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COMPOSITE PMIs

USA: Business activity growth accelerates to five-month high in December

U.S. service sector firms indicated a moderate expansion in business activity at the end of 2019, with growth driven by a stronger rise in new orders. Foreign client demand also picked up, as new export orders increased for the first time since July. Subsequently, the rate of job creation ticked up to a five-month high despite only fractional pressure on capacity. Business confidence, however, remained well below the series average.

Meanwhile, service providers were able to increase their selling prices at a faster pace amid a quicker, albeit only modest, rise in cost burdens.

The seasonally adjusted final IHS Markit US Services Business Activity Index registered 52.8 in December, up from 51.6 in November, signalling a further rebound in output growth following a slump in activity during the summer. The moderate upturn accelerated to the fastest since July and was linked to more favourable demand conditions.

A second successive increase in new business drove the expansion in output, with stronger client demand leading to the fastest rise in new orders for five months. Although growth was relatively lacklustre overall, it signalled a turnaround from the slight contraction seen in October. Foreign client demand also improved, with service providers recording the first upturn in new business from abroad since July. The rate of expansion was fractional overall but was only slightly slower than the series trend.

As a result, service providers ramped up hiring efforts as employment rose for the second straight month and at the quickest rate since July. Although only modest overall, the upturn in workforce numbers was commonly linked to greater business requirements following an uptick in new order growth.

Meanwhile, backlogs of work were broadly unchanged at the end of 2019, as firms signalled little strain on capacity. Although some noted that greater new business inflows had put pressure on operations, others stated that orders and projects were completed in a timely manner.

On the price front, cost burdens increased for the third month running and at a quicker rate. The rise in input prices was generally attributed to higher supplier and wage costs. The increase was the sharpest since July despite being only modest.

At the same time, service sector firms were able to increase their selling prices at a solid pace. The rate of output charge inflation outpaced the rise in input prices and was the fastest since February. Greater output prices were largely linked to efforts to pass higher costs on to clients.

Finally, business expectations for the year ahead improved in December. Where firms foresee an increase in activity over the next 12 months, they attributed this to hopes of further boosts to new sales. That said, the degree of confidence was well below the series trend and levels seen at the end of 2018, with a number of firms reporting uncertainty as to the stability of client demand.

The IHS Markit Composite PMI Output Index* registered 52.7 in December, up from 52.0 in November, to signal a moderate expansion in private sector business activity. The upturn was the fastest since April.

Private sector new business grew at the strongest rate since July, with service providers recording a second successive and sharper rise in client demand. Similarly, firms indicated back-to-back expansions in new export orders, albeit both at fractional rates overall.

Employment also continued to rebound from the contractions seen in September and October, with both sectors registering a rise in staffing levels.

Meanwhile, rates of input and output price inflation quickened as private sector firms sought to pass higher costs on to clients and protect margins.

Finally, output expectations remained historically subdued as firms remained uncertain regarding future client demand.

Chris Williamson, Chief Business Economist at IHS Markit:

(…) the overall survey results are indicative of GDP rising at a relatively modest annual rate of 1.8% in December. The missing ingredient compared to this time last year is optimism about the future, with business sentiment regarding prospects for the next twelve months running well below levels seen this time last year, and close to the lowest for at least seven years. Indeed, much of the recent improvement in demand has come from stronger sales to consumers, with business spending and investment remaining under pressure amid this anxiety about the economic and political outlook.

Chinese business activity growth softens at end of 2019

The Caixin China Composite PMIâ„¢ data (which covers both manufacturing and services) pointed to another strong rise in total Chinese business activity in December. However, the rate of growth eased since November, with the Composite Output Index falling from a 21-month high of 53.2 to 52.6 at the end of the year.

Underlying data showed that business activity continued to expand across both the manufacturing and service sectors, with the former noting the steeper rate of growth. Manufacturing output rose solidly overall, despite the rate of increase easing to a three-month low. In the service sector, business activity expanded strongly overall, though growth also eased from November. This was signalled by the seasonally adjusted Chinese Services Business Activity Index posting 52.5 in December, down from a seven-month high of 53.5 in November.

The total amount of new business received by Chinese companies rose solidly at the end of the year, despite the rate of expansion slipping to a four-month low. This reflected a softer rise in new work placed at goods producers, which registered a modest increase overall. In contrast, services companies recorded a solid increase in sales that was the quickest since September. Anecdotal evidence attributed the upturn in new orders to greater client numbers, new product offerings and improved marketing strategies.

New export order growth weakened in December, with both monitored sectors registering only a marginal rise in new orders from overseas. In the service sector, the slight increase contrasted with a solid expansion during the previous month. Consequently, new export business at the composite level grew at the slowest rate for three months.

Overall, employment across the manufacturing and service sectors in China rose only slightly at the end of the fourth quarter. The upturn was driven by job creation at service providers, as manufacturing firms saw no change to their staffing levels. That said, the rate of payroll growth at services companies was only marginal, with a number of companies adopting relatively cautious approaches to hiring amid efforts to contain costs and boost efficiency.

After a slight fall in November, service providers recorded higher backlogs of work at the end of 2019. Panel members often mentioned that greater volumes of new work had imparted pressure on capacities. That said, the rate of accumulation was only marginal. In the manufacturing sector, outstanding business rose at a modest pace that was the softest for four months. At the composite level, unfinished workloads rose at a slightly quicker, albeit only mild, rate.

December data pointed to a further easing in the rate of input price inflation across China. Notably, services firms recorded the slowest increase in operating expenses since March. Although input costs rose at a slightly faster rate in the manufacturing sector, the rate of inflation remained marginal and much weaker than the historical trend. As a result, cost burdens at the composite level increased at the weakest rate for four months.

Sector data highlighted contrasting trends when it came to selling prices, with an increase in factory gate prices occurring alongside a fall in service sector charges. Though modest, the increase in the manufacturing sector was the most marked seen since October 2018. Output charges set by services companies meanwhile fell for the first time since September 2018, albeit only slightly. Selling prices at the composite level therefore rose at only a fractional pace.

Manufacturing firms based in China were generally optimistic towards the one-year business outlook in December. The overall degree of positive sentiment in the goods producing sector was up from October’s recent low, but still weak in the context of historical data. Meanwhile, the level of optimism expressed by service sector firms edged down to the second-lowest on record. Companies highlighted ongoing trade tensions, relatively subdued economic growth and staff shortages as factors that could dampen prospects over 2020.

Eurozone economy remains close to stagnation at end of 2019

The IHS Markit Eurozone PMI® Composite Output Index improved slightly during December, but still signalled weak economic growth. After accounting for seasonal factors, the index recorded 50.9, up from 50.6 in November and slightly better than the earlier flash reading. Despite the improvement to a four-month high the index nonetheless continued to post at a level amongst the lowest seen since the first half of 2013.

The divergence between the performances of the manufacturing and services economies remained noticeable in December. Overall growth remained centred on the service sector, with growth here reaching a four-month high. In contrast, manufacturing output declined at a rate not exceeded for nearly seven years.

At the national level, Ireland moved to the top of the country rankings during December, expanding at the fastest rate for six months. Spain also registered a solid rate of expansion, as did France despite recording its slowest growth in three months.

There was some positive news in Germany, where there was a return to marginal growth following three months of contraction. In contrast, Italy remained inside negative territory for a second month, registering its worst performance in just under a year.

Supporting the upturn in overall activity was an increase of incoming new work for the first time in four months. Growth was, however, only marginal, and again undermined by weakness in foreign demand. Latest data showed exports falling for a fifteenth successive month, albeit to the weakest degree since the start of 2019.

With activity rising at a slightly faster pace than new business, companies were again able to reduce overall workloads at their units. Latest data showed that levels of work outstanding were cut for a tenth successive month during December, although the rate of contraction was marginal and the weakest since June.

Spare capacity, combined with soft new business growth, continued to weigh on hiring during December. Although payroll numbers increased again, they did so only marginally and to the weakest degree for five years.

Nonetheless, higher labour costs remained a key factor behind increased operating expenses at the end of 2019. December’s PMI data indicated another solid rise in input costs, with inflation little- changed since November. Output charges were also raised, although only modestly as competitive pressures and weak demand conditions limited pricing power.

Finally, confidence about the future improved during December to its highest level since May, though remained well below par. The improvement was broad-based, with the exception of France. Germany in particular saw a strong rise in confidence since November, although sentiment remained weaker than in Italy, Spain and Ireland.

The IHS Markit Eurozone PMI® Services Business Activity Index improved in December to a four-month high of 52.8, up from 51.9 in November. All nations covered by the survey recorded growth in activity, led by Spain and Ireland.

A similar-sized increase in new work was recorded in December, although growth was again dampened by a reduction in new export business, the sixteenth in as many months.

Capacity came under pressure, as signalled by a first increase in outstanding business for five months. Modest backlog growth subsequently encouraged firms to take on additional staff, albeit at the slowest rate since the start of 2019.

Rising staffing costs were again a key driver of input price inflation, which was little-changed at a marked level in December. Margins remained under pressure as output charges increased only modestly since the previous month.

Looking ahead to the coming 12 months, business confidence about the future strengthened to its highest level since July. The upturn was led by a strong improvement in sentiment amongst German service providers.

Chris Williamson, Chief Business Economist at IHS Markit:

Another month of subdued business activity in December rounded off the eurozone’s worst quarter since 2013. The PMI data suggest the euro area will struggle to have grown by more than 0.1% in the closing three months of 2019. (…)

U.S. Light Vehicle Sales Slip in December and for all of 2019

The Autodata Corporation reported that December sales of light vehicles fell 1.9% from November (-3.3% y/y) to 16.87 million units (SAAR). Earlier figures were revised. For the full year 2019 sales of 17.00 million units compared to 17.27 million during all of 2018 and have been fairly flat for the last five years. During the last three months, sales averaged 16.90 million units, the weakest three-month reading since April.

Sales of light trucks declined 3.8% (-0.7% y/y) to 12.14 million units, the lowest level since April. (…) Auto sales rose 3.3% (-9.4% y/y) to 4.73 million, the highest level since July. (..)

Imports’ share of the U.S. vehicle market fell to 22.1%. Imports’ share of the passenger car market fell sharply to 24.5%. Imports share of the light truck market held steady at 21.1% and remained up from the 12.0% low in January 2015.

• Discounts fuel U.S. pick-up truck sales in a slowing market

U.S. Construction Spending Stronger than Expected in November

The value of construction put-in-place rose a larger-than-expected 0.6% m/m (+4.1% y/y) in November with significant upward revisions to both October and September. The Action Economics Forecast Survey had looked for a 0.3% m/m rise. As for revisions, the 0.8% m/m decline initially reported for October was revised to a 0.1% m/m gain while the 0.3% m/m decrease previously reported for September was revised up to a 0.7% m/m increase. The revisions were concentrated in private, residential construction.

Private construction rose 0.4% m/m (+1.6% y/y) in November with significant upward revisions to October and September. The initially reported 1.0% m/m decline for October was revised to a 0.1% m/m increase, and the 1.1% decrease previously reported for September was revised to a 0.3% m/m rise. Private residential construction surged 1.9% m/m (2.7% y/y) in November, led by a 3.4% m/m jump in home improvements, but also a 1.2% m/m gain in single family new house building. Multi-family construction was essentially unchanged in November after having fallen in each of the previous three months.

In contrast to residential construction, private nonresidential construction remained weak in November, declining 1.2% m/m (+0.2% y/y), its sixth monthly decline in the past eight months. Leading the weakness in November were lodging (-3.8% m/m), education (-2.0% m/m), power (-1.6% m/m) and manufacturing (-2.4% m/m).

Public construction increased 0.9% m/m (+12.4% y/y) in November with only modest upward revisions to October and September. Construction of highways and streets, the largest category accounting for nearly one-third of public sector building activity, rebounded in November, rising 2.2% m/m after having fallen 3.0% m/m in October. Education construction, the second largest category, was essentially unchanged in November from October following a 2.8% m/m gain.

Manhattan property decline worsened as Wall Street boomed Average sale prices for co-ops and condos dropped 7.5% in the fourth quarter

Fed Officials Say Global Economic Shift Is Keeping Rates Low San Francisco Fed President Mary Daly and Dallas Fed President Robert Kaplan said population aging, tech advances and lower productivity have changed how the economy behaves

Speaking on a panel at a conference in San Diego, San Francisco Fed President Mary Daly and Dallas Fed President Robert Kaplan said the aging of the population, technological advances and lower worker productivity have changed how the economy behaves.

“There have been substantial structural changes in the U.S. economy since the 80s and 90s and even since the early 2000s,” Mr. Kaplan said. “We talk a little bit too much about cyclical phenomena and maybe not enough about the structural changes.”

The response to these structural changes can’t come from the Fed, he added.

“We need structural reforms away from monetary policy if we’re going to improve the level of potential growth,” he said.

Ms. Daly said this “new world” make it possible to push the unemployment rate lower and draw more people into the labor force. On the other hand, she said, low inflation and low interest rates could make it difficult for the Fed to fight a downturn using its conventional tools of lowering policy rates.

“We don’t have to worry about inflation taking off so we have a little more room to find full employment,” she said. “On the flip side of that, we are going to be fighting inflation from below.” (…)

Ms. Daly said one solution would be to allow inflation to push above 2% following downturns to make up for previous weakness in inflation.

In the long term, the U.S. will need help from fiscal policy makers to push up its potential for strong economic growth, the two officials said. (…)

EARNINGS WATCH

The Q4’19 earnings season is underway with 16 early reporters boasting an 88% beat rate and a +4.1% surprise factor. Sadly, the good news stops here.

These 16 companies had an actual earnings drop of 18.8% on a +2.3% revenue growth rate. At the beginning of Q3’19, these same companies reported a 19.2% earnings decline on a 0.6% revenue gain. During Q4’18, these same companies had a tax rate-boosted 18.7% earnings gain on a 9.2% revenue jump.

In effect, Q4’19 earnings for these companies are 4.1% below their Q4’17 level even though revenues are up 11.6%. Of the 16 companies having reported, 9 are consumer-centric, 2 Industrials and 5 IT.

Total S&P 500 earnings are seen declining 0.3% in Q4 (Refinitiv/IBES), helped by a 2.2% buyback effect (+2.0% in Q3).

TECHNICALS WATCH

The 13/34–Week EMA Trend Chart from CMG Wealth remains bullish. Other CMG Wealth technical charts are also positive with the notable exceptions of NDR’s Crowd and Trading Sentiment charts which are both negative.

This one from Ed Yardeni calls for ST caution:

Iran and the United States: What Comes Next (By: George Friedman)

(…) All of this has to be framed in the strategic context. The U.S. does not want to engage in extensive operations in the region. Washington is depending on sanctions and proxies. Iran still wants to maintain its sphere of influence into the Mediterranean, but above all, an even greater priority is the neutralization of Iraq and the stabilization of its own country. Iran can’t afford to allow Iraq to become a bastion of anti-Iran forces, nor can it wage a conventional war against the U.S., Israel, Saudi Arabia and the UAE. Iran must therefore use what it has used so effectively in the past: special and covert operations. It follows that Iran will take its time to respond. It also follows that the U.S. and its allies, having bought time by killing the head of the Quds Force, must use the time effectively.

• Experts react to the killing of Iranian commander Qassem Soleimani Brookings experts provide their brief analyses on this watershed moment for the Middle East — including what it means for U.S.-Iran relations, for America’s overall position in the Middle East, and more.

Trump administration pressed Dutch hard to cancel China chip-equipment sale: sources

The Trump administration mounted an extensive campaign to block the sale of Dutch chip manufacturing technology to China, with Secretary of State Mike Pompeo lobbying the Netherlands government and White House officials sharing a classified intelligence report with the country’s Prime Minister, people familiar with the effort told Reuters. (…)

The U.S. campaign began in 2018, after the Dutch government gave semiconductor equipment company ASML, the global leader in a critical chip-making process known as lithography, a license to sell its most advanced machine to a Chinese customer, two sources familiar with the matter told Reuters.

Over the following months, U.S officials examined whether they could block the sale outright and held at least four rounds of talks with Dutch officials, three sources told Reuters. (…)

The pressure appears to have worked. Shortly after the White House visit, the Dutch government decided not to renew ASML’s export license, and the $150 million machine has not been shipped. (…)

ASML has never publicly disclosed the identity of the Chinese customer, but Nikkei and others have reported that it is Semiconductor Manufacturing International Corp (SMIC), China’s biggest chip-making specialist. (…)