FLASH PMIs
Flash PMI data for October indicated a marginal increase in the rate of growth of business activity, supported by the fastest expansion of manufacturing production for six months. Growth of service sector activity also picked up, though rates of expansion in both sectors remained subdued.
Adjusted for seasonal influences, the IHS Markit Flash U.S. Composite PMI Output Index reached 51.2 in October, up from 51.0 during September, to signal the sharpest increase in business activity since July. The latest reading pointed to another gradual recovery in output growth from the three-and-a-half year low seen in August.
Despite a slightly stronger rate of business activity growth, the forward-looking survey indicators remained subdued in October. New work rose at the slowest pace since this index began in October 2009, which reflected stagnating order books in the service economy. In contrast, manufacturing companies recorded the sharpest increase in new business volumes since April.
Meanwhile, backlogs of work across the private sector economy fell for the third month running in October, reflecting the near-stalling of inflows of new work.
Employment numbers also fell for a second month, declining at the steepest rate since December 2009, which survey respondents often attributed to more cautious hiring strategies and a lack of new work to replace completed projects.
Average input costs increased for the first time since July, led by a return to higher input prices in the service sector. Manufacturers reported a softer rise in their operating expenses, with some firms attributing this to lower steel prices.
Business expectations continued to edge up from the recent low in August, with optimism the highest for four months. Survey respondents mostly commented on hopes of improved domestic economic conditions.
The seasonally adjusted IHS Markit Flash U.S. Services PMI™ Business Activity Index registered 51.0 in October, up fractionally from 50.9 in September and the highest reading since July. Service providers indicated that new business intakes stagnated in October, which ended a ten-year period of sustained expansion. Anecdotal evidence pointed to subdued demand conditions and weaker business investment spending.
Staffing numbers decreased for the second month running in October. Although only modest, the rate of decline in employment levels was the largest recorded by the survey since December 2009.
Meanwhile, operating expenses increased for the first time since July. There were widespread reports from service providers that trade tariffs had led to price rises among suppliers.
Manufacturing sector business conditions continued to recover in October, as signalled by a rise in the IHS Markit Flash U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) to 51.5, up from 51.1 in September. The rate of improvement was the fastest for six months, helped by stronger growth of output, new orders and employment.
October data also pointed to an increase in new export sales for the first time in four months. Stronger demand encouraged a marginal rebound in input buying, but inventory volumes were depleted again.
Meanwhile, factory gate charges decreased for the first time since September 2016. Manufacturers commented on softer cost pressures and efforts to stimulate sales by price discounting.
Business confidence in the manufacturing sector picked up for the second month running and was the highest since June. A number of firms cited stronger order books and hopes of a recovery in global trade conditions. Comments from manufacturers in the automotive sector were the main exception, with respondents often noting concerns about the demand outlook in domestic and export markets.
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Chris Williamson, Chief Business Economist at IHS Markit:
Despite business activity lifting from recent lows, the survey data point to annualized GDP growth of just under 1.5% at the start of the fourth quarter, and a near-stalling of new order growth to the lowest for a decade suggests that risks are tilted toward growth remaining below trend in coming months.
An increased rate of job culling adds to the gloomy picture, with jobs being lost among surveyed companies at a rate not seen since 2009. At current levels, the survey’s employment gauge indicates non-farm payroll growth slipping below 100,000.
The overall subdued picture reflects a spreading of economic weakness from manufacturing to services, but encouragingly we are now seeing some signs of manufacturing pulling out of its downturn, in part driven by a return to growth for exports and improved sentiment about the year ahead, linked to hopes that trade war tensions are starting to ease.
If manufacturing can continue to gain momentum this should hopefully feed through to stronger jobs growth and an improved service sector performance, leading to better GDP growth, but it remains too early to determine whether the economy has truly turned a corner.
The Eurozone economy remained close to stagnation at the start of the fourth quarter, according to the latest flash PMI data, with demand for goods and services falling for a second successive month. A further steep decline in manufacturing output was accompanied by one of the weakest service sector expansions since 2014. Future expectations sank to the gloomiest since 2013 and jobs growth hit the lowest since 2014. Selling price inflation meanwhile stuck at a near three-year low amid muted cost pressures.
By country, an improved performance in France helped keep the eurozone out of contraction, alongside a mild easing in the rate of decline in Germany. However, the rest of the region slowed closer to stagnation.
At just 50.2 in October, the ‘flash’ IHS Markit Eurozone Composite PMI® rose only marginally from 50.1 in September to signal the second smallest expansion of output across manufacturing and services since the current upturn began in July 2013.
New orders for goods and services fell for a second month in a row, the rate of decline easing slightly but nevertheless adding to the worst picture of demand since mid-2013 in recent months.
The malaise was once again primarily a reflection of a steep deterioration of manufacturing business conditions, where factory output fell for a ninth successive month. The rate of decline was only marginally weaker than seen in September to indicate that the goods-producing sector remained in its deepest downturn since 2012, linked in turn to further steep falls in new orders and exports*.
Service sector growth picked up slightly compared to September but continued to run at one of the weakest rates since late-2014 as new business inflows slipped closer to stagnation. The lack of new business meant backlogs of work fell for the tenth time in the past 11 months, hinting at the further development of excess capacity in both the service and manufacturing sectors.
Future expectations for output meanwhile fell to the lowest since May 2013, prompting companies to take an increasingly cautious approach to hiring. Jobs growth consequently sank to the lowest since December 2014, led by the steepest loss of manufacturing jobs since the start of 2013. Service sector employment growth was meanwhile the lowest seen since January, and the second weakest since 2016.
Finally, average prices charged for goods and services rose only modestly, registering the smallest increase since November 2016. Prices charged for goods fell for a fourth straight month, while prices levied for services showed the smallest monthly rise since August 2017.
The subdued rate of selling price inflation in part reflected a lack of pricing power amid weak demand, but was also a symptom of subdued input cost inflation. Although lifting slightly on September, the average input cost increase was the second lowest since September 2016.
By country, business activity fell for a second successive month in Germany, the rate of decline easing only very slightly on September to mark the worst period of decline since 2012. New orders continued to drop sharply, and employment fell for the first time for six years. The rate of loss of factory output eased but remained among the steepest since 2009. Services growth meanwhile hit the weakest since September 2016, as new business fell at the steepest rate for over six years.
In contrast, business activity picked up in France, registering the third-largest expansion of output seen over the past 11 months. New orders and jobs growth also quickened. Service sector growth accelerated to one of the strongest rates seen over much of the past year, accompanied by a modest return to growth of manufacturing output after a brief slide in September.
A key divergence between France and Germany remained exports, with the former seeing modest growth in new business from abroad while Germany’s exports remained in steep decline. The rest of the euro area saw a near-stalling of growth, with output rising at the weakest pace since the current upturn began in August 2013. Service sector activity rose at the slowest rate since December 2013 while manufacturing output declined at a pace not seen since April 2013.
Chris Williamson, Chief Business Economist at IHS Markit:
The eurozone economy started the fourth quarter mired close to stagnation, with the flash PMI pointing to a quarterly GDP growth rate of just under 0.1%.
The manufacturing downturn remains the fiercest since 2012, and continues to infect the service sector, where October saw the smallest increase in new work for almost five years. (… )
Optimism about future prospects deteriorated further in October to the lowest for over six years, commonly linked to global trade tensions, Brexit related worries and increasingly gloomy economic forecasts.
A further deterioration in jobs growth adds to the risk that the trade-led weakening is spreading further to the household sector, which could dampen growth further as we head towards the end of the year. (… )
The Jibun Bank flash PMI, compiled by IHS Markit and covering both manufacturing and service sectors, fell from 51.5 in September to 49.8 in October, indicating the first contraction in Japanese private sector output for just over three years. At this level, the PMI indicates that the pace of annual GDP growth is flat at the start of the fourth quarter.
The impact of the sales tax increase, which took effect at the start of the month, was evident in October, and most notably in the service sector. Service business activity barely increased, with survey data indicating the second-smallest rise for the past three years. Despite further new business growth, the level of unfinished work fell for the first time in seven months. Job creation was the lowest for nearly two years. Service fees meanwhile surged, rising at the fastest rate since the last sales tax hike five-and-a-half years ago.
However, some caution is warranted as the extent of the tax impact on growth has been complicated by typhoon-related disruptions in October. Furthermore, significant damages caused by Typhoon Hagibis will also lead to higher government spending on rehabilitation works, which in turn could boost services activity.
Anecdotal evidence showed that the easing of the front-loading demand seen prior to the tax increase as well as trade war tensions had dampened demand in October.
In a sign of increasing business gloom, manufacturers cut back further on purchasing activity and inventories. Stocks of finished products fell at a survey-record rate as production volumes declined for a tenth month running. Business sentiment was downbeat, with the Future Output Index, a gauge of expectations, sinking to the lowest level for seven years.
The factory decline gathered momentum at the start of the fourth quarter. Operating conditions in the sector deteriorated at the fastest pace for well over three years, led by the sharpest decline in new order inflows since the end of 2012.
Inflationary pressures in the manufacturing sector were also muted. Output charges fell for a fifth month in a row, in contrast to the service sector. Factory input prices rose at the weakest pace for nearly three years as lower commodity prices and the appreciation in the yen helped bring down imported inflation.
‘Peak Car’ Is Holding Back the Global Economy Protectionism, emissions controls and market saturation drag down a linchpin of world economy
The global auto market is shrinking. World-wide sales fell in 2018, are expected to drop again this year, and Moody’s Investors Service projects another decline in 2020.
Some forecasters think this is mostly a temporary result of a troubled global environment. But structural headwinds may be more important. Rising trade barriers and stricter emissions controls are making cars more costly just as many countries’ markets have become saturated and alternatives like ride-sharing have sprung up. In the U.S., car sales peaked in 2016; in the European Union, in 2000; and in Japan, in 1990. Emerging markets were supposed to pick up the slack, but they too show signs of plateauing: Sales in the last 12 months are down 12% from mid-2018 in China and 14% in India. “Peak car,” loosely defined as a world with all the cars it needs, may be approaching. (…)
In its latest World Economic Outlook, the International Monetary Fund estimates the sector accounts for 5.7% of global economic output and 8% of world trade. The IMF thinks autos contributed a fifth of last year’s slowing in global gross domestic product and a third of the slowdown in trade. (…)
Bottlenecks in meeting new emissions certifications have delayed the rollout of new models in Western Europe. Meanwhile the European Union is mandating that fleetwide carbon dioxide emissions drop 20% by 2021, according to Arndt Ellinghorst, an analyst at Evercore ISI. The necessary technology, he wrote in a recent report, will add €800 to €5,000 ($890 to $5,560) to a vehicle’s cost, or 5% to 11% of the selling price of a car made by BMW, Daimler or Audi. Even if the price ultimately rises only 2% to 5%, that will cut sales by 2% to 5%, Mr. Ellinghorst estimated. (…)
India has ordered its industry to meet tough new developed-country level standards for emissions of particles and nitrous oxide by next year, potentially raising significantly the price of a car in a market where customers are extremely price-sensitive. (…)
Compounding the rising costs of protectionism and emissions regulations is saturation in developed markets where populations are past their peak car-buying years. (…)
The cost and hassle of owning a car mean many affluent urban Chinese own just one and use a ride-sharing service in place of a second, Mr. Dunne said. (…)
September PMI® data from IHS Markit signalled a further downturn in automotive production across Europe, extending the current period of contraction to 13 months. The latest fall reflected worsening demand conditions and ongoing political uncertainty. In particular, a slowdown in Chinese consumer demand has reportedly dented growth opportunities across the automotive sector, according to surveyed businesses.
Forecasts from our Comparative Industry Service meanwhile suggest subdued demand conditions will continue into the near-term, in part due to Brexit-related worries. (…)
The extended soft patch has meant growing numbers of firms reporting excess capacity, meaning autos producers reduced their workforce numbers at the end of the third quarter at the fastest rate since mid-2009. (…)
Looking in more detail at the PMI at country level, key car exporting countries such as Germany and the UK have reported marked falls in foreign demand. Moreover, German automotive manufacturers expect production to continue to drop over the coming 12 months, with British producers also downbeat in the context of the series history. (…)
According to the China Association of Automobile Manufacturers (CAAM), automotive sales in China fell by 5.2% in September, marking the fifteenth successive monthly decline in car purchases. Our automotive experts currently foresee total light-vehicle sales in China falling 7.6% in 2019 and flatlining in 2020.
That said, some major cities in China have loosened their new vehicle quotas in an effort to boost sales and have increased investment in electric vehicle research to help secure future development. However, sales of electric light-vehicles have dropped notably following the recent decrease in subsidies for purchases and an extension in the requirements needed for a vehicle to qualify under the scheme. As such, new energy vehicle sales across China declined by 34.2% in September. (…)
Trump Education Official to Quit, Call for Mass Student-Loan Forgiveness A senior student-loan official in the Trump administration said he would resign Thursday and endorse canceling most of the nation’s outstanding student debt, calling the student-loan system “fundamentally broken.”
Mr. Johnson said repayment trends suggest much of the debt will likely never be repaid, and he is calling for moving toward a system that gets the government out of student lending.
“We run through the process of putting this debt burden on somebody…but it rides on their credit files—it rides on their back—for decades,” he said, adding, “The time has come for us to end and stop the insanity.” (…)
Mr. Johnson proposes forgiving up to $50,000 for anyone with federal student-loan debt, about $925 billion, he said. Nearly 37 million borrowers would have their entire student-loan balances canceled under the plan, he said.
He would also advocate for a tax credit of up to $50,000 for people who already repaid student debt, which he sees as key to attracting wider support for canceling student debt.
Mr. Johnson suggested paying for the plan largely with a 1% tax on corporate earnings. In late 2017, the Republican-controlled Congress passed a tax-cut package that included a cut in business tax rates. All of his proposals would require action from Congress.
Roughly a fifth of all student debt, federal and private, excluding debt owed by students still in school, is at least 90 days delinquent, New York Federal Reserve data show.
The Trump administration has hired consultants to assess the value of its student-loan portfolio, including how much is likely to be repaid. White House officials have expressed alarm over the low rate at which borrowers are paying down their balances.
About 41% of Americans support “immediately canceling and forgiving all current student-loan debt,” according to a Wall Street Journal/NBC News poll released in September. About 16% of Republicans supported such a plan, compared with 36% of independents and 63% of Democrats.
The poll showed that 64% of Americans support income-based repayment plans, which forgive some student debt only after borrowers have spent a number of years paying it down. The Obama administration promoted and President Trump has endorsed income-based repayment.
Mr. Johnson’s proposal would forgive more debt than the plan proposed by Democratic presidential contender Elizabeth Warren (D., Mass.), which calls for forgiving up to $50,000 in student debt for individual families, and scaling back the benefits for those earning above $100,000. Mr. Johnson said he would set no income cap for those receiving benefits. Presidential candidate Sen. Bernie Sanders (I., Vt.) has called for canceling all federal student debt.
Mr. Johnson, 67, has a doctorate in higher-education leadership from Mercer University and wrote his dissertation on student debt. He spent most of his career in financial services, and earlier this decade he headed companies that refinanced private student loans.
He said he sees his plan as part of an effort to get the government out of the student-loan business. Instead, he proposes for prospective students a $50,000 government voucher, which wouldn’t need to be repaid, to cover four years of tuition at college or graduate school.
His proposal is at odds with comments from Mrs. DeVos, who last week criticized the Democrats’ higher-education proposals. Asked on Fox News Channel about the Democrats’ plans to forgive student debt, she said: “Their proposals are crazy….Who do they think is actually going to pay for these? It’s going to be two of the three Americans that aren’t going to college paying for the one out of three that do.”
EARNINGS WATCH
As of Wednesday morning, we had 124 reports in, an 82% beat rate, a +3.7% surprise factor and a –2.9% blended growth rate for the quarter, down from –2.2% on Oct. 1. Actual earnings growth for the 124 companies having reported is +0.5% on revenue growth of +3.7%.
By comparison, after 138 reports during Q2, the beat rate was 78%, the surprise factor +5.1% and the blended growth rate –0.1%, down from +0.3% on July 1. Actual earnings growth for the 104 companies having reported was +8.7% on revenue growth of +3.8%.
Trailing EPS are now $162.67, down 1.0% from $164.31 at the end of September and down 0.5% from $163.44 after 138 reports during Q2.
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PROFITS MATTER
Tesla Delivers a Surprising Profit The electric-car maker posted a surprise profit for the third quarter, easing investors’ fears that the pursuit of growth and record production figures would come at the expense of the bottom line.
Nokia Shares Slide as 5G Troubles Prompt a Profit Warning Finnish telecom-equipment maker’s 5G rollout is proving costly
The Finnish company reported lower profit in China, price pressures amid fierce competition from rivals and an uncertain outlook amid carrier consolidation in North America.
(…) But the rollout has been fitful, and Nokia said equipment for the new networks is proving costly to develop and make. Nokia is the world’s second-largest telecom-equipment maker by sales, behind Huawei Technologies Co.
TECHNICALS WATCH
- 13/34–Week EMA Trend (CMG Wealth)
Lowry’s Research says that equity markets are being sustained by “a withdrawal of Supply, not expansive Demand.”
(…) robust mortgage applications (
And since we looked at seasonality above, keep in mind that since 1960, 5 of the 8 bear markets started between October and January and ended with drawdowns averaging 39.2%…
(Morgan Stanley via Isabelnet)