FLASH PMIs

• USA: Stronger service sector growth helps offset manufacturing downturn in July

At 51.6 in July, the seasonally adjusted IHS Markit Flash U.S. Composite PMI Output Index edged up from 51.5 in June and remained higher than the three-year low recorded during May. However, the latest reading signalled only a modest expansion of private sector output.

Service sector companies recorded the strongest rise in business activity since April. This helped to offset a downturn in manufacturing production in July. Although only marginal, the reduction in output across the goods producing sector was the sharpest for almost ten years.

In line with the trend for business activity, latest data indicated that new business growth gained momentum in July and was the fastest for three months. Improved demand was largely confined to the service economy, which survey respondents linked to resilient consumer spending.

Despite an improvement in order books, the rate of private sector job creation weakened to a 27-month low in July. Softer employment growth appeared to reflect caution about the near-term business outlook, with the latest survey revealing the lowest degree of optimism since this index began in July 2012.

Inflationary pressures remained subdued, with cost burdens rising only marginally during the latest survey period. Meanwhile, service providers reported price discounting in July, which contrasted with a sharper rise in factory gate charges across the manufacturing sector.

The headline seasonally adjusted IHS Markit Flash U.S. Services PMIâ„¢ Business Activity Index picked up to 52.2 in July, from 51.5 in June, to signal the strongest rise in service sector output for three months. That said, the rate of expansion was only modest and still much softer than seen in the first quarter of 2019.

Growth of business activity was supported by price discounting in July, with average charges reduced to the greatest extent since February 2016. Business expectations for the next 12 months dropped sharply across the service sector in July. Moreover, the latest reading was the lowest since this index began in October 2009.

Adjusted for seasonal influences, the IHS Markit Flash U.S. Manufacturing Purchasing Managers’ Index™ (PMI™)1 registered 50.0 in July, down from 50.6 in June and the lowest since September 2009. The latest reading was in line with the neutral 50.0 threshold and therefore signalled stagnant manufacturing business conditions.

The negative influences on the headline PMI were lower production volumes, a fall in employment and reduced stocks of purchases. Production levels dropped only slightly, but the rate of decline was the greatest since August 2009. Moreover, the marginal decrease in staffing levels ended a six-year period of sustained job creation across the manufacturing sector.

Survey respondents noted that a downturn in the automotive sector and heightened global economic uncertainty were factors behind the loss of momentum for the manufacturing sector in July. In some cases, goods producers simply commented on a cyclical downturn in sales following elevated growth rates in 2018.

Latest data revealed that export sales were particularly subdued, with new work from abroad falling at the fastest pace since April 2016. However, domestic demand continued to rise, as signalled by a sustained improvement in total new order books. Marginal increases in new business received by manufacturing companies have been achieved during each of the past two months, following a decline in May.

Chris Williamson, Chief Business Economist at IHS Markit:

The survey data indicated that the economy started the third quarter on a disappointingly soft footing. The PMIs for manufacturing and services collectively point to annualized GDP growth of just 1.6%, up only very marginally from a lacklustre 1.5% indicated by the survey in the second quarter.

The overall picture of modest growth conceals a two-speed economy, with steady service sector growth masking a deepening downturn in the manufacturing sector. The survey’s gauge of factory production has slumped to its lowest since August 2009, and indicates that manufacturing output is falling at a quarterly rate of over 1%, led by an increasing rate of loss of export sales.

The survey’s employment gauge has meanwhile fallen to a level consistent with 130,000 jobs being added in July, down from an average of 200,000, in the first quarter and 150,000 in the second quarter, as firm became increasingly cautious in relation to hiring. Manufacturers are shedding workers at the fastest rate since 2009 and service sector job creation is now down to its lowest since April 2017.

Future prospects have also darkened to the gloomiest since comparable data were first available in 2012, suggesting that companies may look to tighten their belts further in coming months, dampening spending, investment and jobs growth. Geopolitical worries, trade wars and increasingly widespread expectations of slower economic growth at home and internationally have all pulled business optimism lower.

• Eurozone economic growth falters as manufacturing downturn deepens

Eurozone economic growth edged lower in July as a deepening manufacturing downturn was accompanied by a slight moderation in service sector growth. Overall inflows of new work almost stagnated and business sentiment fell to its lowest since late-2014, causing companies to take an increasingly cautious approach to hiring. Selling prices meanwhile came under pressure amid tough competition and weak demand.

Having risen in the prior two months, the IHS Markit Eurozone Composite PMI® fell to 51.5 in July according to the ‘flash’ estimate, down from 52.2 in June to register the weakest monthly expansion of output for three months. Over the past six years, only four months have seen lower PMI readings.

The modest overall expansion masked a widening divergence between the manufacturing and service sectors to the largest since April 2009. While the service sector continued to record robust growth, albeit easing slightly compared to June, the manufacturing sector reported the steepest drop in production since April 2013. Similar modest rates of growth were seen in Germany, France and the rest of the region as a whole, with manufacturing acting as an increased drag on output in all cases, notably in Germany.

Overall growth of new business meanwhile slowed to near stagnation, its lowest for five months. Manufacturers reported the second-largest drop in new orders since 2012 and service sector inflows of work slipped to the second-lowest in five months. Exports (including intra-euro area trade) remained a key area of weakness, declining at a rate not exceeded since data covering both goods and services were available in late-2014. Good exports fell at the steepest rate since November 2011, while a more muted decline was seen for services.

Backlogs of work fell at an accelerated rate as firms increasingly depended on previously-placed orders to maintain current output growth. Work-in-hand dropped particularly sharply in manufacturing, down to the greatest extent in seven years.

Companies’ future expectations of output also worsened, sliding to the lowest since October 2014. A small rise in sentiment in the service sector (though still among the gloomiest seen over the past four years) was countered by a drop in optimism in manufacturing to the lowest since December 2012. The survey saw growing concerns about trade wars and weakened economic growth prospects both locally and globally, as well as rising geopolitical stress, notably including Brexit.

Companies scaled back their hiring in response to the deteriorating outlook and order book situation, resulting in the smallest employment gain for 34 months. Manufacturers reported their third consecutive monthly fall in payroll numbers, with jobs being lost at a rate not seen since June 2013. Service sector companies reported further net job creation, though the rise was the smallest for four months.

Inflationary pressures became increasingly subdued amid the slowdown. Average prices charged for goods and services registered the smallest increase since November 2016, led by the largest drop in factory selling prices since April 2016. Service sector charges meanwhile rose at the second-slowest rate seen over the past 14 months.

Input cost inflation across the two sectors remained unchanged from June’s 33-month low. Input prices fell for a second successive month in manufacturing but rose at a slightly increased rate in services. While manufacturing costs were often reported to have eased on the back of lower global commodity prices as suppliers offered discounts, service sector costs were often pushed up by higher wages. (…)

Chris Williamson, Chief Business Economist at IHS Markit:

(…) The pace of GDP growth looks set to weaken from the 0.2% rate indicated for the second quarter closer to 0.1% in the third quarter. The manufacturing sector has become an increasing cause for concern (…) with the survey indicative of the goods-producing sector contracting at a quarterly rate of approximately 1%. (…)

• OUTPUT GROWTH ACCELERATES IN JAPAN DURING JULY

Home Sales Stumble, as Pricey West Coast Markets Suffer Declines Existing-home sales, which fell 1.7% in June, have been slumping year-over-year for 16 consecutive months

Existing-home sales fell 1.7% to a seasonally adjusted annual pace of 5.27 million, the National Association of Realtors said Tuesday. Sales declined 2.2% compared with a year earlier, marking the 16th consecutive month of annual declines in sales.

The spring selling season is crucial because about 40% of the year’s sales take place in March through June. Falling sales during most of this period have puzzled economists. They struggle to explain why the housing market has remained soft while the rest of the economy has been booming. Borrowing rates have fallen to their lowest levels in two years, wages are rising and unemployment is at a 50-year low.

“It doesn’t make economic sense,” said Lawrence Yun, the NAR’s chief economist. (…)

The median price of a home fell in San Jose, Seattle and Los Angeles in June, compared with a year earlier, according to real-estate brokerage Redfin. For San Jose, that was the seventh month of annual price declines. The slowdown in the West Coast marketsnow spans all price points, including starter homes, which had been the tightest segment of the market. In San Jose, inventory for homes in the bottom-third price tier nearly doubled in June compared with a year earlier, while prices dropped 3.8%, according to Redfin. (…)

While price declines are concentrated on the West Coast, other costly markets such as New York, Boston and the Denver area are also weakening. (…)

“It doesn’t make economic sense”. Maybe not for an economist, but for most ordinary people it makes financial sense:

Meanwhile,

• Oceanfront Estate in One of the Hamptons’ Most Coveted Enclaves Asks $60 Million

The Chemical Activity Barometer (CAB), a leading economic indicator created by the American Chemistry Council (ACC), eased 0.2 percent in July on a three-month moving average (3MMA) basis following three months of gains in March-May and weak months in the winter. On a year-over-year (Y/Y) basis, the barometer fell 0.2 percent (3MMA).

The unadjusted measure of the CAB rose 0.2 percent in July and fell 0.4 percent in June. The diffusion index rose to 65 percent in July. The diffusion index marks the number of positive contributors relative to the total number of indicators monitored. The CAB reading for June was revised downward by 0.39 points and that for May by 0.09 points.

“A pattern of fluctuating barometer readings – months up followed by months down – indicates late-cycle activity,” said Kevin Swift, chief economist at ACC. “The CAB reading continues to signal moderate gains in U.S. commercial and industrial activity through late 2019, but rising volatility suggests change may be on the way.”

U.S., China Set to Resume Trade Talks in Shanghai Next Week A U.S. delegation is expected to travel to China for trade talks next week, according to a senior administration official, marking what would be the first in-person talks since the Group of 20 summit last month.

U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin will travel to Shanghai for meetings with China’s Vice Premier Liu He and his team to resume formal negotiations following their collapse in May, the person said.

Messrs. Lighthizer and Mnuchin stressed in “very strong terms” in recent phone calls with Chinese negotiators that the U.S. wants China to agree to buy more American agricultural products, White House economic adviser Lawrence Kudlow told reporters earlier Tuesday. He said China appears willing to do so as a “good-will gesture.”

“They are indicating that they are looking at purchases of agriculture,” Mr. Kudlow said. “We hope strongly that China will very soon start buying agriculture products.” (…)

IMF Cuts Global GDP Forecast for 2019, Citing Fallout From Trade Tensions GDP growth expected to slow to 3.2%; world trade forecast to grow 2.5%, off sharply

Real global economic growth will slow to 3.2% this year, 0.1 percentage point slower than forecast in April, and down from 3.6% last year and 3.8% in 2017, according to the quarterly update to the IMF’s flagship World Economic Outlook, released Tuesday. (…)

The IMF now projects world trade will grow 2.5% in 2019, a downgrade of nearly a full percentage point in the forecast since April. Earlier forecasts had anticipated a slowdown, but not this sharp. As recently as 2017, global trade in goods and services was growing at a robust 5.5%. (…)

The downgrades in growth were largely concentrated in emerging markets, with growth in India down 0.3 percentage points from earlier forecasts, Russia down 0.4 points, Mexico down 0.7 points and Brazil down 1.3 points.

Advanced economies fared relatively better in this round of forecasts. The U.S. and euro area are expected to grow more slowly than in 2018, but the U.S. slowdown is now forecast to be less pronounced than in the April round of forecasts while Europe’s outlook was unchanged. (…)

The WTO said in its mid-year monitoring report that, since October, trade restrictions were applied to approximately $340 billion a year of trade.

Those new trade restrictions were the second-highest figure on record, surpassed only by the $588 billion in restrictions reported in its previous monitoring report. (…)

Nissan warns of profit plunge, set to unveil 10,000 job cuts Nissan Motor Co Ltd warned on Wednesday that first-quarter profit tumbled around 90% percent, a day before it is expected to announce more than 10,000 job cuts as the crisis deepens at Japan’s second-largest automaker.

America’s Highest Minimum Wage Sparks Fight in Small California City The San Francisco suburb of Emeryville recently implemented the highest minimum wage in the U.S., $16.30 an hour, becoming ground zero for a national debate over how to balance boosting wages for the lowest-paid workers and ensuring small businesses can afford to employ them.

(…) A 2018 survey commissioned by Emeryville found that most retailers had adapted to minimum-wage increases, but the restaurant industry was struggling. (…)

EARNINGS WATCH

We now have 104 reports in. Beat rate: 79% on earnings, 64% on revenues (50% on Industrials). The earnings surprise factor is +5.3% and positive in all sectors. Trailing EPS is $163.54.

TECHNICALS WATCH

The Russell 2000 of small-cap stocks continues to struggle (relatively, anyway) and its ratio to the S&P slipped to another multi-year low despite Tuesday’s gains in both indexes. This is the 6th day in the past 30 sessions when the ratio between them dropped to a new low while the S&P itself was within 1% of a new high. There hasn’t been this tight of a cluster since April 1999.

With this latest round of new lows in the ratio, it’s looking increasingly like one of the handful of major peaks. We can see below that after other times the ratio formed major peaks, they very roughly preceded the declines in 1987, 1990, 2000, 2007, and 2015.

SentimenTrader’s Jason Goepfert emphasises “very roughly preceded” with several examples of misses adding

while it’s not an automatic sell signal for the most important and widely benchmarked index in the world (the S&P 500), it’s hard to find a positive in the continued poor performance of the smaller stocks.

DOJ to Open Broad Antitrust Review of Big Tech Companies The Justice Department is opening a broad antitrust review into whether dominant technology firms are unlawfully stifling competition.

The Justice Department is opening a broad antitrust review into whether dominant technology firms are unlawfully stifling competition, adding a new Washington threat for companies such as Facebook Inc., Google, Amazon.com Inc. and Apple Inc.

The review is geared toward examining the practices of online platforms that dominate internet search, social media and retail services, the department said, confirming the review shortly after The Wall Street Journal reported it.

The new antitrust inquiry under Attorney General William Barr could ratchet up the already considerable regulatory pressures facing the top U.S. tech firms. The review is designed to go above and beyond recent plans for scrutinizing the tech sector that were crafted by the department and the Federal Trade Commission.

The two agencies, which share antitrust enforcement authority, in recent months worked out which one of them would take the lead on exploring different issues involving the big four tech giants. Those turf agreements caused a stir in the tech industry and rattled investors. Now, the new Justice Department review could amplify the risk, because some of those companies could face antitrust claims from both the Justice Department and the FTC.

The FTC in February created its own task force to monitor competition in the tech sector; that team’s work is ongoing.

The Justice Department will examine issues including how the most dominant tech firms have grown in size and might—and expanded their reach into additional businesses.

The Justice Department also is interested in how Big Tech has leveraged the powers that come with having very large networks of users, the department said.

There is no defined end-goal yet for the Big Tech review other than to understand whether there are antitrust problems that need addressing, but a range of options are on the table, the officials said. (…)

John, a long time reader and supporter of this blog, sent me this link to an interesting video, related to the above: https://www.youtube.com/watch?v=WQMuxNiYoz4