the dollar fall by as much as 20% next year, they said.

Goldman Sachs Asset Management’s James Ashley, who also sees potential for more curve steepening, is forecasting a weaker dollar against emerging currencies such as China’s yuan. (…)

• Bets on More Fed Bond-Buying Help Contain Treasury Yields Some investors believe the central bank could start buying more long-term U.S. Treasurys as soon as its next policy meeting,a trend that has helped temper some recent selling and kept yields from rising higher.

One factor influencing such bets: the outcome of the Nov. 3 election, which resulted in the strong possibility of divided government in Washington and left investors thinking the Fed might need to assume more responsibility to support an economy increasingly buffeted by a surge in coronavirus cases.

Treasury Secretary Steven Mnuchin’s decision to not extend several emergency Fed lending programs beyond Dec. 31 also left the Fed with fewer alternatives to Treasury purchases for economic stimulus. (…)

Most investors don’t expect the central bank to increase the total amount of Treasurys it buys on a monthly basis. But some think it could shift its purchases toward more longer-dated Treasurys. That could provide more economic stimulus because short-term Treasury yields are already close to zero and many individuals and business take out longer-term loans. (…)

Jim Caron, head of global macro strategies for Morgan Stanley Investment Management’s fixed-income team, said the 10-year Treasury yield could reach around 1.25% by the spring or summer of next year because of the combination of coronavirus vaccines and more economic aid from Congress.

Still, he isn’t reducing longer-term Treasurys in his portfolios just yet, partly because of the protection they offer if the economy performs worse than expected this winter.

Believe in Global Reflation? The Dollar Does (John Authers)

Long-term U.S. inflation breakevens have risen to their highest in 12 months. This is true both of the projected average for the next 10 years, which is now above 1.8%, and of anticipated average inflation for the five years starting five years from now, which is now above 1.9%. (…)

A cheaper dollar makes life much easier for emerging markets that have borrowed in dollars, and eases the existence of big U.S. multinationals. (…)

Treasury yields rose sharply Tuesday, and didn’t stop the dollar from falling. The sharp fall in differentials earlier this year plainly helped to weaken the dollar — but it isn’t clear that another dose of lower European bond yields would help:

(…) According to the IIF, the current quarter is likely to be the strongest for [EM] inflows since the first three months of 2013, immediately before the Taper Tantrum. If we exclude China, then flows from foreigners into the emerging market complex are at their strongest since the second quarter of 2014, immediately before the slump in oil and other commodity prices that pulled down the terms of trade for much of the emerging world, and caused their currencies to fall.

OPEC+’s Lose-Lose Equation Oil producers face risks no matter which route they choose to take on output

(…) Negotiations have become more complicated as Brent crude prices approached $50 a barrel on vaccine optimism. While that isn’t high enough for OPEC members to avoid fiscal deficits, it makes some feel antsy about voluntarily forgoing revenue. After briefly breaking above $49 a barrel last week, Brent crude slipped below $48 after the group failed to reach consensus on Monday. (…)

Iraq publicly indicated last week that the country is losing patience with the OPEC+ imposed production cuts. It isn’t alone. The country is just one of seven for which RBC Capital Markets has raised its gauge of geopolitical risk. The restless group includes Nigeria, which has slipped into recession and also faces protests at home, and even the relatively well-off United Arab Emirates. (…)

SENTIMENT WATCH

An extreme of extremes

Last week, options traders returned to their speculative ways. Traders large and small plunged into call options, buying them at a pace twice as great as put options.

Options activity is but one of the many extremes that our indicators are showing. So many, in fact, that an average of more than 55% of the core indicators have been in extreme territory over the past week.

Spread out over a week, this is the most extremes we’ve seen among our indicators in 15 years. Other times we’ve seen more than 50% become extreme, stocks have had a tough time holding their upside momentum.

• Citi Flashes Warning on S&P 500 ‘Overshoot’ Rally: Taking Stock

A record-setting November for the S&P 500 Index is renewing anxiety about how long the advance will last, and some signs indicate the market may be poised for a breather.

Take a gauge of sentiment compiled by Citigroup that tracks metrics from margin debt to options trading and newsletter bullishness. This reading of panic versus euphoria rose to 1.10 from .87 over the weekend in a sign that this round of investor exuberance may start fading. The last time the level was this high was in August, before stocks embarked on a 9.4% slump. (…)

“Our sense is that the idea of no alternatives to buying broad-based equities has led to an overshoot,” Levkovich, the bank’s chief U.S. equity strategist, said in a note. “Current euphoric readings signal a 100% probability of losing money in the coming 12 months if we study historical patterns – indeed, we saw such levels back in early September as well right before a selloff in stocks.” (…)

The retail brokerage market is thriving but consolidating. TD Ameritrade (now owned by Charles Schwab), Robinhood, and ETrade (owned by Morgan Stanley) account for two-thirds of flows. At all three, options trading grew in the third quarter as equity volume lagged. Individual investors are using more leverage. (Bloomberg)

Hewlett Packard Enterprise to Leave Silicon Valley for Texas The tech giant is moving its headquarters to the Houston area, the latest sign of how the pandemic is reshaping the way Silicon Valley companies operate.

THE “KING OF DEBT” GAMBIT:

Barr says he has not seen proof that voter fraud swayed US election Attorney-general contradicts Trump’s claims of vast conspiracy to rig presidential vote

Trump Nears ‘Checkmate’ Stage in Last-Gasp Bid to Undo Election

• Trump Raises $170 Million as He Denies His Loss and Eyes the Future The president’s campaign has ratcheted up its appeals for cash, but the first 75 percent of every contribution is going to a new political action committee that could fund his next political move.

• The Trump campaign sent hundreds of emails in November, asking supporters to donate as the president fought the results of the 2020 election, The Post reported.
  

• But the fine print shows that only a fraction of small-dollar donations go to the Trump campaign’s legal fund, with most of the money going into a new account designated to seed his political future instead. (Biz Insider)

Seems like a pretty profitable gambit to me…