U.S., China Face Thorny Obstacles to Lasting Trade Peace The truce between Washington and China opens a brief window for the two nations to explore whether they can bridge deep divides on a range of difficult disputes.
(…) Beijing pledged to give U.S. firms greater access to Chinese markets, saying that is in line with China’s commitment to continued economic liberalization. But in the past, Beijing hasn’t meaningfully fulfilled such market-opening promises because of resistance from those with a stake in the status quo, such as state-owned firms. This time around, China is willing to consider putting in place a mechanism to measure its progress, the people said. (…)
Discussions were friendly and devoid of threats, the people said.
The U.S. said China agreed to buy more agricultural products, help with getting North Korea to give up nuclear weapons and crack down on the export of fentanyl, the heavily addictive opioid.
Mr. Trump was especially pleased with Chinese offers to buy more agricultural products, the people said. Farmers have been hit hard by Chinese tariffs on their crops. (…)
Issues still on the table include forced technology transfer by U.S. companies doing business in China; intellectual-property protection that the U.S. wants China to strengthen; nontariff barriers that impede U.S. access to Chinese markets; and cyberespionage.
In a sign of the difficulty of the talks ahead, Chinese officials haven’t acknowledged they accept the U.S. negotiating agenda or any deadline for talks. Nor is it clear what accommodation on any or all of the issues would prove sufficient to hold off the U.S. from raising tariffs when its deadline expires. (…)
U.S. officials said that both countries sought a cease-fire because of concerns that tariff hikes would hurt their economies and markets. Their economies are bound to play an outsize role in what the negotiations resolve, as well—and prompt fierce lobbying from companies and business organizations with sales at stake. (…)
Within the Trump administration, the deal did little to paper over divides. For instance, it isn’t clear who will handle negotiations with China. (…)
It was only Sunday night that we learned what is the “incredible deal”, yet unconfirmed by China, that Trump got for the 3-month truce:
Only 4% of Chinese car purchases are imported and 10% came from the U.S..
(…) The tariff reduction benefits Daimler and BMW more than U.S. automakers such as General Motors Co. or Ford Motor Co. That’s because the German luxury brands dominate the top 10 list of vehicle imports into China.
“China isn’t giving away that much as German automakers like BMW and Daimler benefit the most,” said Janet Lewis, an analyst at Macquarie Capital Securities in Tokyo. “Longer-term, China has more to gain from free trade in autos,” with local Chinese manufacturers such as Guangzhou AutomobileGroup Co. and Geely Automobile Holdings Ltd. looking to move overseas, she said. (…)
So we got a truce after Xi gave Trump enough without committing to much. The pattern seems to be the same for all trade “deals”. But we only got a 3-month respite which will most likely be seasoned with more tweets and declarations in coming weeks. We are not out of the woods but we have learned that both Trump and Xi are, in the end, practical people concerned by the economic consequences of their decisions when faced with hard facts.
Based on today’s pre-opening of 2800, investors’ relief has brought valuations back near neutral (2870).
But much damage has been done as today’s PMIs reveal:
THE PMIs
The U.S. PMI will be released later today. Will post it tomorrow.
Weakest growth of Eurozone manufacturing economy since August 2016
November’s IHS Markit Eurozone Manufacturing PMI signalled the continued growth slowdown of the single currency area’s manufacturing economy. Although remaining above the crucial 50.0 no change mark for a sixty-fifth month running, the final PMI came in at 51.8 in November, down from 52.0 in October and the lowest reading since August 2016.
Weakness was centred on the investment goods sector, according to market groups data. Capital goods producers registered net falls in both production and new work. Export trade was also down for a third month running, whilst cost pressures remained elevated. In contrast, solid growth continued to be recorded amongst consumer goods producers.
The euro area’s ‘big-four’ economies posted the lowest manufacturing PMI readings of all countries covered by the survey during November. Most notably, Italy recorded a
second successive monthly deterioration in manufacturing operating conditions, registering its lowest PMI reading in nearly four years. France saw growth ease towards
stagnation, whilst Germany saw its weakest expansion in over two-and-a-half years. In contrast, Spain saw a slight improvement in growth, whilst there were also stronger gains seen in Austria, Greece and Ireland. The Netherlands continued to register the highest expansion, despite the pace of growth slipping to its lowest in over two years.Underlying the weaker overall expansion of the manufacturing economy was a second successive monthly deterioration in new orders (albeit slight). In line with the recent trend, export trade was reported to have fallen for the second month running. Net falls in new work were seen in France, Germany and Italy.
Faltering demand was in part linked to challenging conditions in the autos industry which also impacted on output. Overall production of manufactured goods continued to rise during November, but only marginally and at the weakest pace in nearly five-and-a-half years of continuous growth.
With output rising at a time of falling new work, manufacturers were able to clear backlogs of work and build inventories of finished goods for a second month in succession. Meanwhile, on the jobs front, employment growth was sustained during November. However, the weaker underlying trends in output and new orders spilled over into the labour market, with the net gain in payroll numbers the weakest since September 2016. Higher employment was recorded across all nations except France, where a slight decline was seen for the first time in over two years.
Input prices continued to increase at an elevated rate, despite inflation easing slightly since October. Price pressures remained especially acute in Germany and Austria, compared to the relatively weaker rises seen in Italy, Spain and Greece. Output charge inflation for the region as a whole remained at an above average rate, despite being the slowest recorded for 15 months.
Finally, latest data showed that sentiment about future output was little changed on October’s near six-year low. Concerns over trade and the future performance of the autos industry and political worries all served to depress confidence in November. German manufacturers remained especially downbeat, with outright pessimism again recorded.
The darker outlook is linked to trade wars and tariffs as well as intensifying political uncertainty and has led to increased risk aversion and a commensurate cutting back on expenditure, notably for investment. Producers of investment goods such as plant and machinery reported the steepest drop in demand in November, with reduced capital spending by companies compounded by on-going disruption of business in the autos sector.
Hopes that the soft patch may prove short-lived are countered by business optimism about prospects for the year ahead remaining among the gloomiest seen since the sovereign debt crisis in 2012, suggesting companies are bracing themselves for further weak demand in the coming months.
China manufacturing output remains stable in November
November data pointed to a marginal improvement in Chinese manufacturing operating conditions. Companies signalled a slightly stronger increase in total new work, despite reduced amounts of export orders. Production was meanwhile stable for the second month in a row. Relatively muted client demand and efforts to lower costs contributed to a further reduction in staff numbers, while confidence towards the year ahead remained subdued. At the same time, inflationary pressures eased, with input costs increasing at the softest pace for seven months and selling prices falling for the first time in a year-and-a-half amid efforts to attract new business.
The headline seasonally adjusted Purchasing Managers’ Index™ (PMI™) was little-changed from October’s reading of 50.1 at 50.2 in November. This signalled a further fractional improvement in the health of China’s manufacturing sector.
Chinese goods producers saw a slightly quicker, but still marginal, increase in total new orders during November. Data indicated that weaker external demand continued to weigh on overall sales, as export orders declined further midway through the final quarter. New business from abroad has now fallen in each of the past eight months. According to panellists, a combination of relatively subdued sales and stricter environmental policies meant that production levels were unchanged for the second month in a row.
The subindex for new orders continued to rise, pointing to improved demand, which may be due to a recent raft of government policies aiming to support the private sector. The gauge for new export orders dropped further into contractionary territory in November, indicating the impact of the Sino-U.S. trade friction on exports.
Workforce numbers continued to decline in November, with a number of firms commenting on softer demand conditions and company downsizing policies. The rate of reduction was similar to that seen in October and moderate. Nonetheless, this contributed to a further increase in the level of work-in-hand (but not yet completed).
Reflective of the trend for new orders, buying activity rose only slightly in November. As a result, stocks of purchased items expanded marginally, as has been the case in each of the past five months. Weaker than expected client demand also led to the first increase in stocks of finished goods for seven months.
Insufficient inventories of inputs at suppliers, alongside delays linked to environmental inspections, led to a further deterioration in vendor performance in November. Although purchasing costs continued to increase in November, the rate of inflation eased to a seven-month low. At the same time, efforts to stimulate client demand led to a renewed fall in prices charged by manufacturers. That said, the rate of reduction was only fractional.
The gauges for output charges and input costs both dropped significantly, in line with the weakening domestic commodities market, which was impacted by plummeting oil prices across the globe, expectations about the loosening of restrictions on factory production that governments impose on the grounds of environmental protection, and weakening demand. Upward pressure on prices of industrial products was eased somewhat.
Business confidence picked up from October’s 11-month low, but remained relatively weak in the context of the series history. While some firms anticipate new products and stronger demand conditions to boost output, a number of companies cited concerns over the impact of strict environmental policies and relatively sluggish market conditions.
Slower improvements in output and demand drag Japan PMI lower
November survey data revealed that Japan’s manufacturing sector continued to expand, albeit to the weakest extent since August 2017. Weighing on the overall rate of improvement were slower rises in production and new orders. Export orders also increased at a weaker rate amid reports of softer demand from China and Europe. Meanwhile, firms were less upbeat towards future output than in October, with confidence falling to a two-year low. Nonetheless, additional staff were hired, while input buying grew at an accelerated pace.
The headline Nikkei Japan Manufacturing Purchasing Managers’ IndexTM (PMI)® fell from 52.9 in October to 52.2 in November, therefore pointing to a slower rate of improvement in business conditions. The latest reading for the headline index was the lowest since August 2017.
Overall, growth in the sector was sustained, as has been seen since September 2016. However, the PMI was in part pulled lower by a softening in demand conditions. New order growth eased in November to a mild pace that was the joint-weakest in just over two years. A slower rise in sales to clients in foreign markets was also recorded. While inflows of new work from abroad were supported by other Asian markets such as South Korea and Taiwan, weaker demand from China and Europe limited the expansion. As a result, production growth moderated in November.
Outstanding business was accumulated to a lesser degree as a consequence of weaker growth in workloads. However, Japanese manufacturers continued to hire additional staff at a relatively solid pace. According to anecdotal evidence, employment was raised as part of efforts to improve production capabilities. Over twice as many panellists reported growth in payroll numbers as those indicating cutbacks.
On the supply side, evidence of further prolonging of input delivery times remained, with vendor performance deteriorating to a strong degree. Shortages of both stocks and labour were reportedly exacerbated by increased input demand. Survey data signalled an accelerated pace of input buying in November as firms sought to limit the impact of future raw material price rises and further supplier delays.
Panellists mentioned a number of inputs to be sources of cost pressures during November, including fuel, steel, paper, chemicals and food. Labour costs also edged up, contributing to a sharp rate of input price inflation that was close to October’s 91-month peak. As a response, output charges were lifted, extending the current bout of inflation to almost two years. That said, the increase was slightly softer than seen in the previous month.
The outlook towards future output remained positive in November, but in line with slower growth momentum, confidence eased. Optimism has now softened for six successive months, with the level of positive sentiment at a two-year low. Some firms raised concerns towards expected order book volumes.
The fall in Japan’s manufacturing PMI tells us that October’s bounce-back was indeed a transitory jump back to normality following weather-related disruptions in September. The underlying picture remains subdued, with momentum tilting towards a slowdown. New orders rose at just a slight pace as goods producers raised concerns about the demand environment. Subdued sales performances reflected fragile conditions both domestically and abroad. According to firms, weak demand from China and parts of Europe hampered export growth.
As such, expectations for future growth were reduced, with business confidence towards the year-ahead sliding for a sixth straight month to the lowest in two years.
Ned Davis Research’s Global Recession Probability Model has considerably deteriorated in recent months, putting the probability of a global recession at over 91.5% based on the last 48 years of data.
Europe, for one, seems awfully close to recession:
Source: Longview Economics (via The Daily Shot)
And watch Canada:
Canada’s Economic Growth Slows Amid Lower Business Investment Gross domestic product grew at a 2.0% rate in the third quarter, matching expectations
GDP advanced 2.9% in the previous quarter. (…) net trade added to quarterly growth, although due mostly to import weakness; business investment declined markedly; and weakness emerged in the oil-and-gas sector in September, which is expected to continue through the fourth quarter due to a commodity-price decline. (…)
Business investment fell 1.7% in the quarter on a nonannualized basis, on declines in investment in nonresidential buildings and engineering structures, as well as machinery and equipment. The drop in machinery and equipment investment by businesses marked the sharpest decline in the category since the third quarter of 2016.
Export volumes on a nonannualized basis rose 0.2% in the three-month period, marking a sharp slowdown from the revised 3.1% gain that was recorded in the previous quarter. Meanwhile, import volumes fell 2.0% in the third quarter, with imports of refined petroleum falling 27.2%. Import volumes rose 1.4% in the previous quarter. (…)
-
Could revised data convince Bank of Canada to ditch hawkish tone?
Data revisions by StatCan reduce past GDP growth. NBF says that
unless the BoC also downgrades its estimate of potential GDP, the output gap at the end of Q3 was worse than the –0.1% it is currently estimating. The household savings rate was also downgraded significantly, with Q2 revised down from 3.4% to just 1.0%. (…) the savings rate dropped further in the third quarter to just 0.8%. (…) Those downgrades, along with sinking oil prices and enhanved uncertainties with regards to globa growth, would justify a return to a more neutral stance by the BoC after it took a hawkish turn last October.
Wow! Some revisions! bringing the Canadian consumer, and the whole Canadian economy, on the brink. Consumer spending slowed to +1.2% SAAR in Q3 from +2.3% in Q2. Residential construction cratered 5.9% SAAR, the 3rd consecutive quarterly decline.
The Canadian economy was already suffering from a huge oil discount gap amid declining world prices, weak exports even with a weaker dollar, weak corporate investments and uncompetitive wages and tax rates. GM’s announced plant closings are slashing the odds of Congress rapidly and easily approving the new-NAFTA agreement.
Now, we see the Canadian consumer, already skittish on its spending, suddenly without any savings buffer.
The BoC meets Dec. 5. Raising rates would be suicidal. But will it cut?
Who wants to be long the loonie here?
Meanwhile, the Fed chairman has given us an apparent Powell Put last week. Coincidentally, recent numbers suggest that inflation may be slowing significantly in coming months. Core PCE inflation was +0.1% MoM in October or +1.2% annualized. Last 3 months: +1.1% annualized, down markedly from +2.0% during the previous 9 months. This with a strong economy. And now this:
If the core PCE deflator continues on its 0.1% monthly cruise (+0,11% MoM on average last 5 months), the YoY inflation rate will be 1.4% next March. At a 0.15% monthly rate, inflation will be 1.7% next March.
Remember the Fed’s dual mandate: price stability and maximum sustainable employment. We have had 20 years of inflation below 2.5% and unemployment is 3.7%. Mission accomplished, no?
If inflation is not about to accelerate soon, why raise rates any further and risk a recession when the rest of the world has shifted to low gear?
The Fed’s search for the neutral rate could actually bring the whole economy to neutral, providing Mr. Trump with a lot of tweeting material.
-
Dallas Fed chief urges caution on further rate rises Robert Kaplan says patience is needed given tepid inflation and softening global growth
-
Goldman, JPMorgan Stick With Forecasts of Four Fed Hikes in 2019
(…) the economists acknowledged a shift in tone while noting robust growth, steady inflation and falling unemployment should keep the central bank tightening monetary policy through next year. An increase this month is all but guaranteed. (…) The economy continues to grow faster than its long-term trend and unemployment is on track to fall below 3.5 percent, which will “keep the Fed on a continued hiking path,” they said. (…)
OIL
Russia and Saudi Arabia have agreed to extend OPEC’s efforts to stabilize oil markets, Russian President Vladimir Putin said over the weekend, as the broader coalition of producers inches closer to a deal this week.
Russia has yet to decide on how much production it would cut, Mr. Putin said, underscoring the remaining challenges ahead. (…)
-
US oil production surges to new record Data come as Opec weighs output cuts to end price slump
The FT reports that record oil companies pumped 11.475m barrels per day in September, 1.98m b/d higher than in September 2017. That was the second biggest annualised increase on record, after August this year.
Shale production is not slowing just yet as Texas oil production averaged 4.7m b/d in September, up 34% YoY. In North Dakota, production was 1.3m b/d, up 22% YoY in spite of pipeline bottlenecks depressing local oil prices in regions such as the Permian basin of Texas and New Mexico.
The leader of western Canada’s oil-rich province of Alberta on Sunday said she is forcing oil companies to cut crude production by nearly 9% for next year in a bid to lift depressed prices.
The move by Alberta Premier Rachel Notley marks an extraordinary industry intervention in Canada, the fourth-largest oil producer in the world, as the global energy industry deals with steep, sudden declines in oil prices. (…)
According to the Alberta government directive, oil producers in the province need to cut a total 325,000 barrels a day of raw crude and bitumen—a heavy, raw form of crude similar in consistency to asphalt—until a glut of crude is drawn down, or the equivalent of an 8.7% reduction in output. The reduction is to begin Jan. 1. After that happens, the cut is set to drop to an average 95,000 barrels a day until Dec. 31, 2019, when the new rules expire.
During a briefing with reporters, Alberta officials said they estimate there are roughly 35 million barrels of oil in storage, and it would take three months to bring excess storage back to historic levels closer to 16 million. After March, the government would reset the cut to keep excess crude from collecting in storage. (…)
Canadian crude was selling at a spot price for a little under $22 a barrel Friday, roughly a $29 discount to West Texas Intermediate, the U.S. benchmark, said industry analysts.
In October, the discount on Alberta crude versus WTI breached the $50 mark, alarming producers and government officials in the province. The low price for Alberta crude is costing the Canadian economy about 80 million Canadian dollars ($60.2 million) a day in lost revenue, the Alberta government estimates. That is double the prior estimate of C$40 million a day the province made this summer.
The planned production cut could shave the price differential between Alberta crude and WTI by $4 a barrel, Alberta officials said. (…)
-
Qatar Plans to Withdraw From OPEC in January Qatar said it plans to leave OPEC, a surprise decision for a member that has long played a key role inside the cartel, but has more recently clashed with de facto leader Saudi Arabia.
American Exceptionalism May Be Ending—at Least in Stocks Recent choppy trading in U.S. shares has revived a yearslong debate: Are the best days of the bull market over, and should investors pivot to cheaper stocks overseas?
Hmmm…Keep reading!
EARNINGS WATCH
The Q3 earnings season is practically over with 491 companies having reported. The beat rate is 77% and the earnings surprise factor is +6.4% to 28.2% (+24.8% ex-Energy). The surprise factor was +1.3% on revenues to +8.5% (+7.4% ex-E).
Q4 estimates are +17.1%, down from 20.1% on Oct. 1 while Q1’19 earnings are seen up 6.7%, down from 8.1%.
Trailing EPS are $157.77 or about $160.50 pro forma the tax reform for the full 12 months. Full year EPS are seen reaching $162.75, and potentially $176.15 in 2019.
Factset says that analysts have cut their Q4 estimates by 2.6% during the last 2 months, about in line with the 2.4% average cut during the past 5 years. Refinitiv’s data shows that revisions have been much fewer lately but somewhat more negative on larger companies.
Importantly, corporate pre-announcements are not showing any deterioration. If anything, they are slightly more positive than at the same time during Q3.
CANADIAN EARNINGS WATCH
With 231 of the 242 companies in the TSX Composite Index in, the beat rate is 52% and the surprise factor a strong 6.3%. The beat rate slips to 49% when excluding Technology (100% beat rate) with the highest beat rate at 56%. Q3 earnings are expected up 17.1%, thanks to a 41% jump in Energy earnings which account for 33% of total TSX earnings. Ex-Energy, earnings are seen up 7.9%. Q4 profits are seen up 7.6%, down from 12.9% on Oct. 1. Ex-Energy, the forecast drops to +2.9% which would result in full year 2018 earnings rising 13.4% (9.2% ex-E).
The outlook for 2019 is for Energy profits rising 12.5%, ex-E, 9.3% for total earnings rising 10.3%. Given the above on the Canadian economy and the uncertain prospects for oil prices, betting on any of these forecasts seems highly risky at this time.
Canadian equities are very, very cheap at 10.9x 2018 profits but the headwinds are numerous and unpredictable.
EUROPEAN EARNINGS WATCH
We now have 280 STOXX 600 companies in and the beat rate is 50% with a surprise factor of +2.8%. But note that, excluding the 18 technology in the index (72% beat rate with a +9.9% surprise factor), 7 of the 10 sectors have a beat rate at or below 50%(44% average) and 5 of the 10 sectors have a negative surprise factor.
Full year aggregate earnings are seen up 8.1% but only 5.2% ex-Energy on 3.1% revenue growth. Then there is Brexit, Italy, banks, the ECB…
But if you read the Eurozone PMI above carefully, you may wish to discount any future earnings forecast for Europe-sensitive companies. Over and above the demand problems, European companies seem to be facing a serious margins squeeze:
Source: Deutsche Bank Research (via The Daily Shot)
Unbowed by Blunder, Strategists See Stellar 2019 for U.S. Stocks
To date, Bloomberg has gathered 14 forecasts for 2019 from the firms it tracks, and so far the average prediction is for the S&P 500 to rise 11 percent to 3,056 by the end of next year.
Listening to their bullish calls during the last two bear markets would have resulted in half your investment being lost.
A good lead to what follows:
RISK MANAGEMENT
Edge and Odds is really about pertinent facts, valuation and probabilities, the essence of risk management. Steve Blumenthal provides us with a very interesting factoid:
The reason risk management is so important, in my view, is that in one year from now 75% of the investable assets will be in the self-directed hands of pre-retirees and retirees. It is money that can’t afford another 50% loss, which could occur in the next recession. Imagine you are 60 or 70 years old and it was the top of the market in December 1999. Here is a look at just how long it would have taken you to get back to even.
TECHNICALS WATCH
Steve’s 13/34-week EMA chart remains bullish by a hair:
But this chart sure needs a quick and sharp turn in markets, something that Lowry’s Research sees: “Thus, in the current case, a consistent pattern of rising intermediate- and
short-term Demand, combined with an absence of intense selling, i.e., 80% or 90% Down Days, is likely sufficient to suggest a new sustained market uptrend is underway.” I don’t fancy Lowry’s wording “likely sufficient to suggest”. From my lens, its Supply/Demand chart remains inconclusive from a trend viewpoint. Here’s NDR’s Volume Demand chart, also positive but …
Last week I said that this week would be the week markets get trumped, one way or the other. If the Trump/Xi pause truly relieve investors, we could well get a nice Christmas rally. The S&P 500 200dma has turned back up and a good close above 2760 may well trigger renewed enthusiasm. Trumped up? For how long?
Last week I referred to NDR’s work suggesting that a 0.5% reversal in the 200dma is a “get out signal”. It seems we will dodge that signal for now.
The rest of the world equities remain in a downtrend:
Cheap and oversold Canadian equities but with a very fragile economy.
Amazon Tests Its Cashierless Technology for Bigger Stores The online giant’s strategy, if successful, would further challenge brick-and-mortar retailers racing to make their businesses more convenient.
(…) t is unclear whether Amazon intends to use the technology for Whole Foods, although that is the most likely application if executives can make it work, according to the people. Amazon has previously said it has no plans to add the technology to Whole Foods. (…)
Although the technology functions well in its current small-store format, it is harder to use it in bigger spaces with higher ceilings and more products, one of the people said, meaning it could take time to roll out the systems at more larger stores. (…)