Edge and Odds

The enemy of knowledge is not ignorance, it’s the illusion of knowledge (Stephen Hawking)

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so (Mark Twain)

Edge and Odds

Invest with smart knowledge and objective odds

THE DAILY EDGE: 5 JULY 2019: No Economic Fireworks

Payroll employment increases by 224,000 in June; unemployment rate changes little at 3.7%

Total nonfarm payroll employment increased by 224,000 in June. Employment growth has averaged 172,000 per month thus far this year, compared with an average monthly gain of 223,000 in 2018. After revisions, job gains have averaged 171,000 per month over the last 3 months.

The change in total nonfarm payroll employment for April was revised down from +224,000 to +216,000, and the change for May was revised down from +75,000 to +72,000. With these revisions, employment gains in April and May combined were 11,000 less than previously reported.

The average workweek for all employees on private nonfarm payrolls was unchanged at 34.4 hours in June. In manufacturing, the average workweek edged up 0.1 hour to 40.7 hours, while overtime was unchanged at 3.4 hours. The average workweek for production and nonsupervisory employees on private nonfarm payrolls held at 33.6 hours.

In June, average hourly earnings for all employees on private nonfarm payrolls rose by 6 cents to $27.90, following a 9-cent gain in May. Over the past 12 months, average hourly earnings have increased by 3.1 percent. Average hourly earnings of private-sector production and nonsupervisory employees increased by 4 cents to $23.43 in June [+3.4%].

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Weak Factory Orders and Shipments Data

Manufacturers’ orders declined a greater-than-expected 0.7% (-1.2% year-on-year) in May following a slightly downwardly-revised 1.2% drop in April (was -0.8%). The Action Economics Forecast survey looked for a 0.5% decrease. Factory shipments edged up 0.1% (1.4% y/y) after contracting 0.6% in April (revised from -0.5%). Shipments of nondefense capital goods excluding aircraft, also known as core durable goods, which is one of the key inputs into nonresidential equipment investment in GDP, rose 0.6% in May (+4.0% y/y) and is currently growing at 1.5% annual rate for the quarter.

Orders in the volatile durable goods sector fell 1.3% (-2.8% y/y) after dropping 2.8% in April. This decline was driven by a 4.6% collapse in orders for transportation equipment (-8.4% y/y) as civilian aircraft orders plummeted 28.2% in May. While notoriously volatile on a monthly basis, these orders have fallen 56% over two months and 66% from a year ago. Total factory orders excluding transportation edged up 0.1% (0.4% y/y). (…)

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Strangely, after pointing out the growth in the important non-def cap goods ex-air series, Haver omits to signal the poor trend in new orders in same series, up only 1.4% YoY in May from +9.1% in July 2018, and up a puny 0.3% annualized in the last 4 months (down 0.8% annualized in the last 3).

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Weakening new orders in the less volatile part of manufacturing is confirmed by the PMIs and Haver illustrates how this eventually feeds in economic growth:

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Purchasing managers worldwide are extremely gloomy based on what they see in their daily activities managing inputs vs outputs:

June’s soft manufacturing surveys drove Goldman Sachs’ CAI to 0.7%:

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High five Surprised smile Wait, wait! Morgan Stanley will not be outdone by GS as Zero Hedge revealed last week:

Morgan Stanley’s Business Conditions Index, which captures turning points in the economy, fell by 32 points in June, to a level of 13 from a level of 45 in May. This drop is the largest one-month decline on record and the lowest level since December 2008 during the financial crisis, according to the firm.

(…) the MSBCI suggests the Mfg PMI New Orders component will fall to 40 over the next few months, which would be down approximately 25% on a y/y basis. Another way of putting it – if Morgan Stanley’s indicator is right, the world is already in a recession.

German Factory Orders Plunge Across Industries

(…) The 2.2% overall drop on the month was far worse than the 0.2% fall predicted by economists in a Bloomberg survey. The year-on-year decline of 8.6% was the biggest in almost a decade. (…) JPMorgan now predicts that Germany may have contracted in the second quarter. If that happens, it would be the third time in a year that Europe’s largest economy posted no growth at all.

Germany’s troubles, some of which are linked to the car industry, have weighed on the euro region. Governing Council member Olli Rehn summed up the mood on Thursday, saying saying that growth has “slowed significantly” and it’s no longer possible to consider the downturn as temporary. (…)

ING adds:

(…) In particular, foreign orders dropped sharply: -5.7% MoM from non-Eurozone countries and -1.7% MoM from Eurozone countries, reflecting continued global uncertainties. After four disappointing months, domestic orders increased by 0.7% MoM. Still, domestic orders have been an even bigger disappointment than foreign orders this year, having dropped by an average of 1.5% MoM since the beginning of the year. (…)

The last two times order books shrank with a similar magnitude was in 2011/12 and 2008/9. While the former fall ended mildly with a decent rebound, the latter continued and we all know how it ended. Back to the current situation, a strong inventory build-up in the automotive industry also does not bode well for the coming months and brings back the not so distant memories of last Fall. Combined with the weakest June performance of the labour market since 2002 and disappointing retail sales, today’s new orders wrap up a week to forget for the German economy. The fear factor is back.

From Markit’s June German PMI:

(…) Overall employment in Germany is now in a lower growth phase, with the service sector providing the bulk of new jobs. In a similar vein, the PMI data have shown the strongest quarterly growth performance from the service sector for almost five years, but thanks to falling manufacturing production, overall economic output looks to be expanding at only a moderate pace. (…)

Rising inflows of new work continued to form the basis for growth across the services economy. June saw new business increase at a solid rate that was quicker than that recorded in May, albeit slightly slower than April’s seven-month high. Continuing the theme of recent months, the main driver of the increase in new business was stronger demand from domestic sources. New work from abroad fell for the eleventh time in the past 12 months and at the quickest rate since January 2015. Surveyed firms partly attributed this to delayed decision-making among European clients. (…)

But the survey’s forward-looking indicator – the only one based on sentiment – raises question marks over how long the service sector can continue growing at such a pace and keep compensating for the weakness in manufacturing. Slowdown fears have weighed on service sector optimism, which is now the lowest since October 2015.

And the subsequent German Construction PMI:

(…) The latest figures show that the construction sector has lost all of its growth momentum, with the PMI slipping for the third month in a row in June to register in line with the 50 ‘no change’ mark. Only commercial activity increased, with the previously strong housing activity component having its first setback in eight months. (…)

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Germany is but a microcosm of the Eurozone’s cyclical industries as Markit shows:

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Markit’s Eurozone Nowcaster is pointing down:

China Reiterates Demand That U.S. Must Lift All Tariffs

On Friday, an influential blog connected to state media said the talks will “go backward again” without that step, echoing the line from Ministry of Commerce’s weekly briefing on Thursday. (…) “If the two sides are to reach a deal, all imposed tariffs must be removed,” Ministry of Commerce Spokesman Gao Feng said on Thursday. “China’s attitude on that is clear and consistent.” (…)

China laid out three red lines for a trade deal when the talks collapsed in May. As well as the removal of all the tariffs, any purchases must be in line with the country’s real demand and the deal must be based on equality and mutual respect.

Chinese purchases of U.S. agricultural products is the country’s “special chip” in the negotiation, and any imports will depend on whether the talks will be equal and mutually respectful, according to the Taoran Notes commentary.

China is apparently considering buying some agricultural goods from the U.S. as a gesture of goodwill, but so far, there has been no sign of the “tremendous” purchases that President Donald Trump said China had promised to make.

Crunch Time Looms for Trump’s New Nafta

(…) Next Tuesday is the first day Trump can send the USMCA implementing legislation to Congress, starting the clock for lawmakers to take it up. (…)

U.S. Trade Gap Widened in May Despite Tariff Moves Trade deficit in goods and services jumped 8.4% in May from a month earlier

(…) The gap widened because of the biggest monthly rise in imports in more than four years along with moderate growth in exports amid a cooling global economy.

The monthly trade figures provide a window into how U.S. trade is affecting the economy. Sarah House, a senior economist at Wells Fargo , said that a bigger trade deficit appears likely to shave around half a percentage point off economic growth in the second quarter after adding almost twice that much in the first.

Regarding U.S. trade with China, the bilateral goods deficit widened in May by 12% from the prior month to $30.2 billion, as both imports and exports rose sharply. (…)

Capital Economics said it expects gross domestic product growth in the second quarter to come in around 1.5% in annual terms, down from 3.1% in the first quarter. (…)

How the trade balance performs going forward, she said, will in part depend on whenBoeing Co. is able to resume exports of its best-selling 737 MAX aircraft, which has been grounded since March due to safety questions. Civilian-aircraft exports rose in May from April but were down 12% in the first five months of 2019 compared with a year earlier. Many economists expect aircraft shipments to decline further in the months ahead.

Imports rose 3.3% in May from April, the fastest monthly growth since March 2015, to $266.16 billion, the Commerce Department said Wednesday. The increase was led by a 7.5% rise in automotive imports, to a record $33.23 billion, as well as an 11% jump in crude-oil imports, to $13.02 billion.

Exports, meanwhile, increased 2% to $210.64 billion, the biggest monthly increase in a year. Outbound shipments were boosted by a 41% jump in exports of soybeans, which have been volatile in the past year after being targeted by China for retaliatory tariffs. (…)

Many suggest that beat-the-tariffs imports played a big role in May’s trade numbers. Perhaps, but Canada’s exports to the U.S. jumped 8.1% YoY in May without any tariff issues.

Canada Posts Unexpected Trade Surplus on Record Exports to U.S.

(…) The country ran a rare trade surplus of C$762 million ($582 million) in May, from a deficit of C$1.1 billion previously. It’s only the fourth surplus for the country since oil prices began declining in 2014, driven by a 4.6% increase in exports. (…)

Exports to the U.S. increased 3.7% [MoM] to a record C$39.3 billion, widening Canada’s trade surplus with its biggest trading partner to C$5.9 billion — the largest since October 2008.

May’s export jump comes on the heels of other strong gains, bringing the increase in merchandise shipments to 15% since December. That’s the biggest five-month gain in Canadian exports in more than a decade.

Export volumes — the variable that goes into calculations of real growth — were up 4% in May, the most since August 2016. (…) Nine of 11 sectors tracked by Statistics Canada recorded an increase in exports in May, led by a 12.4% jump in motor vehicle shipments. Non-energy exports are up 6.3% since December. (…)

Some economists now anticipate annualized growth could come in closer to 3% in the second quarter, well above Bank of Canada expectations for 1.3%.

Canada non-energy export volumes strengthen

The Peterson Institute takes a global view of trade:

Trump Has Gotten China to Lower Its Tariffs. Just Toward Everyone Else.

China increased its retaliatory tariffs hitting US exports on June 1 in response to President Donald Trump’s latest escalation of his trade war. Yet, this action is only half of the bad news for US exporters. The other half is that China has begun rolling out the red carpet for the rest of the world. Everyone else is enjoying much improved access to China’s 1.4 billion consumers, a fact that has been little noticed or reported in accounts of the US-China economic confrontation. (…)

Figure 1: China’s average tariff rate is climbing on US goods and falling for the rest of the worldAs China’s economic growth has slowed during the trade war, its imports from both the United States and the rest of the world have also fallen (figure 4). China’s tariff reductions toward the rest of the world are likely to have helped stem the decline in imports from those countries. Nevertheless, the drop in US exports to China—due to slowing domestic demand, the retaliatory tariffs, as well as the incentive to switch to other foreign sources—is much more severe. (…)Figure 4: China’s imports from the United States have declined much more rapidly than imports from elsewhere during the trade war

This is not good news for US exporters. China’s retaliatory tariffs put them at a disadvantage relative to local firms, which obviously don’t have to pay any border taxes. But reducing tariffs on imports from other countries means US exporters also face an increasing disadvantage relative to competitors in Canada, Japan, Europe, and elsewhere. (…)

THERE WILL BE BLOOD
Farmers Built a Soybean Export Empire Around China. Now They’re Fighting to Save It. Trade tensions have hammered sales of soybeans to the Chinese, a major export market it took U.S. agriculture decades to create. Growers are traveling to Beijing and Washington to plead their case. “Farmers can’t say, I’ll just grow broccoli this year.”

The customer is China and the export is soybeans, of which the U.S. shipped $21 billion abroad in 2017, far more than anything else farmers grow. That marked a tripling in two decades, the fruit of a sweeping effort, by nearly every arm of U.S. agriculture, to build a once-obscure crop into a blockbuster.

Then last year, sunk by a bitter trade dispute, American soybean exports to China plunged 74% by volume. Brazil raced to fill the gap, while prices paid to U.S. farmers recently slid to a seven-year low. (…)

Last year, U.S. farmers planted soybeans on more than 89 million acres, an area roughly the size of Montana. That was more than the land planted to corn, long Midwestern farmers’ crop of choice.

Seed companies, grain traders, railroads and other businesses have all been part of the soybean-industry buildup—investing heavily, rolling out new varieties and adding rail capacity to ferry crops to market. (…)

Joe Steinkamp, an Indiana farmer and a director of the American Soybean Association, brought such a message to a recent meeting with Gregg Doud, chief agricultural negotiator for the Office of the U.S. Trade Representative. Mr. Steinkamp said he expressed concern about destroying export markets for younger farmers who are struggling with debt loads or access to credit.

“We don’t want the next generation to be scared away from agriculture,” Mr. Steinkamp said, on what was his third trip to Washington since Chinese tariffs took effect. “Markets don’t just come back.” (…)

The U.S. share of world soybean exports is expected to drop to 31% this season, the lowest on record, while Brazil’s portion is forecast to swell to 52%, which would be its largest ever.

At an agricultural forum in Beijing last fall, according to Mr. Schickler, China’s deputy agriculture minister said China would not easily forget the current standoff, and China is building alternatives for soybean imports so it will never again be so dependent on a single source.

(…) Brazil’s ambassador to China told the group his country was working to become China’s most reliable supplier.

According to Mr. Sutter, the CEO of the Soybean Export Council, Chinese companies are working to develop soybean production in Russia, where soybeans haven’t yet become a major crop.

American farmers have few easy options if Chinese demand for U.S. soybeans remains depressed. Robust world grain supplies suggest there is little need for additional U.S. corn or wheat production. Switching to a new crop would require huge investments in equipment and infrastructure, to say nothing of finding viable markets. (…)

For that reason, the U.S. soybean industry is also working intensely to woo buyers in other international markets. The largest single-country export customer after China is Mexico. (…)

Restoring trade with China remains a critical goal for the export council. “We need to be looking for a way to get out of the mess we’re in” with China, said Mr. Adams, the former American Soybean Association president. In the trade fight, in his view, “We’re going to have to blink.”

(…) “If the US flip-flops again in the negotiations, the promises to buy American agriculture products will also be overturned,” Taoran Notes said. (…) The commentary was published ahead of next week’s revival of trade talks, when American negotiators will visit Beijing.

A lot will ride on how the US government handles the supply ban on Chinese telecom giant Huawei Technologies, sources have told the South China Morning Post. (…)

Beijing remained coy on whether China would immediately resume buying American soybeans, an American source briefed about the situation told the South China Morning Post.

He said Beijing wanted first to see how – and if – the Trump administration would ease the supply ban on Huawei, as promised by Trump.

He said the White House probably would make an announcement “in the next couple of days” on the conditions under which American companies would be allowed to resume supplying the Chinese tech giant.

The Chinese would then commit to buying American agricultural products. (…)

GM’s China sales decline for fourth straight quarter amid economy woes

(…) U.S. car companies’ share of China’s passenger vehicles market has fallen to 9.6% in the first five months of this year from 10.9% in the year-ago period, according to CAAM. Over the same period, German car makers’ share has risen to 23.3% from 20.9% and Japanese auto makers’ to 21.3% from 17.3%. (…)

Samsung Electronics Expects Quarterly Operating Profit to Fall More Than 50% sluggish demand for memory chips was exacerbated by the nagging U.S.-China trade dispute.

Samsung said it expects operating profit to fall to 6.5 trillion South Korean won ($5.56 billion) from 14.87 trillion won a year earlier. Revenue is expected to fall 4.2% to 56 trillion won. The company will report final results later this month.

The Suwon, South Korea-based company’s preliminary results exceeded market expectations. Analysts expected an operating profit of 6.01 trillion won and revenue of 54.6 trillion won for the quarter, according to S&P Global Market Intelligence.

Analysts say the company benefited in the quarter from a weaker-than-expected domestic currency and what the company described as a “one-time gain related to the display business.” (…)

The South Korean tech giant could experience further geopolitical headwinds in the coming months. Earlier this week, Japan effectively placed export restrictions on South Korea for three materials used to produce semiconductors and displays. The move could affect Samsung’s production yields for chips and displays since the materials can’t be easily replaced in the production process.

Dow Industrials Close at Record High The Dow Jones Industrial Average closed at a record, its first new high in nine months and fourth straight session of gains. The Dow was the last of the three major indexes to notch a record this year.
TECHNICALS WATCH

CMG Wealth’s Trade Signals and Lowry’s Research’s analysis all suggest a positive technical picture:

  • 13/34–Week EMA Trend Chart

  • Volume Demand vs. Volume Supply

  • S&P 500 Index 200-day Moving Average Trend

  • S&P 500 Index 50-day vs. 200-day Moving Average Cross

However, the gap to the slightly rising 200dma is wide:

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Mutually Assured Disruption in Silicon Valley With venture-capital funds flowing freely, everyone wants to be a disrupter; few actually disrupt

(…) The heightened competition is reflective of an era where big investors, desperate to generate returns when interest rates are low, are plowing money into startups like never before. By The Wall Street Journal’s count, as of April there were 88 still-private U.S. startups valued at $1 billion or more, up from 43 just five years earlier. (…)

Squeezed by U.S. Sanctions, Iran Shifts From Patience to Confrontation Tighter new U.S. sanctions have proven more punishing than Iran’s leaders expected, driving Tehran to hit back militarily and breach limits it had agreed to put on its nuclear program.

Well, with all the above, I hope we all have a nice weekend!

THE DAILY EDGE: 3 JULY 2019: Earnings Warning!

U.S. Auto Sales Slipped in First Half of 2019

(…) The research firm J.D. Power estimates the annualized selling pace in June to come in at 17.3 million, lower than a year earlier. The U.S. auto industry in the first half has posted six straight months of weaker sales compared with the same period in 2018, according to Cox Automotive. (…)

In a research note last week, Morgan Stanley forecast global auto production to fall 4% this year, which will pressure profits for suppliers and car companies. (…)

COMPOSITE PMIs
USA: Subdued growth of business activity continues in June

June survey data indicated a marginal increase in business activity across the U.S service sector. Although the upturn was among the weakest over the last three years, the rate of growth quickened from May’s recent low. The faster expansion was supported by an acceleration in the rate of increase in new business. The slight pick up in client demand also led to a renewed rise in backlogs of work, with employment increasing moderately to accommodate greater pressure on capacity. Uncertainty regarding future new order growth dampened business confidence further as expectations hit a three-year low. Inflationary pressures meanwhile quickened slightly, but remained muted overall.

The seasonally adjusted final IHS Markit U.S. Services Business Activity Index registered 51.5 in June, up slightly from 50.9 in May. The latest index figure signalled a stronger expansion than the earlier ‘flash’ reading (50.7). That said, June data indicated only a marginal increase in output that was the second-slowest since August 2016 (behind May). Where a rise was reported, service providers linked this to a faster upturn in new business.

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Domestic and external demand conditions improved slightly in June, with both new business and new export orders from abroad rising at quicker paces. Although the upturn in foreign demand was broadly in line with the series trend, total new orders increased at the second-slowest rate since April 2017. Some firms noted that greater advertising and marketing had improved new business intakes, but other continued to lament soft underlying demand conditions.

Subsequently, service providers registered a lower degree of business confidence in June, with the level of positive sentiment dropping to the lowest since June 2016. Optimism was weighed down by greater competition and concerns surrounding the strength of future new order growth.

A modest expansion in new business led to a renewed rise in the level of outstanding business in June, following no change in May. The rate of backlog accumulation was only marginal but accelerated to a three-month high.

Despite soft underlying demand conditions across the service sector in June, firms continued to expand their workforce numbers amid a tight labour market and difficulties finding skilled staff. The increase in employment was broadly in line with the average for 2019 to date.

Meanwhile, although input prices rose at a quicker pace, the rate of inflation remained historically subdued. Higher prices faced by service providers were linked to greater wage and fuel costs. Following broadly unchanged output charges in May, selling prices rose marginally in June and at the fastest rate for three months. Firms stated that higher charges were due to the pass through of increased cost burdens to clients.

The Composite PMI Output Index registered 51.5 in June, up from 50.9 in May. The expansion remained only marginal overall, despite quicker business activity growth across both the manufacturing and service sectors. Moreover, the rate of increase was the second slowest since August 2016 (behind May). The upturn in new business quickened in June, as manufacturers registered a renewed rise in client demand.

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Service providers noted a moderate and faster increase. External demand conditions also picked up, with private sector firms recording a return to growth in new export orders. Meanwhile, pressure on capacity increased as backlogs of work rose at the fastest pace for three months. The upturn drove another marginal rise in employment. Inflationary pressures picked up in June, but remained historically subdued. Input prices rose at the fastest rate of three months, largely linked by manufacturers to trade tariffs. Output charges increased at a marginal pace, following broadly unchanged prices in May.

Business confidence dipped to a series low in June (since July 2012), despite a slight increase in optimism among manufacturers. The subdued level of positive sentiment was attributed to uncertainty surrounding future new order growth and global trade tensions.

Chris Williamson, Chief Business Economist at IHS Markit:

An improvement in service sector growth provides little cause for cheer, as the survey data still indicate a sharp slowing in the pace of economic growth in the second quarter. The PMI data for manufacturing and services collectively point to GDP expanding at an annualised rate of 1.5%.

A major change since the first quarter has been a broadening-out of the slowdown beyond manufacturing, with the service sector growth now also reporting much weaker business activity and orders trends than earlier in the year.

Hiring was hit as firms scaled back their expansion plans in the face of weaker than expected order inflows and gloomier prospects for the year ahead. Jobs growth was the weakest for over two years and future expectations across both services and manufacturing has slipped to the lowest seen since comparable data were first available in 2012.
(…)

CHINA: Manufacturing slowdown drags business activity growth down to eight-month low

The Caixin China Composite PMI™ data (which covers both manufacturing and services) showed that business activity in China rose only marginally overall. The rate of expansion slowed to the weakest since last October, as signalled by the Composite Output Index edging down from 51.5 in May to 50.6 in June.

The lower headline index reading was driven by falls in the sector headline readings for both services and manufacturing. The seasonally adjusted Chinese Services Business Activity Index fell from 52.7 in May to 52.0 in June, signalling only a modest rate of expansion that was the slowest since February. At the same time, manufacturing output declined for the first time in five months, albeit only marginally.

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Total new business at the composite level also rose at a softer pace in June compared to May. Services firms reported a slightly stronger increase in new work, supported by state policies that boosted client spending. There were also mentions of new product launches and a general improvement in market conditions. In stark contrast, factory orders received by Chinese manufacturing firms decreased during the month amid reports of trade tensions.

Disruptions to trade led to a slight reduction in new work from abroad at manufacturers in June. The latest data marked the third drop in external demand at Chinese factories in the year to-date, although the latest fall was only fractional overall. Notably though, a decline was also recorded at service companies for the first time in nine months.

With regards to employment, composite data indicated a second consecutive fall in job numbers across China’s private sector economy. Similar to that seen in May, the rate at which employment decreased was slight, and mainly driven by reduced staffing at manufacturing companies. Services firms meanwhile reported a broadly unchanged level of employment, as greater hiring to meet higher new business was weighed on by the non-replacement of voluntary leavers.

Outstanding business at Chinese private sector firms increased marginally in June. That said, this represented the fastest rise in backlogs since the end of 2018. As service providers continued to reduce the amount of work-in-hand, the rise was centred on goods producers who related this to lower production levels and sustained job shedding.

Price pressures remained historically subdued in June, as the rate of overall input price inflation at Chinese companies was broadly in line with that seen in May. Services firms saw a moderate increase in operating costs, reportedly linked to higher staff expenses and elevated purchasing activity. At the same time, manufacturers reported only a marginal uplift in input prices. However, this still represented the quickest rise in overall costs faced by goods producers since November 2018.

With input price inflation still soft, private sector companies afforded another marginal increase in selling charges. Both services and manufacturing firms recorded a similarly slight uptick, although the overall rise was the strongest for three months. For manufacturers, the mark-up in output prices during June followed an unchanged price level in May.

Lastly, expectations at Chinese firms regarding future activity fell to a record-low for the second consecutive month in June. While service sector companies remained strongly optimistic, the outlook among manufacturers was only marginally positive overall. Some companies expected the launch of new products and expansion plans to boost output in the year ahead, while others were concerned about the China-US trade tensions.

Solid growth of euro area signalled in June

After accounting for seasonal factors, the IHS Markit Eurozone PMI® Composite Output Index strengthened to 52.2, up from 51.8 in May (and slightly better than the earlier flash reading of 52.1). June’s PMI reading was also the highest recorded since November 2018, signalling a pick-up in economic growth of the single currency area.

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However, the headline index masked notable divergences in sector performance during June. Whereas the services economy enjoyed a solid rise in activity that was the best in eight months, the recent downturn in manufacturing continued. Production amongst goods producers was reported to have fallen for a fifth successive month, and at a rate that was amongst the sharpest seen in the past six years. (…)

Solid growth of the eurozone economy was underpinned by a further rise in volumes of new work, the fourth in as many months. Despite being the best recorded since last November, growth in new work was modest overall. As with activity, overall gains in new work were restricted by another month of deteriorating manufacturing order books.

With overall activity rising at a faster rate than new business, companies continued to make inroads into their work outstanding. June’s survey data indicated that backlogs were reduced for a fourth successive month, albeit only slightly and at the slowest rate in the current sequence of contraction.

Staffing levels rose in June at a solid rate, extending the current record period of continuous expansion to 56 months. At the country level, Germany and Ireland led the way in terms of employment gains.

Price pressures showed further signs of waning during June. Input costs rose at the slowest rate since September 2016, pulled down in the main by a first fall in manufacturing input prices for three years. Although output charges continued to rise, they did so only modestly and at a rate amongst the weakest seen in the past two years.

Finally, ongoing worries over global trading conditions led to a second successive monthly fall in business confidence to a level that broadly matched last December’s 50-month low.

The IHS Markit Eurozone PMI® Services Business Activity Index remained comfortably above the 50.0 no-change mark that separates growth from contraction during June. Moreover, by rising to 53.6, from 52.9 in May, the index indicated the strongest growth of activity since October 2018.

All nations covered by the survey registered a rise in activity compared to the previous month, led by Ireland and Germany. In contrast, Italy recorded only a marginal increase in activity.

Higher overall services activity in the euro area was associated with a similar-sized and stronger increase in new business volumes. This led to some pressure on capacity, as highlighted by the strongest increase in backlogs of work since last November.

Jobs were subsequently created at a faster rate across the euro area services economy. The fastest increase in employment was seen in Germany, followed by Ireland. Solid employment gains were seen in Italy and France.

Rising employment costs remained a key driver of overall inflation of operating expenses in the latest survey period. However, the net rise in costs was the weakest recorded by the survey since September 2017. In contrast, charges rose at a slightly faster rate, though still one that remained well below that of costs.

Finally, business sentiment slumped to a four-and-a-half year low during June. According to the latest data, German and French service providers were the least confident of a rise in activity from present levels in 12 months’ time.

Chris Williamson, Chief Business Economist at IHS Markit:

The June PMI surveys indicate that the pace of eurozone economic growth picked up at the end of the second quarter, though it would be wrong to get overly excited by the upturn. The survey is indicative of GDP merely rising by just over 0.2% in the second quarter, and a deterioration of business expectations for the year ahead to one of the lowest
seen for over four years suggests the business mood remains sombre. Downside risks to the outlook prevail amid trade war worries, rising geopolitical uncertainty and slowing global economic growth.

Looking at the largest states, the survey data are consistent with GDP growth easing sharply to 0.4% in Spain and only modest 0.2% expansions in both France and Germany. Italy is on course to see a 0.1% decline. (…)

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U.S. government staff told to treat Huawei as blacklisted

A senior U.S. official told the Commerce Department’s enforcement staff this week that China’s Huawei should still be treated as blacklisted, days after U.S. President Donald Trump sowed confusion with a vow to ease a ban on sales to the firm. (…)

In an email to enforcement staff on Monday that was seen by Reuters, John Sonderman, Deputy Director of the Office of Export Enforcement, in the Commerce Department’s Bureau of Industry and Security (BIS), sought to clarify how agents should approach license requests by firms seeking approval to sell to Huawei.

All such applications should be considered on merit and flagged with language noting that “This party is on the Entity List. Evaluate the associated license review policy under part 744,” he wrote, citing regulations that include the Entity List and the “presumption of denial” licensing policy that is applied to blacklisted companies. (…)

A person familiar with the matter said the letter was the only guidance that enforcement officials had received after Trump’s surprise announcement on Saturday. A presumption of denial implies strict review and most licenses reviewed under it are not approved. (…)

HP, Dell to Shift Up to 30% of Laptop Production From China, Report Says

Microsoft Corp., Amazon.com Inc., Sony Corp. and Nintendo Co. are also looking to move some of their game console and smart speaker manufacturing away from the country, the Nikkei Asian Review cited those sources as saying. (…)

Alphabet Inc.’s Google has already shifted much of its production of U.S.-bound motherboards to Taiwan, averting a 25% tariff, Bloomberg News reported last month.

Reshoring to other foreign shores…

U.S. Slaps Import Duties of More Than 400% on Vietnam Steel

(…) In three preliminary circumvention rulings on Vietnamese steel, the Commerce Department said certain products produced in South Korea and Taiwan were shipped to Vietnam for minor processing before being exported to U.S. as corrosion-resistant steel products and cold-rolled steel. (…)

The U.S. is hardening its rhetoric against Vietnam, one of its major trading partners and an economy that’s benefiting from President Donald Trump’s trade war with China. Trump described Vietnam last week as “almost the single-worst abuser of everybody” when asked if he wanted to impose tariffs on the nation. (…)

Amazon’s Deal Making Threatened by D.C. Scrutiny Amazon.com has been on a buying spree in recent years, but the U.S. government’s increased scrutiny of large tech companies threatens to slow that pace.

The company has struck more than $20 billion worth of acquisitions and investments since the start of 2017, more than its deal volume in all of the previous 23 years in the online retailer’s history, according to data provider Dealogic. The spree’s biggest was Amazon’s $13.7 billion purchase of Whole Foods Inc. in 2017.

Amazon’s deal-making style is to act quickly, quietly and frequently without investment bankers, according to people familiar with the company’s thinking. But the closer attention from Washington will likely result in Amazon throttling down on acquisitions, especially larger deals. (…)

EARNINGS WATCH
Grim Earnings Forecasts Are Getting Worse by the Week

(…) In and of itself, a flurry of downward revisions is nothing unusual at this time of year. Companies are always more likely to disclose bad news, and a few may be interested in lowering estimates before they report. But the extent of the negativity this time around is notable and is another burden for investors struggling to formulate views on the economy, global trade and the Federal Reserve.

Of S&P 500 companies that have revised their profit outlook over the past couple months, 82% cut, data compiled by Bloomberg show. The proportion bears an eerie similarity to the third quarter of last year, right before stocks plunged nearly 20%. Before that, you have to go back to 2015 to find more pessimism.

Wall Street analysts have been forcefully downgrading estimates too. In June, they cut forecasts on 116 more stocks than they upgraded them for, the worst reading since September 2017, according to Sundial Capital Research. (…)

Ghost Grim forecasts you say? How about very grim actual reports?

Monday I noted that 20 S&P 500 companies with May quarter ends had already reported their Q2. While the beat rate is 85% and the surprise factor is +6.3%, I emphasized that their actual earnings were down 11.2% on a 2.8% revenue growth.

Pointing up Pointing up Digging further this morning, i found these same companies’ reports for Q4’18 and Q1’19. This is not a good trend!!! Look at the sharp drop in revenue growth. Composition: 6 in Consumer Staples, 6 in Consumer Discretionary, 6 in Tech and 2 in Industrials.

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