THE AMERICAN CONSUMER

• U.S. Light Vehicle Sales Decline to Four-Year Low

Sales of light vehicles decreased 0.8% (-2.6% year-on-year) in February to 16.57 million units at a seasonally adjusted annual rate (SAAR). This is the weakest vehicle sales since February 2015.

An 8.1% drop in auto sales (-11.6% y/y) to a 5.02 million unit pace drove the decline. In January sales increased 2.1%. Purchases of domestically-produced cars fell 9.0% (-11.0% y/y) to 3.65 million units. Sales of imported cars were down 5.5% (-13.0% y/y) to 1.37 million.

Light-truck sales grew 2.8% (1.9% y/y) last month to an 11.55 million unit rate, reversing some of January’s 7.9% drop. Purchases of domestically-made light-trucks gained 2.1% (0.3% y/y) to 9.15 million units. Sales of imported light trucks jumped 4.8% (8.3% y/y) to 2.39 million. (…)

Imports’ share of the U.S. vehicle market rose last month to 22.7%, with the auto share up to 27.3% and the light truck market increasing to 20.7%, a nine-and-a-half year high.

• Target jumps on 2019 forecast, strong holiday quarter Target Corp forecast full-year adjusted profit above Wall Street estimates on Tuesday and posted better-than-expected holiday quarter results, driven by strong digital sales and higher customer footfall at its stores.

(…) Its comparable sales, that include both in-store and digital sales, rose 5.3 percent (…)

This comes after WMT reported SSS up 4.2% YoY and AMZN product sales +8.2% in Q4.

U.S. Construction Spending Reverses Earlier Increase

The value of construction put-in-place declined 0.6% (+0.8% y/y) during December. It reversed an unrevised 0.8% November gain. A 0.2% rise had been expected in the Action Economics Forecast Survey. During all of 2018, construction’s value rose 4.1%, the weakest increase since a 2011 decline.

The value of private construction activity also fell 0.6% at yearend and was little changed y/y. The decline was the first in three months and was led by a 1.4% drop (-3.5% y/y) in the value of residential building, the fourth decline in five months. Single-family construction dropped 3.2% (-5.2% y/y), the largest of seven consecutive months of decline. The value of improvements eased 0.4% (-3.9% y/y) after strengthening 12.7% in November. Multi-family construction rose another 3.1% (5.3% y/y) after three months of strong increase. Nonresidential building activity improved 0.4% (3.8% y/y) after a 1.1% decline. Office construction was unchanged (8.2% y/y) and commercial construction fell 1.0% (-4.5 y/y). Factory sector building rose 1.7% (6.6% y/y).

The value of public construction eased 0.6% (+4.2% y/y). The 6.6% rise during all of last year was the strongest in ten years. (…)

China Cuts Growth Target Amid Challenging Downturn China lowered its economic growth target this year to between 6% and 6.5%, bowing to a deepening slowdown that can’t be quickly arrested without aggravating debt levels that are already high.

(…) Chief among the remedies to prop up growth: increasing deficit spending, launching new tax cuts and other fee reductions for businesses—totaling 2 trillion yuan, or 2% of China’s $13 trillion economy—and boosting bank lending to small and private companies by 30%.

Mr. Li nodded to the “uncertainties of the China-U. S. trade friction” that weigh on growth and the negotiations for a resolution. The economic blueprint he delivered calls for giving foreign investors greater access to China’s markets and allowing foreign firms to enter more sectors without Chinese partners. A new foreign-investment law, he said, will level the playing field between foreign and domestic firms—a central demand of Washington’s. (…)

• China’s Stimulus Muddle Deepens Beijing is going to find it increasingly difficult to achieve its twin aims of cutting debt while keeping growth on track

In recent days, we got reports that Evegrande, China’s largest property developer and one of China’s most indebted company, cut prices 10% across the board to boost sales. Car dealers are also discounting heavily, underscoring the slowdown in consumer sensitive sectors.

“Chongqing consumers stop buying cars when they buy a house. When not buying a house, they buy a car,” an auto dealer said in an interview last week. When the stock market rises, said another dealer of luxury vehicles, so do auto sales. Dealers say that their customers are increasingly strapped for cash. While, back in 2015-16, around 40-50% of auto sales were financed, now, dealers say, the number is 60-70%. (J Capital)

COMPOSITE PMIs

• U.S. business activity growth accelerates to seven month high in February

Business activity across the U.S. service sector continued to improve in February, with the rate of expansion quickening to the fastest since July 2018. The rise in output was supported by a sharp increase in new business and a return to growth in new export orders. Moreover, foreign demand rose at the strongest rate since last May. Subsequently, pressure was placed on capacity and led to the fastest rise in outstanding business for nine months. In expectation of further new order growth and in an effort to clear backlogs, the pace of job creation reached a five-month high and was strong overall. That said, service providers were less upbeat towards the year-ahead outlook for business activity.

The seasonally adjusted final IHS Markit U.S. Services Business Activity Index registered 56.0 in February, up from 54.2 in January and broadly in line with the earlier released ‘flash’ figure of 56.2. The rise in business activity was the quickest since last July and above the long-run series trend. Panellists reported that greater client demand and favourable economic conditions were key driving factors behind the upturn.

At the same time, service providers registered a faster increase in new business in February. More robust client demand and the opening of new facilities were commonly mentioned as contributing factors to the latest rise. The expansion was the strongest since last October and historically sharp. Firms also reported a return to growth in new export orders following a two-month sequence of decline. Furthermore, the pace of increase was the fastest for nine months and well above the series average.

In line with a stronger rise in new business, firms were required to take on more staff in February amid strains on capacity. The rate of job creation was the quickest for five months and accelerated significantly from that seen in January. At the same time, backlogs of work increased for the second successive month and to the greatest extent since May 2018.

Meanwhile, inflationary pressures picked up in February, with service providers registering faster rises in both input and output charges. The strong increase in cost burdens was largely linked to higher raw material and fuel prices, tariffs and higher interest rates. The rate of input cost inflation accelerated from January’s 22-month low and was the quickest since last November. Firms reportedly sought to pass greater cost burdens on to clients through increased output prices. The rate of charge inflation quickened for the second month running as more favourable demand conditions allowed companies to raise prices.

Service sector firms remained optimistic in February. The degree of confidence was, however, weaker than that seen in January and historically subdued. Although service providers commented on the strength of client demand, others highlighted concerns around the sustainability of new business growth.

The Composite PMI Output Index registered 55.5 in February, up from 54.4 in January. The faster overall expansion was driven by a quicker upturn in business activity in the service sector, counteracting the slowdown in manufacturing output. Similarly, composite new business increased at the strongest rate for four months amid a quicker rise in new orders at service providers. Manufacturing firms registered a slower rise in new business. Nevertheless, new export orders received by both manufacturing and service sector firms picked up in February, with service providers registering a return to growth in foreign demand.

Inflationary pressures were relatively subdued in February compared to those seen throughout 2018. Rates of input price and output charge inflation were strong overall and accelerated from those seen in January. Meanwhile, a quicker overall output expansion led firms to increase their workforce numbers at a more robust rate. The pace of job creation was the strongest since September 2018.

A slight reduction in optimism across both the manufacturing and service sectors resulted in a lower degree of overall confidence towards future output in February.

Chris Williamson, Chief Business Economist at IHS Markit:

The US PMI surveys tell a tale of two economies in February, with any slowdown story confined to the goods-producing sector. While manufacturing struggled, with the surveys consistent with a near stalling of factory output and order books, the service sector remained encouragingly resilient, enjoying its strongest burst of activity for seven months.

With the size of the vast service sector overshadowing the manufacturing sector, the two surveys suggest the overall pace of economic growth accelerated in February. Having correctly indicated that the economy grew at a slower but still solid pace in the fourth quarter (our model from the survey indicated 2.5% growth against an initial official estimate of 2.6%), the data for the first two months of 2019 point to a similar 2.6% annualised rate of expansion.

In addition to signalling stronger economic growth, the surveys suggest hiring also remained encouragingly solid in February with a 250,000 non-farm payroll rise indicated, albeit predominantly driven by the service sector. (…)

GDP growth of 2.6% would be at the top end of consensus and substantially above the Atlanta Fed current reading which is based on recent official data releases. If so, it would mean that we will get significant revisions in official data in coming weeks. If I have to choose, I go with the PMI surveys.

• China Composite PMI drops on weak Services

The Caixin China Composite PMI™ data indicated a softer rise in Chinese business activity during February. At 50.7, down from 50.9 at the start of 2019, the Composite Output Index pointed to a marginal expansion of output that was the slowest in four months. (…)

The slowdown was largely centred on the services sector, which registered the softest increase in business activity since last October. Notably, the seasonally adjusted Chinese Services Business Activity Index posted 51.1, down from 53.6, to signal a marginal rate of growth that was weaker than the long-run trend. Manufacturing production meanwhile returned to expansion in February, though the rate of increase was fractional overall.

The relatively subdued rise in services activity coincided with a slower increase in new business in February. Notably, service providers signalled the least marked expansion of new orders since last October amid some reports of relatively muted demand conditions. In the manufacturing sector, new orders rose for the first time in three months, albeit only slightly. At the composite level, new business expanded at a slightly faster, but still marginal, pace during February.

The trend in exports meanwhile deteriorated midway through the first quarter of 2019. Overall, foreign sales declined marginally, driven by a renewed fall at manufacturing companies. At the same time, new export order growth eased to a five-month low at services companies.

Employment trends continued to differ by sector, with services companies registering the fifth successive monthly rise in staffing levels as manufacturers continued to scale back their workforce numbers. That said, the latest expansion of service sector payrolls was only marginal, having eased since the start of the year. At the same time, goods producers saw a slightly quicker rate of job shedding compared to January. As a result, composite employment fell back into contractionary territory in February.

Services companies in China signalled lower backlogs of work for the second month in a row during February. Though moderate, the rate of depletion was the quickest seen since September 2015, with some firms citing greater efforts to clear incomplete orders. In contrast, outstanding workloads continued to increase modestly across the manufacturing sector. Nonetheless, the steeper reduction in the level of work-in-hand at service providers underpinned the first fall in unfinished business at the composite level for three years.

Operating expenses faced by services firms continued to rise in February. The rate of increase quickened slightly since the start of the year, by remained modest overall. Meanwhile, average purchasing costs for manufacturers declined for the third consecutive month, albeit only slightly. At the composite level, input cost inflation picked up from January’s three-year low and was moderate.

February data showed that both manufacturers and service providers raised their output prices only slightly. That said, it marked the first increase in factory gate prices for four months. Where higher selling prices were reported, panellists generally linked this to firmer overall demand conditions.

Chinese companies continue to expect activity to increase over the next year in February. Optimism was widely linked to new products, company expansion plans, greater investment and expectations that overall market conditions will improve. However, the level of positive sentiment softened since January, with confidence easing slightly across both the manufacturing and service sectors.

• Eurozone records modest improvement in growth

February’s IHS Markit Eurozone PMI® Composite Output Index indicated firmer growth of the eurozone’s private sector economy when compared to January. The seasonally adjusted index strengthened to 51.9, up from 51.0 and a three month high. Moreover, the index improved on the earlier February flash reading of 51.4.

Underlying trends in activity generally strengthened across the region during February with the exception of Spain, where growth softened slightly compared to January. Disparate trends also persisted, with Ireland expanding markedly compared to continued contraction in Italy. France saw a return to marginal growth, whilst output in Germany rose at a solid and strengthened rate.

There remained a notable divergence between the performances of the manufacturing and service sectors during February. On the one hand, ongoing trade tensions, weakness in the automotive industry and political uncertainties continued to weigh on demand for manufactured goods. Manufacturing new orders deteriorated to the greatest degree in nearly six years during February, placing downward pressure on output which fell slightly for the first time in nearly six years.

In contrast, service providers registered modest but nonetheless improved growth in activity when compared to January. The trend in services new work was also favorable, with the sector registering a firmer rise in sales. Growth merely offset the decline in manufacturing orders, however, to leave overall private sector new work unmoved on the month.

In spite of the underwhelming trend in new business, private sector companies in the euro area again chose to take on additional workers. Growth remained solid, improving on January and extending the current period of expansion to well over four years. Germany, Ireland and Spain all continued to record robust gains in employment, compared to a relatively modest gain in France and marginal growth in Italy. With capacity levels continuing to expand, private sector companies were again able to comfortably keep on top of their workloads. Backlogs of work were stable during February.

Despite evidence of rising wage pressures, especially in Germany, Ireland and Spain, overall cost pressures continued to weaken. Thanks to noticeably slower inflation in manufacturing, overall input costs rose to the weakest degree for a year-and-a-half. A similar trend emerged for output charges, which increased in February at the slowest pace since September 2017.

Finally, business confidence improved during February to a five-month high, though nonetheless remained amongst the weakest recorded for the past four years. Political and economic uncertainties continue to weigh on sentiment.

The IHS Markit Eurozone PMI® Services Business Activity Index remained above the crucial 50.0 no-change mark in February, rising to 52.8, from 51.2 in January and a three-month high. All countries recorded growth in activity, albeit to varying degrees. Whilst France and Italy registered marginal gains, activity levels in Germany, Ireland and Spain all rose to robust degrees.

There was an improvement in overall new business growth and, despite being modest, the increase in sales was sufficiently strong to place pressure on capacity. Backlogs of work increased during February following January’s decline, with Germany and Ireland recording the most acute increases in outstanding business. These two nations also recorded the strongest employment gains during the latest survey period. Overall, private service sector jobs in the euro area rose at a marked and accelerated rate during February.

With demand for workers continuing to increase, there were many reports of higher salaries being paid. This helped to explain another sharp increase in overall service sector operating costs. Where possible, firms sought to protect margins via a solid increase in output charges.

Finally, business confidence improved in February to its highest level in four months, though remained below its trend level.

Chris Williamson, Chief Business Economist at IHS Markit:

Measured overall, the survey shows the quarterly rate of GDP growth picking up to 0.2% in February from 0.1% in January, meaning the first quarter could see the eurozone economy struggle to beat the 0.2% expansion seen in the fourth quarter of last year.

Manufacturing remains especially fragile, with an increased rate of decline of new orders and signs of excess capacity relative to sales boding ill for future production. While the service sector is showing greater resilience, inflows of new business remained worryingly weak, providing little hope for any noticeable improvement in performance in the coming months. (…)

TRADE STUFF

China suspends customs clearance for Tesla Model 3 imports: Caixin

China’s customs authority has suspended customs clearance procedures for Model 3 cars built by Tesla Inc, the financial publication Caixin reported on Tuesday. The report said the customs authority in Shanghai had found various irregularities in 1,600 imported Model 3 cars, including the improper labeling of the vehicles. (…)

China says Canadian stole secrets; Huawei to sue U.S. China’s government and its leading smartphone maker, Huawei Technologies Ltd, stepped up pressure on Monday on the U.S. and Canadian governments in a dispute over trade and telecoms technology that has ensnared Huawei’s CFO, who faces U.S. criminal charges.

Trump Attacks India on Trade as U.S. Seeks Its Help on China

The Trump administration notified Congress on Monday that it wants to scrap trade concessions for India [and Turkey], the largest beneficiary of the so-called generalized system of preferences that impacts $5.7 billion worth of goods.

The move affects just a fraction of India’s trade flows, yet it comes weeks before India’s national elections, and just as Prime Minister Narendra Modi’s government is trumpeting its foreign policy prowess and military strength following a stand-off with Pakistan. (…)

U.S. Push on Food Trade Pressures EU U.S. and European trade negotiators, under growing domestic pressure over agriculture, are set to meet again this week as clashing demands threaten to rekindle a tit-for-tat economic war.

Macron lays out proposals for a more ‘protective’ EU French president calls for ‘renaissance’ in Europe to fend off ’nationalists’

(…) “Never since the second world war has Europe been so necessary,” he wrote in an address to the “citizens of Europe” to be published on the opinion pages of multiple newspapers on Tuesday. “And yet Europe has never been so much in danger.” (…)

Evidence Grows That Trump’s Trade Wars Are Hitting U.S. Economy

In two separate papers published over the weekend, some of the world’s leading trade economists declared Trump’s tariffs to be the most consequential trade experiment seen since the 1930 Smoot-Hawley tariffs blamed for worsening the Great Depression. They also found the initial cost of Trump’s duties to the U.S. economy was in the billions and being borne largely by American consumers.

In a study published on Saturday, economists from the Federal Reserve Bank of New York, Princeton University and Columbia University found that tariffs imposed last year by Trump on products ranging from washing machines and steel to some $250 billion in Chinese imports were costing U.S. companies and consumers $3 billion a month in additional tax costs and companies a further $1.4 billion in deadweight losses. They also were causing the diversion of $165 billion a year in trade leading to significant costs for companies having to reorganize supply chains.

Significantly, the analysis of import price data by Mary Amiti, Stephen Redding and David Weinstein also found that almost all of the cost of the tariffs was being paid by U.S. consumers and companies. That contradicts Trump’s claim that China is paying the tariffs. (…)

In a separate paper published on Sunday four economists including Pinelopi Goldberg, the World Bank’s chief economist and a former editor-in-chief of the prestigious American Economic Review, put the annual losses from the higher cost of imports alone for the U.S. economy at $68.8 billion, or almost 0.4 percent of gross domestic product.

That was offset by the gains from protectionism derived by U.S. producers benefiting from the tariffs, the economists found. After accounting for the impact of higher tariff revenue and the benefits of higher prices to domestic producers the study found the aggregate annual loss for the U.S. economy fell to $6.4 billion, or 0.03 percent of GDP. (…)

Economists at the Institute of International Finance last week calculated Chinese retaliatory tariffs alone were causing roughly $40 billion a year in lost U.S. exports. (…)

TECHNICALS WATCH

From Nautilus Capital:

• Breadth has Surged. Recall that over 90% of stocks in the SP500 exceed their 50 DMA. February 15th marked the first time for this trigger in 6 months. Since 1991, the SP500 has averaged gains of +20% 1-year later. (10 up vs. 0 down.)
• The SP500 just registered a statistically significant Bullish Long-term Trend Following Signal. When the 1-month moving average closes above the 12-month moving average after below for 3 months, returns since 1958 average + 17.42% 1 year later. (16 up vs. 0 down.) Since 1927, the same signal generates a 1-year return that averages +14.96% (22 up vs. 5 down.)

The S&P 500 remains stuck at 2800…

…but the equal weighted index has gone through its resistance…or has it really?