(…) China’s yuan fell as much as 1.9% to a record offshore low of 7.1087 to the dollar in Hong Kong, according to data from Refinitiv, putting the currency on course for its biggest single-day loss against the dollar since August 2015, when Beijing allowed a sudden depreciation. (…)
In addition to the currency move, Beijing said that Chinese companies had suspended purchases of U.S. agricultural products, and that the government has not ruled out putting tariffs on U.S. farm goods purchased after Aug. 3.
China’s central bank said Monday’s depreciation was “due to the effects of unilateralist and trade-protectionist measures and the expectations for tariffs against China.” People’s Bank of China Governor Yi Gang said that China won’t engage in competitive devaluation and that the decline was due to market forces. (…)
“China has always used currency manipulation to steal our businesses and factories, hurt our jobs, depress our workers’ wages and harm our farmers’ prices,” Mr. Trump wrote in a tweet on Monday. “Not anymore!” (…)
Monday’s action by the Treasury is mostly symbolic, requiring the U.S. administration to consult with the International Monetary Fund to try to eliminate the unfair advantage the currency measures have given a country. (…)
Traders contend that the Chinese government is merely allowing the currency to respond to market conditions as the trade war fuels concern about the global economy.
“Other emerging markets are also tanking,” said Win Thin, global head of currency strategy at Brown Brothers Harriman. “If China is going to allow market forces to determine the exchange rate, this is what will happen with the yuan.”
At the same time, Chinese authorities will likely be wary of letting the yuan depreciate too far. Continued sharp declines in the currency could stoke capital outflows and make it difficult for local companies to service their dollar-denominated debt. (…)
(…) The Chinese authorities had plainly been trying to keep the exchange rate below 7 per dollar in recent years, and over the last few months this became an important sign of good will in the trade dispute. This latest move beyond 7 should therefore be taken as a clear sign that good will has been withdrawn.
It is almost exactly four years since a clumsily handled devaluation of the yuan in mid-2015 caused a global sell-off. That was a mistake. This time, the Chinese authorities unmistakably knew what they were doing, and said so. This devaluation evidently counteracts some of the effect of U.S. tariffs, so it is obviously a step in the trade conflagration at the very least. (…)
So both sides have taken action to escalate and neither has shown weakness. But neither has yet taken measures that rule out any reconciliation, and the latest escalations have been more symbolic than anything else.
What does game theory suggest should come next? Here there is a critical difference between China President Xi Jinping and Trump. One is president for life, while the other needs to be re-elected in a little over a year. This gives Xi an advantage. The protests in Hong Kong also give him a huge incentive not to show weakness. Hong Kong matters, and it makes it even harder for him even to appear to compromise toward western interests. Meanwhile, Trump will likely make the strong economy a central plank of his re-election campaign, and could do without the problems that would follow a worsening trade conflict. He, like Xi, would badly prefer not to look weak, but he has an election to win.
That said, Trump has a relatively robust economy behind him, and a central bank with the fire power to add stimulus. He also has the ability to push them to use that fire power by talking up the trade war. China’s leadership desperately needs to keep delivering economic growth, and it is in the middle of a difficult deleveraging. So some of the logic that seemed so clear to investors a week ago remains in place. There is a logic behind escalation at present, but there is still ample incentive for both sides to calm things down. (…)
What lies ahead? Obviously we need to know whether Trump’s threatened tariffs take effect as threatened at the end of this month. Words from the Fed could also change things, with another cut next month seen as a total certainty, the central bank is unlikely to do anything to alarm traders even more, but any risks from Fedspeak would be toward sowing concern that rates will not fall on cue.
Within markets, one of the greatest risks concerns emerging-market currencies. Most are no longer manipulated, though their finance ministers might want to manipulate them. This means that many have tumbled against the dollar, adding to the risk of an emerging- market crisis. (…)
But the greatest issue is that so much still turns on the next move in the trade conflict, and to predict that move you have to predict the internal workings of Trump’s mind. So whatever any investor does, they should best stay balanced.
President Donald Trump has reacted to China’s move to let the yuan depreciate by branding Beijing a currency manipulator while also claiming China’s foreign-exchange strategy means it’s paying the cost of U.S. tariffs. (…)
Goldman Sachs sees no trade deal before 2020 U.S. election, now expects three rate cuts Goldman Sachs said it no longer expects the United States and China to agree on a deal to end their prolonged trade dispute before the November 2020 presidential election as policymakers from the world’s largest economies are “taking a harder line”.
COMPOSITE PMIs
U.S service providers signalled a solid start to the second half of 2019. July data indicated a faster rise in business activity, supported by more robust domestic and foreign client demand. New orders increased at the quickest rate since March and new business from abroad grew at the strongest pace for five months. Nonetheless, positive sentiment towards output slipped to a new series record low. At the same time, the rate of job creation was only moderate overall. Meanwhile, inflationary pressures were historically subdued in July, with rates of both input price and output charge inflation easing.
The seasonally adjusted final IHS Markit U.S. Services Business Activity Index registered 53.0 in July, up from 51.5 in June and accelerating further from May’s recent low. The upturn in business activity was solid overall and the fastest for three months. Service providers attributed the rise to greater new business and improved client demand. That said, the pace of expansion was slower than that seen at the start of the year and below the series average (55.1).
Supporting the acceleration in output growth was a stronger increase in new business. Service providers registered the quickest expansion in new orders since March, with the rate of growth accelerating for the second successive month. Foreign client demand also improved, with new business from abroad rising at the sharpest pace since February. The rise in new export orders was also faster than the series average.
Although client demand strengthened further from May’s recent low, service sector firms reported another fall in business confidence during July. The degree of optimism slipped for the sixth month running to a fresh series record low, reflecting heightened economic uncertainty.
Weaker business sentiment was further reflected in a further moderate increase in employment. Despite a faster rise in business requirements, the rate of job creation was broadly unchanged from those seen in the previous four months. Furthermore, service providers registered further pressure on capacity as the level of outstanding business increased for the seventh successive month and at a stronger pace in July. The accumulation of backlogs was solid overall and the sharpest for four months.
On the price front, output charges rose only slightly during July. Panellists stated that the rate of charge inflation was historically muted amid promotional discounting to entice new customers. The subdued rise in output prices came alongside only a moderate increase in input costs. Where a rise was reported, firms attributed this to higher purchase costs following temporary supplier shortages amid unseasonable bad weather. That said, the rate of inflation was among the slowest for over two years.
The Composite PMI Output Index registered 52.6 in July, up from 51.5 in June, to signal a moderate expansion in overall business activity. The rise was led by service providers who registered a faster increase in output, with manufacturers only recording a slight upturn in production.
Similarly, the rate of new business growth ticked up and was the fastest since March as both manufacturers and service providers registered a quicker expansion. Export orders did not fare as well, with only a fractional overall upturn recorded in July. A contraction in new business from abroad among manufacturers contrasted with an accelerated increase at service providers.
Private sector firms recorded a further rise in employment in July, with the rate of job creation in line with that seen in June. The rise in workforce numbers came alongside a faster increase in backlogs of work. The accumulation of incomplete work was led by service sector firms, as manufacturers recorded a fall.
Business confidence weakened among both manufacturers and service providers, with each sector registering fresh series lows amid ongoing uncertainty. Inflationary pressures remained historically subdued as rates of both input cost and output charge inflation softened.
Chris Williamson, Chief Business Economist at IHS Markit:
(…) The PMIs for manufacturing and services collectively point to GDP expanding at an annualized rate of under 2% in July, below that seen in the second quarter and among the weakest seen over the past three years.
A sharp drop in future expectations meanwhile suggests downside risks have increased in the near-term at least, hinting that the upturn in growth seen in July could prove short-lived and that GDP growth could remain disappointingly modest in the third quarter. (…)
Here’s the ISM Non-Manufacturing Index courtesy of The Daily Shot:
- While Markit’s composite PMI points to 2% growth, the ISM Non-Manufacturing Index points to 1%:
Source: Piper Jaffray (via The Daily Shot)
A scary chart from The Daily Feather considering the importance of Services for employment:
Source: The Daily Feather (via The Daily Shot)
The Caixin China Composite PMI™ data (which covers both manufacturing and services) indicated that business activity across China continued to expand at a marginal pace at the start of the third quarter. This was highlighted by the Composite Output Index posting 50.9 in July, up slightly from 50.6 in June.
The uptick in the headline index was helped by the stabilisation of manufacturing output following a decline in June. Meanwhile, business activity at services companies expanded at only a modest rate in July. This was shown by the seasonally adjusted Chinese Services Business Activity Index slipping from 52.0 in June to 51.6, which was the lowest index reading for five months.
Composite new orders expanded at a faster, albeit still modest, rate during July. The improvement was largely driven by a further solid increase in new business placed with service providers, despite the rate of expansion edging down from June. Services companies that registered higher new order intakes indicated that this was supported by new products and new clients. At the same time, there was a renewed upturn in new work received by manufacturing companies, albeit fractional.
On the exports front, new work from abroad rose slightly at the composite level for the second time in three months. This was driven by a solid rebound in export sales at services companies. Meanwhile, manufacturing firms registered broadly stable new export business following a marginal reduction in June.
Employment trends across China remained subdued at the start of the third quarter, with composite data showing a marginal reduction in headcounts for the third month running. The fall was centred on the manufacturing sector, which recorded the most marked decline in staffing levels since February. Meanwhile, job creation at services companies remained marginal in July, as softer business activity growth and efforts to contain costs weighed on hiring decisions.
July data pointed to a further marginal rise in unfinished workloads at Chinese companies. The increase was underpinned by a modest increase of backlogs at goods producers. In contrast, service providers registered another marginal drop in outstanding business, with some firms citing greater efforts to complete unfinished projects.
At the composite level, average input prices continued to increase at a modest pace during July. The rate of cost inflation recorded across the manufacturing sector softened since June and was only slight. At the same time, operating expenses at services companies rose at a solid pace, with the rate of inflation strengthening slightly since the previous month. Firms commonly linked higher costs to greater prices for materials, fuel and staff.
Composite data indicated that prices charged by Chinese businesses fell for the first time in six months in July, albeit only fractionally. The decline was driven by a renewed fall in factory gate charges. Though modest, it was the first time manufacturers had cut their prices since January. Services companies raised their charges only slightly in July, with some firms indicating that competitive pressures had restricted pricing power.
Business confidence regarding future output picked up in July, with the overall level of positive sentiment improving to a three-month high. Stronger optimism was seen across the manufacturing sector, having recovered from June’s record low. Services companies remained more upbeat overall, however, despite the degree of positive sentiment being unchanged from June.
The IHS Markit Hong Kong PMI™ sank to 43.8 in July, down from 47.9 in June, signalling the steepest deterioration in private sector conditions since March 2009. Notably, export orders to mainland China fell at the sharpest pace for nearly four years.
The IHS Markit Eurozone PMI® Composite Output Index slipped closer to the 50.0 no-change mark during July. Unchanged on the earlier flash reading, the index posted 51.5, a level indicative of only modest growth and down from June’s seven month high of 52.2.
The headline index continue to mask notable differing performances between the manufacturing and services economies. Whilst service sector activity rose at a solid, albeit slightly slower pace, there was a notable and accelerated fall in manufacturing production during July. Latest data showed that goods output fell for a sixth successive month and to the recorded degree since April 2013.
T
he most prominent encapsulation of these trends was seen in Germany, where a rapidly deteriorating manufacturing economy almost entirely offset ongoing robust growth of the service sector. Latest composite data showed Germany expanding at its slowest rate for over six years. Italy fared little better than Germany, despite growth improving slightly to a four-month high. Modest growth was seen in Spain, but nonetheless the weakest in nearly six years. France performed best, although even here the rate of expansion was relatively subdued and well below trend.
Weighing on the performance of the overall eurozone economy in July was ongoing weakness in demand. New work placed with private sector companies rose only slightly, weighed down in the main by another marked reduction in manufacturing order books.
Companies were again broadly able to keep on top of their workloads, as signalled by another reduction in levels of work outstanding. July marked a fifth successive monthly fall in backlogs, with the reduction the sharpest since April. Helping firms to keep on top of their workloads was another rise in employment, maintaining a trend that stretches back to November 2014. However, in line with softer rises in new work and activity, growth in staffing numbers was the weakest since April 2016.
(…) Latest data showed that confidence was at its lowest level for just under five years, with firms in Germany by far the least positive about activity over the coming 12 months. Meanwhile, inflationary pressures continued to fade. Dragged down by falling costs in manufacturing, overall operating expenses rose at the weakest pace since September 2016. Similarly, output charges rose only modestly and at the weakest rate in 32 months.
July’s IHS Markit Eurozone PMI® Services Business Activity Index signalled a solid increase in activity to extend the current period of growth to six years. However, by falling to 53.2, from 53.6 in June, the index indicated a slightly slower rate of expansion. With the exception of Italy, the ‘big-four’ nations recorded slower gains in services activity in July. Germany continued to record the strongest growth. Despite bucking the wider easing trend, Italy again registered the slowest rise of activity.
Incoming new work continued to increase at a solid, albeit slower rate, whilst firms registered a net increase in backlogs of work: the third in successive months. Jobs were again added and, despite the rate of growth easing to its weakest since March, the net increase remained historically marked. Germany again led the way in terms of employment gains during July, although growth softened to a six-month low.
On the cost front, higher wages led to another robust increase in overall operating expenses in the euro area service sector. Although charges were raised at a solid pace, the increase remained much lower than that of input costs.
Finally, business confidence strengthened during July to its highest level in three months. There was a notable uptick in confidence seen amongst French services companies, whilst firms in Italy were the most optimistic overall. Conversely, German service providers registered their lowest level of confidence since the end of 2014.
Chris Williamson, Chief Business Economist at IHS Markit:
(…) While the service sector has helped offset the manufacturing downturn, growth also edged lower among service providers in July, meaning the overall pace of expansion of GDP signalled by the PMI has slipped closer to 0.1%. The main source of expansion currently appears to be the consumer, in turn buoyed by the relative strength of the labour market. However, with the July survey indicating the weakest jobs gains in over three years, there are signs that this growth engine is also losing impetus, and adding another headwind to the economy for the coming months.
RECESSION WATCH
The Conference Board Employment Trends Index™ (ETI) increased in July, following a decline in June. The index now stands at 110.98, up from 109.30 (a downward revision) in June. The increase marks a 1.3 percent gain in the ETI over the past 12 months.
“The Employment Trends Index increased in July but continues to hover around a flat trend since the summer of 2018,” said Gad Levanon, Head of The Conference Board’s Labor Market Institute. “In the second half of 2018, the Employment Trends Index started signaling a slowdown in job growth. So far this year, job growth has indeed slowed down compared to 2018, which is not surprising given the modest economic slowdown and the recruiting difficulties associated with a tight labor market. (…)
Via CMG Wealth: Recession Probability Based on Employment Trends – Low U.S. Recession Risk
- Contraction signals are generated when the index falls by 4.8% from a high point.
- Current signal indicates expansion. Last signal date in 2009.
TECHNICALS WATCH
Lowry’s Research issued one of its selling signals yesterday “when Selling Pressure gained 6 points to 125, putting the Index into the dominant position above Buying Power, which lost 5 points to 121.” Signs of despair surfaced as “breadth was heavily negative” and “volume was also very heavy at 4.6 billion shares, 25% above the level on Friday’s market decline.”
EARNINGS WATCH
We now have 413 reports in as of yesterday night. The beat rate is steady at 74%. The surprise factor is +5.9% with the lowest surprise at +2.8% (Cons. Disc.). The blended growth rate is now 2.9%, up from 0.3% expected on July 1. However, among the important sectors, only Financials (+9.6%) and Health Care (+9.5%) are expected to post strong growth. Four sectors have negative growth according to Refinitiv:
Q3 estimates are being revised lower however, now –1.1% from +0.8% on July 1. Same for Q4: now +5.6% from +7.2%.
In truth, nobody would bet an old shirt on these given current conditions.
The Rule of 20 makes no forecast. It only measures valuation risk vs reward using trailing EPS and inflation. Trailing EPS now stand at $164.23. With inflation at 2.13% per last month data, the Rule of 20 P/E is now 19.54 at today’s opening, a 2.5% undervaluation from the 20.0 “Fair Value (2935).
The recent decline in the Rule of 20 P/E has triggered a change in The Rule of 20 Strategy, reducing cash from 30% to 20% at today’s opening of 2860. Understand this is a strategy solely based on numbers and only intended as information on valuation risk/reward and should definitely not be viewed as investment advice.
(…) New York City’s minimum wage has increased three times for employers with at least 11 employees in the past three years. At the end of 2016, the hourly rate rose to $11 from $9 an hour. In 2018, the minimum wage jumped to $13 from $11 an hour. The rate will increase to $15 an hour for employers with 10 or fewer workers at the end of 2019.
The current federally mandated minimum wage is $7.25 an hour. Other states have passed $15-minimum-wage legislation, including Massachusetts, California, Maryland, Illinois, New Jersey and Connecticut. (…)
Thomas Grech, president of the Queens Chamber of Commerce, said he has seen an uptick in small-business closures during the past six to nine months, and he attributed it to the minimum-wage legislation.
“They’re cutting their staff. They’re cutting their hours. They’re shutting down,” he said. “It’s not just the rent.” (…)
“Many people working in the restaurant industry wanted to work overtime hours, but due to the increase, many restaurants have cut back or totally eliminated any overtime work,” he said. “There’s only so much consumers are willing to pay for a burger or a bowl of pasta.” (…)
Proxies for the current margin squeeze:
Bankruptcy petitions for consumers and businesses are on the rise. There was a 5% monthly increase in total bankruptcy filings in July 2019, the American Bankruptcy Institute said this week. There were 64,283 bankruptcy filings, up from 62,241 for the same period last year.
There were 452,797 filings in the first seven months of 2019, up from 450,568 during the same period last year. There were roughly 1,000 more consumer bankruptcies at this point this year, compared to the same point last year, the organization added.
The recent bankruptcy data shows many consumer and corporate filings last month were coming, from southern states. Alabama had the highest per capita rate, with 5.61 filings per 1,000 people, followed by Tennessee (5.39) and Georgia (4.31), Mississippi (4.25) and Nevada (3.79). (…)
(…) Gen Z is becoming more open to doing college differently or not going at all, according to a new study by TD Ameritrade (…).
About one in five Gen Z and young millennials say they may choose not to go to college. Many others see a less conventional path through education as a good idea. Over 30% of Gen Z — and 18% of young millennials — said they have considered taking a gap year between high school and college.
What’s more, 89% of Gen Z, along with nearly 79% of young millennials, have considered an education path that looks different from a four-year degree directly out of high school. For millennials, that’s up 18% from 2017. (Gen Z was not surveyed in 2017.)
“There are more options today,” Dara Luber, a senior retirement manager at TD Ameritrade, told MarketWatch. “More students are looking at online courses, doing classes at community college, commuting from home, or going to a trade school.”
One reason for this shift away from a traditional college education is student debt. The average borrower now leaves college with about $37,000 of loan debt, up more than $10,000 from 10 years ago. And outstanding student debt owed by all borrowers reached $1.5 trillion in 2018. That’s nearly three times as high the collective $600 billion owed one decade prior. (…)
Just over one in four young millennials say they are delaying college due to the cost, according to the TD Ameritrade study. That’s up 7% from 2017. And 73% of Gen Z and young Americans say “they chose or would choose a less expensive college to avoid debt,” the study found. (…)
About half — 49% — of young millennials said their degree was “very or somewhat unimportant” to their current job. Only 27% of parents said the same. (…)
The sheer scale of China’s need for farm commodities including soybeans make it likely that the country would need to turn to the U.S. eventually, said Terry Reilly, senior agriculture futures analyst at brokerage firm Futures International. (…)
Archer Daniels Midland Co. , after reporting a 58.5% decline in quarterly earnings last week, warned that China is becoming more comfortable buying food elsewhere, recently approving poultry imports from Russia and pork shipments from Argentina.
This Reuters’ headline is not supported by any factual “White House rhetoric” in the body of the article. I searched around and really found nothing to support that. Same with this other Reuters’ headline: Trump dismisses fears of long-lasting trade war
