Auto Sales Sputtered in September Amid Rising Rates, Trade Concerns Several major auto makers reported steep declines in U.S. sales for September, a slowdown that comes amid shifts in North American trade policy and the looming threat of tariffs on European and Japanese imports.
The industry is expected to post a 7% drop in sales in September compared with the same year-ago period when full industry results are tallied later Tuesday. Analysts attribute the drop to one fewer selling day this month and a surge in sales last September as buyers rushed out to replace vehicles damaged from Hurricane Harvey and Irma. (…)
Cars are already getting expensive in the U.S., as Tuesday’s results showed: Transaction prices rose an average of around 2 percent, or close to $700, across the board. Honda’s were up as much as 4.6 percent and Ford’s climbed about 3.2 percent. (Bloomberg)
The September 2018 US light-vehicle SAAR came in at ~17.44mm (18.16mm last year), above RBCe/Bloomberg consensus of 17.0mm. September sales of 1.43mm units were down -6% y/y (one fewer selling day). (RBC)
U.S. economy has ‘remarkably positive outlook,’ Fed chair says
Fed’s Powell Sees Little Sign of Labor Market Overheating Federal Reserve Chairman Jerome Powell said he doesn’t see evidence the labor market is at risk of overheating or of pressuring up prices.
Oil rises toward four-year high as Iran sanctions loom Oil traded above $85 a barrel and near a four-year high on Wednesday, supported by expectations that U.S. sanctions on Iran will tighten supply and strain the ability of Saudi Arabia and other producers to pump more.
IHS Markit U.S. Services PMI™ Service sector activity growth dips to eight-month low
(…) Encouragingly, new orders growth regained momentum, adding to existing pressure on operating capacity. Backlogs rose for the first time since June, and job creation was the joint-fastest for over four years as firms took on more staff to meet demand. Meanwhile, output price inflation accelerated to the quickest in the series history amid a faster rise in cost burdens.
The seasonally adjusted final IHS Markit U.S. Services Business Activity Index registered 53.5 in September, down from 54.8 in August. The latest figure indicated the weakest growth since January, with the rate of expansion softening for the fourth month running. Nonetheless, the average for the third quarter of 2018 was strong overall. Anecdotal evidence cited greater demand, however, some clients were apprehensive due to reports of a sluggish housing market.
Reassuringly, the rate of new business growth picked up in September, moving closer to the strength seen earlier in the year. The sharp upturn in new orders was commonly attributed to improved client demand.
In line with a stronger rise in new business, capacity pressures increased in September. Service providers suggested greater business requirements drove job creation, extending the current sequence of employment growth that began in March 2010. Notably, hiring increased at the joint-quickest rate since June 2014.
Backlogs also rose, ending a two-month period of contraction. Moreover, the level of outstanding business increased solidly, with companies noting that new order growth outpaced that of output.Greater demand for inputs and the ongoing effects of tariffs were widely cited as factors behind a stronger rise in input prices in September. Moreover, the rate of inflation was steep and accelerated from August’s recent low.
Subsequently, output prices charged by service providers continued to rise in September. The pace of selling price inflation accelerated to the fastest in the nine-year series history.
IHS Markit Eurozone Composite PMI® Manufacturing sector leads growth slowdown in September
The euro area economy expanded at its slowest rate for four months during September, according to the final IHS Markit Eurozone PMI® Composite Output Index. Posting 54.1, the headline index was down on August’s 54.5 and slightly lower than the earlier flash estimate of 54.2. (…) Whilst there was an upturn in growth in the service sector to a three-month high, manufacturing recorded its slowest rise in output since May 2016.
At the national level, there was again a broad based expansion. With the exception of Ireland, which recorded a strong rate of growth that was unchanged on August’s seven-month high, private sector expansion remained much weaker than rates seen around the turn of the year. Most notably, Spain registered the slowest increase in activity in
nearly five years, whilst growth in Italy was little changed on August’s near two-year low.Germany and France continued to record relatively robust rates of expansion, despite the latter recording its weakest performance in 21 months.
Supporting the rise in activity across the single currency area was another expansion of incoming new work. Growth was solid, albeit a little softer than in August.
There was further evidence of capacity pressures during September, with backlogs of work increasing for the fortieth successive month. However, growth was modest, in part restricted by a further expansion of workforce numbers. Employment increased during September to stretch the current run of expansion to just under four years. Jobs continued to be added at the strongest rates in Germany and Ireland.
On the price front, input cost inflation remained sharp and was slightly higher than in August, whilst output prices also increased at a firmer rate. In line with the recent trend, price pressures remained most acute in Germany. The pricing power of companies in France and Italy remained notably weaker in comparison. (…)
Comparisons with official data indicate that the survey data are equivalent to GDP rising by almost 0.5% in the third quarter. Note that the PMI data also indicate that we can expect the official growth estimates for the first half of the year to eventually be revised higher.
However, the fourth quarter is unlikely to see such robust growth, as recent months have seen a clear loss of momentum in terms of both output and new order gains.
The most worrying signs come from exports. Trade flows have more or less stalled, which represents a marked contrast to the record rate of export growth seen at the end of last year. While service sector growth remained resilient in September, it would be unusual for this to be sustained in the absence of improved manufacturing growth.
Similarly, while employment gains remained historically high, a steady erosion in the rate of order book growth so far this year suggest the appetite to hire will soon wane without any notable upturn in new order inflows.
With business confidence about the outlook running at one of the lowest seen over the past two years, companies are clearly not expecting any such imminent turn-around in demand.
BTW:
One of the more striking data releases this quarter was for German goods orders, which showed broad-based declines in every category of trade (capital, intermediate and consumer goods trade), along with falls in both new orders from domestic and foreign markets. (…) As foreign new orders data has a slight lead over exports data, the prospects of a rebound in net trade appear grim. (Schroeder)
New Nafta Clears The Way For A China Fight
Gavekal’s Arthur Kroeber shares my views on Trump’s wars so far, but warns of a real war with China (via John Mauldin)
The good news is that after months of posturing, President Donald Trump’s administration has cut a deal for a new North American Free Trade Agreement, on terms not that different from the old Nafta. Along with July’s hasty agreement with the European Union to defer car tariffs in favor of vaguely defined negotiations, the new Nafta confirms Trump’s “speak loudly and carry a small stick” pattern: creating leverage and then using it to get not very much.
The less good news is that this string of precedents is irrelevant to the growing confrontation with China. Trade war on all fronts may now be off the agenda, but conflict with China over trade, investment, technology and geopolitical dominance will only escalate.
The new Nafta is a pretty paltry achievement given all the huffing and puffing that preceded it. On the most critical issue—the retention of a dispute settlement mechanism that the US hated—Canada won a complete victory, in exchange for minor weakening of its absurd protections for dairy farmers. Mexico and Canada will escape car tariffs by accepting export quotas that are far higher than their current exports and will take many years to exhaust.
(…) can we conclude that the other big dispute, with China, will be resolved in a similar way? Absolutely not. In fact quite the opposite. (…)
For Nafta, a key constraint was that 36 states have Canada as their top export market. Failing to complete a deal would have created a big political vulnerability. Only five states count China as their top trade partner. Moreover, Mexico, Canada and the EU countries are traditional friends and allies of the US and pose no threat to American geopolitical dominance. China, by contrast is an obvious strategic rival that aims to replace American hegemony in Asia and to surpass the US in crucial new technologies such as artificial intelligence.
The forces pawing the ground for a fight with China are far stronger, and the reins on them far weaker, than was the case in the Nafta and trans-Atlantic scuffles. (…)
The main potential brake on US-China economic cold war is the business community, which has US$250bn invested in China and stands to lose a lot. But at the moment it has little to gain from carrying Beijing’s water. Multinationals have been frustrated for years by constraints on market access, onerous regulation, and misappropriation of intellectual property. Right now their best bet is to deplore tariffs, but not fight them too hard in case the pressure encourages Beijing to ease up on some of its restrictive policies.
In short, we should expect US-China tensions to escalate significantly in the coming months, through the imposition of higher tariffs (which could put further downward pressure on the renminbi) and other economic and non-economic measures including limits on visas for Chinese tech workers and students, and perhaps sanctions on Chinese companies linked to cyberespionage, (…)
The US has confined its economic warfare to a single battlefield, but the fight will be a long one.
Meanwhile, China is preparing for a protracted conflict:
CHINA: The rate of new project approvals suggests increasing fiscal stimulus.
Source: @DriehausCapital (via The Daily Shot)
EARNINGS WATCH
Thomson Reuters’ data show an 89% beat rate for the 18 S&P 500 companies that have already reported Q3 results. The beat rate is +3.0%.
Trailing EPS show as $155.62, a very surprising (and suspect) jump from $148.55 last week given the small number of Q3 data.
Amazon Unleashes More Wage Pressure
(…) With holiday staffing needs quickly approaching, many finance chiefs—particularly those whose companies employ low-wage workforces—will have to wring their balance sheets to compete for workers or risk a staffing shortfall. (…)
In a survey of 15,000 of the company’s warehouse workers, ProLogistix found a total 39% switched jobs for an increase in hourly wage between 25 cents and $1. “Pay rates are the very first thing workers look at when considering a job,” Mr. Devine said. Following the move by Amazon, “other companies will have to follow.”
Amazon Chief Executive Jeff Bezos said Tuesday that the company’s wage increase comes as a response to criticism of its warehouse worker wages. Minimum wage for some 250,000 Amazon employees and 100,000 seasonal employees hired for the busy holiday season will be set at $15 effective Nov. 1. (…)
Micro 100 Tool Corp., a Meridian, Idaho, tool maker, currently pays some entry-level positions about $13 an hour, said Mick Armstrong, the company’s finance chief. If Amazon, which is hiring locally, were to go on a recruiting blitz, Micro 100 likely would reassess its pay. “Instead of offering $13, we’re probably going to have to offer more,” Mr. Armstrong said.
A pay raise could increase the company’s cost of sales by about $270,000 annually and the company would have to consider increasing prices on its products, Mr. Armstrong added. The company also is examining ways to increase productivity through automation. (…)
Far reaching implications
Amazon’s 350k employees are spread across the U.S., broadly putting pressures on labor costs while keeping a lid on pricing power. All happening while the economy is boosted by companies advancing orders to beat tariffs deadlines.
Hmmm…
I normally don’t care much about daily equity gyrations but yesterday’s action was unusual. The S&P 500 Index was flat but the DJIA rose 0.5% while the S&P 600 Index lost another 1.0% (-2.6% in 2 days, –2.4% for the Russell 2000). The FANG+ Index was also down more than 1% yesterday. The DJIA gain was narrow with declining Issues at 60% of total Adv/Dec Issues, while Down Volume was 54% of total NY Up/Down Volume.
Chaikin Analytics tracks 200-day moving averages of each S&P 500 sector’s relative performance vs the S&P 500 Index. Well, 8 of the 11 sectors have been underperforming the S&P 500 Index for quite a while. The only 3 that have carried the overall Index are Consumer Discretionary, Health Care and Information Technology. But CD’s relative performance has been flat since June while IT is slightly weaker. Only HC is clearly strong.
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Passenger-car purchases by dealerships declined 12 percent to 2.06 million units in September, the China Association of Automobile Manufacturers said. That leaves the market up just 0.6 percent for the first nine months of the year, and the association said fourth-quarter comparisons from 2017 are challenging. (…)
Trump and Xi Plan to Meet Amid Trade Tension
