THE DAILY EDGE: 1 FEBRUARY 2019

Payroll employment increases by 304,000 in January; unemployment rate edges up to 4.0%

Total nonfarm payroll employment increased by 304,000 in January, and the unemployment rate edged up to 4.0 percent, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in several industries, including leisure and hospitality, construction, health care, and transportation and warehousing. There were no discernible impacts of the partial federal government shutdown on the estimates of employment, hours, and earnings from the establishment survey.

The change in total nonfarm payroll employment for November was revised up from +176,000 to +196,000, and the change for December was revised down from +312,000 to +222,000. With these revisions, employment gains in November and December combined were 70,000 less than previously reported. After revisions, job gains have averaged 241,000 per month over the last 3 months.

The average workweek for all employees on private nonfarm payrolls was unchanged at 34.5 hours in January. In manufacturing, both the workweek and overtime decreased by 0.1 hour to 40.8 hours and 3.5 hours, respectively. The average workweek for production and nonsupervisory employees on private nonfarm payrolls held at 33.7 hours.

In January, average hourly earnings for all employees on private nonfarm payrolls rose by 3 cents to $27.56, following a 10-cent gain in December. Over the year, average hourly earnings have increased by 85 cents, or 3.2 percent. Average hourly earnings of private-sector production and nonsupervisory employees increased by 3 cents to $23.12 in January, [or 3.4%].

THE PMIs

U.S. output growth picks up to four-month high in January

Overall operating conditions across the U.S. manufacturing sector improved in January, supported by faster expansions in output and new orders. Domestic demand drove new business growth, as new export orders rose only marginally and at the weakest rate since last October. Business confidence about the year ahead also picked up markedly to reach a three-month high. Meanwhile, goods producers increased their workforce numbers strongly amid a quicker rise in new orders. Nonetheless, backlogs continued to expand. On the price front, input cost inflation eased to a 12-month low but remained marked and above the series trend.

The seasonally adjusted IHS Markit final U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) posted 54.9 in January, up from 53.8 in December. The latest headline figure signalled a strong and faster improvement in the overall health of the sector, and was above the long-run series average.

Supporting the higher PMI reading was a sharp and quicker expansion in production across the manufacturing sector in January. The rise in output was the fastest since last September and stronger than the series trend. Output growth reportedly stemmed from greater client demand and efforts to clear backlogs.

Similarly, the upturn in new orders accelerated and was steep overall. The latest rise in new business extended the trend seen throughout the series history. Anecdotal evidence suggested that new client acquisitions and more favourable domestic demand conditions drove the increase. Furthermore, the rate of new export order growth softened in January. The pace of expansion was the slowest since last October and only marginal overall.

Domestic markets provided the main source of new work for manufacturers, offsetting a near-stalling of export trade, the latter linked to subdued demand for US goods in foreign markets. Although higher than December, the overall rise in new orders was the second-lowest since last August, hinting at a slight cooling of demand growth in recent months which served to keep the headline PMI below the average recorded last year.

In line with greater production requirements, manufacturing firms expanded their workforce numbers at a solid rate, with growth picking up from December’s recent low. At the same time, surveyed companies also registered a modest rise in backlogs of work.

Meanwhile, upward price pressures across the manufacturing sector remained marked in January. Panellists continued to note that increased input costs were due to tariffs on steel and aluminum, alongside greater demand for inputs. That said, the rate of cost inflation was the slowest for one year, aided by the feeding through of lower oil prices. Manufacturing firms were able to take advantage of increased client demand and raised their factory gate charges at a faster rate.

Higher production requirements led to a further rise in buying activity, with many respondents also noting a greater need to stockpile for future output.

Finally, business confidence picked up among manufacturers. Panellists stated that positive sentiment stemmed from new client acquisitions and expectations of firmer demand conditions. The degree of optimism was the second-highest since last May.

China manufacturing sector performance subdued at start of 2019

Latest survey data signalled subdued overall operating conditions in the Chinese manufacturing sector at the start of 2019. Production and total new work were both slightly down at the start of the year, despite a renewed increase in export orders. Relatively muted demand conditions underpinned the first fall in purchasing activity for 20 months, while firms also registered lower inventories of both purchased and finished items. On a positive note, employment levels fell at the weakest rate for nine months, while confidence towards the business outlook was at its highest since May 2018.

The headline seasonally adjusted Purchasing Managers’ Index™ (PMI™) posted 48.3 at the start of 2019, down from 49.7 in December, to point to a continued softening in the health of China’s manufacturing sector. The latest PMI reading was the lowest since February 2016.

After rising slightly at the end of last year, Chinese manufacturing production weakened in January. According to panellists, softer demand conditions led companies to revise their production schedules. That said, the rate at which output fell was only modest. January’s survey indicated a generally subdued trend in total new work placed with Chinese goods producers. Underlying data indicated that weakness largely stemmed from muted domestic demand, as new work from abroad rose slightly at the start of the 2019.

Yet the gauge for new export orders rose notably above the 50 level, the dividing line that separates contraction from expansion, reaching its highest point since March 2018, showing that companies’ export orders have obviously rebounded since the truce in the China-U.S. trade war.

Workforce numbers at manufacturing firms in China fell only slightly in January. Furthermore, the rate of reduction was the slowest seen for nine months. At the same time, companies reported a further modest increase in the amount of outstanding orders.

The softer fall in employment was accompanied by a slight improvement in business confidence. Notably, sentiment regarding the 12-month business outlook was at its most positive since May 2018. Some firms anticipate new products and planned company expansions to boost output over the next year.

Purchasing activity weakened in January, driven by a softer trend in overall new order intakes. That said, the pace of decline was modest. Manufacturers also adopted a relatively cautious approach to inventories, as firms reduced their holdings of both stocks of purchases and finished items at the start of 2019.

After broadly stabilising at the end of 2018, average suppliers’ delivery times increased across China’s manufacturing sector in January. That said, the rate at which times lengthened was only slight.

In contrast to the marked increases seen through most of 2018, average input costs faced by Chinese manufacturers fell for the second month running. According to panellists, lower cost burdens were due to reduced prices for raw materials. At the same time, output charges also fell in January, amid reports of a general drop in market prices.

On the whole, countercyclical economic policy hasn’t had a significant effect. While domestic manufacturing demand shrank, external demand turned positive and became a bright spot amid positive progress in Sino-U.S. trade talks. As companies were more willing to reduce their inventories, their output declined, indicating notable downward pressure on China’s economy. China is likely to launch more fiscal and monetary measures and speed up their implementation. Yet the stance of stabilizing leverage and strict regulation hasn’t changed, which means the weakening trend of China’s economy will continue.

Eurozone manufacturing sector moves closer to stagnation

Manufacturing operating conditions in the eurozone improved only marginally and at the slowest rate for over four years at the start of 2019. After accounting for seasonal factors, the IHS Markit Eurozone Manufacturing PMI registered 50.5, down from 51.4 in December, unchanged from the flash estimate. The headline index has now fallen for six
consecutive months and stood in January at its lowest level since November 2014.

Ongoing weakness was apparent in the intermediate goods sector at the start of 2019, whilst producers of investment goods recorded a deterioration in operating conditions for the first time since July 2013. In contrast, the consumer goods category continued to enjoy solid growth in January.

In line with recent trends, it was the ‘big-four’ economies that recorded the lowest manufacturing PMI readings during January. Most notably, Germany entered contraction territory for the first time in over four years whilst the downturn in Italy gathered pace.

Despite recording relatively subdued readings, France and Spain bucked the trend across the region by recording firmer PMI numbers. All other nations recorded slower growth, with respective headline indices for the Netherlands, Austria and Ireland the weakest in around two-and-a-half years.

Volumes of new orders placed with eurozone manufacturers deteriorated for a fourth successive month during January. The rate of contraction was also the sharpest recorded by the survey since April 2013 as domestic and international demand deteriorated further (new export orders declined at a pace unchanged on December’s 68-month record).

Manufacturers subsequently turned to existing orders to maintain production levels. Latest data showed backlogs of work falling for a fifth successive month which helped to support production. However, output growth was marginal, and the weakest registered in the current 67-month run of expansion.

Stocks of finished goods meanwhile rose in January for a fourth month in succession and to the greatest since the survey began over 20 years ago. Despite facing a weaker trend in new work, manufacturers continued to take on additional workers during January. However, whilst solid, job creation was the softest recorded by the survey since September 2016. Moreover, robust jobs growth in Germany, Austria, Greece and Ireland contrasted sharply to a first reduction in Italian manufacturing employment for over four years.

On the price front, average input costs continued to increase during January, but at a noticeably slower rate with inflation dropping to its lowest level for nearly two-and-a-half years. Downward price pressure came from a reduction in the cost of oil related goods plus signs of easing capacity constraints (delivery times lengthened to the weakest
degree since July 2016).

Nonetheless, with some reports of higher prices for foodstuffs and raw materials in general, manufacturers continued to increase their own charges. The current sequence of inflation was extended during January to 28 months, though the latest net increase in output prices was the weakest in a year-and-a-half.

Finally, business confidence strengthened on December’s six-year low, but remained well below the series trend. Worries with regards to international trade and political developments within Europe continued to be reported by panellists.

The January PMI adds to the likelihood that the manufacturing sector is in recession and will act as a drag on the economy in the first quarter. Some temporary factors remain evident, including an auto sector that is struggling to regain momentum after new emissions regulation and some signs of ‘yellow vest’ disturbances dampening demand in France. However, there appears to be a more deep-rooted malaise setting in, which reflects widespread concerns about the destabilising effect of political uncertainty and the damage to exports from rising trade protectionism.

Worryingly, weaker than anticipated sales mean warehouses are filling up with unsold stock at a rate not previously recorded over the two decades of prior survey history, suggesting firms will need to cut operating capacity in coming months unless demand revives, boding ill for future production growth.

While there is some evidence that firms are hoarding labour in the hope of sales picking up again, and business optimism did perk up from December’s six-year low, jobs growth is starting to deteriorate as increasing numbers of firms seek to cut costs and raise productivity. Any such downturn in the labour market will in turn potentially drive
consumer sentiment lower, and adds further to the risk that economic growth will continue to slow in coming months.

Japan manufacturing output falls for first time in two-and-a-half years

The Japanese manufacturing sector began 2019 with a notably softer improvement in business conditions. The headline PMI fell to the lowest since August 2016 amid coincident declines in both output and new orders for the first time in two-and-a-half years. A stronger deterioration in international demand was also recorded in January. In turn, firms made inroads into their backlogs of work, reduced stocks and scaled back input buying. Meanwhile, business confidence weakened for the eighth straight month, and employment growth eased.

The headline Nikkei Japan Manufacturing Purchasing Managers’ IndexTM (PMI)® signalled a marginal improvement in business conditions during January. The headline figure fell to 50.3, from 52.6 in December, the lowest since August 2016.

The PMI was pulled down by the output sub-index during January. Survey data indicated the first decline in manufacturing production for two-and-a-half years, ending the longest sequence of growth since the global financial crisis. Panellists attributed the downturn to weak demand. Although the rate of decrease was only mild, it was a stark contrast to the solid expansion in December.

January data pointed to weaker sales performances in Japan’s goods-producing sector. New orders fell for the first time since September 2016 amid reports of fewer workloads from both domestic and international clients. Panellists also mentioned reduced orders for semi-conductor-related items. Meanwhile, export orders fell for a second successive month and to the greatest extent since July 2016. Lower demand from China and the USA was mentioned by some manufacturers.

Reduced workloads enabled firms to allocate resources to clearing outstanding business. Backlogs fell for the first time since August 2017. With production requirements dropping, Japanese manufacturers lowered purchasing activity. Stocks of both finished goods and inputs were also scaled back due to unfavourable demand conditions, according to panel members. Decreased input demand alleviated some of the pressures on supply chains in January, but stock shortages and capacity problems at vendors resulted in further input delivery delays. (…)

Elsewhere, higher transportation, energy and material costs contributed to another monthly rise in purchasing prices. However, the rate of inflation was the slowest since December 2017. Nonetheless, output charges were raised to a stronger degree.

The downward trend in business confidence extended into January, with optimism easing for an eighth month in a row. The scheduled consumption tax rise and further escalations to Sino-US trade tensions hampered sentiment.

U.S. New Home Sales Improve as Prices Plummet

New home sales jumped 16.9% (-7.7% y/y) to 657,000 (SAAR) and recovered October’s 8.3% drop. It was the highest level of sales since March. Sales of 564,000 had been expected in the Action Economics Forecast Survey.

The median price of a new home fell 7.0% (-11.9% y/y) in November to $302,400, the lowest price since February 2017. The average price of a new home declined to $362,400 (-6.7% y/y), also the lowest price since February 2017.

By region, a m/m doubling of sales in the Northeast to 46,000 (150% y/y) was accompanied by a nearly one-third m/m rise (-2.5% y/y) in the Midwest to 77,000. New home sales in the South rose 20.6% to 160,000 (-0.8% y/y) but sales in the West declined 5.9% (-25.9% y/y) to 160,000.

Looks more like monthly volatility in numbers along a pretty flat trend.

U.S. Employment Costs Continue to Firm

The employment cost index (ECI) for civilian workers rose 0.7% in Q4 2018 following a 0.8% Q3 gain. The gains combined to lift y/y compensation growth to 2.9%, the strongest increase since Q3 2008. Civilian workers include those in private industry and state & local government, but not federal government employees.

Wage and salaries rose 0.6% (3.0% y/y) following a 0.9% jump while benefits for civilian workers improved 0.7% (2.7% y/y) after a 0.4% gain (2.7% y/y).

Employment cost gains in private industry moderated to 0.6% last quarter after a 0.8% Q3 rise. Here again, however, the y/y rise accelerated to 3.0%, the strongest growth in ten years. Compensation in goods producing industries rose 0.6% (2.3% y/y) following a 0.2% rise. Factory sector compensation improved 0.6% (2.1% y/y) and earnings in the construction sector rose 0.5% (2.8% y/y). Compensation within the service sector strengthened 0.6% (3.1% y/y) as earnings in the leisure & hospitality sector jumped 1.4%. The 4.1% y/y gain was increased from a low of 0.8% in early 2013. Education & health care compensation firmed 0.7% and the 2.8% y/y increase also was a ten-year high. Professional & business services compensation improved 0.5% (2.6% y/y) after a 0.9% rise. Trade, transportation & utilities compensation rose a lessened 0.5%, but the 3.4% y/y rise remained nearly the strongest in 15 years. Financial services compensation increased 0.5% (3.3% y/y) after a 0.1% uptick. Information sector earnings rose 0.3% and accelerated to 4.8% y/y. State & local government workers realized their second straight 0.8% gain in compensation and the 2.7% y/y rise was the quickest in ten years.

Wage gains within private industry eased q/q to 0.7%, but the 3.1% y/y increase was improved from 1.6% averaged from 2009 to 2012. Goods-producing industry wages rose 0.7% (3.1% y/y). Factory sector wages surged 0.8% (2.8% y/y), the quickest quarterly increase since 2006, and construction wages rose a steady 0.5% (3.1% y/y). Service-producing industry wages increased 0.6% and a strengthened 3.2% y/y. Annual wage growth in leisure & hospitality rose to 4.6% from a low of 0.7% in 2011. In education & health services, wages rose 0.7% (3.2% y/y) after a 1.0% jump. Professional & business services wages added 0.5% (2.8% y/y) to a 1.2% Q3 rise, and trade, transportation & utilities wages rose a lessened 0.4% (3.4% y/y). State & local government workers wages rose 0.6% and an accelerated 2.4% y/y.

Private industry benefits rose an improved 0.5% (2.6% y/y) as service-producing benefits strengthened 0.6% and 3.0% y/y, triple the growth early in 2016. Sales & office worker benefits improved a steady 0.7% q/q, but the 3.4% y/y gain doubled the 2015 rise. Goods-producing benefits nudged 0.2% higher (1.2% y/) after a 0.4% decline in Q3. Factory sector benefits rose 0.3% q/q after a 0.7% shortfall, leaving the y/y rise depressed at 0.9%. State & local government worker benefits strengthened 1.0% q/q. The y/y increase was steady at 3.1%.

  

We are clearly seeing the effect of minimum wage increases in the YoY industry numbers. Otherwise, overall comps are not accelerating with quarterly gains of 0.6%, 0.8% and 0.7% for civilian workers and 0.6%, 0.8% and 0.6% for private industry workers in the last 3 quarters.

Trump Gives Upbeat Assessment of Trade Talks With China The U.S. and China moved closer to settling their trade dispute, with President Trump saying he expects to meet again with Chinese President Xi Jinping to resolve the conflict that has rattled the global economy.

(…) At the meeting, Mr. Liu said China would buy 5 million tons of U.S. soybeans daily, a number Mr. Trump repeated, adding it would “make our farmers very happy.” The administration later clarified that China has agreed to buy an additional 5 million metric tons of soybeans—but not daily, and no time frame was specified. (…)

“This isn’t going to be a small deal with China,” Mr. Trump said. “This is either going to be a big deal or it’s going to be a deal that we’ll just postpone for a while.”

But as Mr. Trump and Mr. Liu met with reporters Thursday afternoon, the president said he didn’t anticipate the need to extend the deadline. His top China trade negotiator, U.S. Trade Representative Robert Lighthizer, later said the March 1 deadline remains intact. (…)

Mr. Lighthizer described “two very intense and very long days of discussions.” He said the two countries are in “constant negotiations” that would take a short break for the Chinese New Year next week. Mr. Trump said Mr. Lighthizer and Treasury Secretary Steven Mnuchin would travel to China in February as negotiations continued. (…)

“We made substantial progress,” Mr. Lighthizer said. He said the talks focused on structural issues and enforcement, adding that a final deal remained elusive. He said the two sides discussed enforcement of any deal, which he called a “foundational issue.” (…)

“The more likely scenario is a deal where Trump declares victory, which is relatively modest in scope, and the two sides de-escalate tension and continue discussions on complicated issues left unresolved,” said Mr. Prasad, who speaks regularly with Chinese officials. (…)

With Mr. Trump agreeing to meet with Mr. Xi, the president has effectively become the chief negotiator, giving Mr. Mnuchin a bigger chance to influence policy.

Trump Says China Soybean Purchase Is a ‘Fantastic Sign of Faith’

(…) “That’s a tremendous purchase, which will take place now and our farmers are going to be very happy,” Trump said. “On behalf of our agricultural industry and on behalf of our farmers, frankly, we appreciate it very much. That’s a very big order.” (…)

Already in his victory lap!

Meanwhile,

EU and Japan celebrate ‘open and fair’ trade deal World’s largest bilateral agreement comes into force, erasing most tariffs

The FT says that the pact eliminates almost all tariffs between economies representing close to 30% of global GDP. The “cars for cheese” deal means European exporters alone will save about €1bn in duties a year. Regulatory barriers to trade will be smoothed away and markets in public procurement opened up.

Solid U.S. Economy Drives Stocks to Best January in 30 Years

The blue-chip index’s 7.2% rise was its best January performance since 1989, while the S&P’s 7.9% advance marked its best start to the year since 1987.

The S&P 500 is up 15.2% from its December 24 low which was itself 20.3% down from the Sept. 20 high! The Rule of 20 Strategy was 100% cash in September (since January 2018 in fact) and 100% equity on December 26. So far, so good.

EARNINGS WATCH

Almost at mid-point of the season as 210 companies had reported by the end of the day Wednesday. The beat rate has slipped to 71% but the surprise factor rose to +2.3%. Q4 earnings are now seen up 14.9% (12.8% ex-Energy), up from 14.2% (12.3%) 2 days ago and only slightly below the 15.8% growth rate expected on Jan. 1.

Importantly, Q1’19 estimates keep coming down from the expected 5.3% growth one month ago. They are now +1.1%, down from 1.8% 2 days ago, with only 3 sectors expected to post growth of 5.0% or more. Energy estimates took most of the beating, from +18.0% to –10.8%, but all but one sector (utes) have been downgraded.

Q2’19 and Q3’19 estimates are not changed meaningfully (+4.0% and +3.3% respectively) but Q4’19 forecasts have finally come down (+10.5% from +11.5% on Jan. 1 and +11.1% on Jan. 28).

As a result, full year 2019 EPS are now seen reaching $170.61, up 5.8% from the 2018 estimate of $161.33, the latter being below the trailing figure of $162.02.

This means that trailing EPS will likely stall during the first half of 2019, potentially creating more market volatility (read downside risk) given the poor earnings breadth and the lack of earnings backwind in general. The 2019 earnings story is essentially a Q4’19 story with potentially strong cross-winds during the year.

• Amazon (AMZN) Tops Q4 EPS by 37c, Q1 Guidance Misses
• Cigna Corp. (CI) Tops Q4 EPS by 9c, Revenues Beat; Offers FY19 EPS Guidance Below Consensus
• Honeywell (HON) Tops Q4 EPS by 2c, FY Midpoint Guidance Light
• ExxonMobil (XOM) Tops Q4 EPS by 33c
• Merck (MRK) Tops Q4 EPS by 1c, Offers FY Guidance