Trucking Companies Orders Most Big Rigs In 12 Years Trucking companies in January ordered the most new big rigs in nearly 12 years, as they hustled to take advantage of one of the hottest freight markets in recent memory.
A nationwide shortage of available trucks has sent shipping costs soaring, with retailers and manufacturers in some cases paying over 30% above typical rates to book last-minute transportation for cargo. Trucking companies, buoyed by strong demand and flush with cash following the recent tax overhaul, are accelerating plans to replace or expand their fleets. (…)
Meanwhile, companies ranging from Hershey Co. HSY -2.72% to over-the-counter medicine provider Prestige Brands Holdings Inc. PBH -0.84% are reporting that the cost of moving freight is weighing on earnings. On Monday Sysco Corp. the world’s largest food distributor, said steep freight cost increases hurt its profits, with additional hikes expected for several more quarters. (…)
In January, North American trucking companies ordered 48,700 heavy-duty trucks, the big rigs used for regional and long-haul routes, according to a preliminary report from ACT Research. That is more than double the prior-year level. (…)
Trucking companies binged on new trucks in 2014, creating a glut when freight demand slumped in late 2015 and 2016. Fleets sharply cut back on orders after that, helping to set up today’s shortage. (…)
Truck industry analysts expect production of heavy-duty trucks in North America to grow by about 25% this year to about 320,000 vehicles. That represents an increase in daily production to about 1,300 trucks, from 1,100 in December. But it may take longer for those trucks to reach the market, as the backlog of orders is now at 159,000 trucks, from 134,000 at the end of December, according to ACT. (…)
COMPOSITE PMIs
January survey data indicated a solid rise in U.S. service sector business activity, though the rate of growth eased for a third month running to reach a nine-month low. That said, new business continued to expand strongly, with the upturn accelerating to the fastest since last September.
The seasonally adjusted final IHS Markit U.S. Services Business Activity Index registered 53.3 in January, down from 53.7 in December. The latest index reading signalled a solid expansion in business activity among service providers, albeit the slowest since April 2017. Anecdotal evidence linked the latest upturn to more favourable economic conditions. Greater demand also drove the fastest rise in new orders since September 2017. Where growth was reported, panellists linked this to the acquisition of new clients and higher sales spurred by increases in marketing activity.
Reflecting recent trends in output and new orders, the level of outstanding business at service sector firms increased for the ninth successive month in January. Moreover, backlog accumulation accelerated to a rate that was the joint-sharpest since March 2015.
Meanwhile, job creation remained solid with firms increasing their workforce numbers in response to greater activity requirements.
The January data also indicated a further rise in input costs faced by service providers to the fastest since last September. A number of survey respondents linked the latest increase to higher raw material costs, especially fuel.
Average prices charged also increased further in January, with the pace of inflation quickening. Stronger client demand reportedly allowed firms to pass on greater cost burdens to customers through higher charges. Overall, output price inflation was solid and above the series trend.
The final seasonally adjusted IHS Markit U.S. Composite PMIâ„¢ Output Index fell to 53.8 in January, down from 54.1 in December.
Combined, the two PMI surveys point to the economy expanding at a reasonably solid, albeit not exciting, 2-2.5% annualised rate at the start of the first quarter.
Markit’s estimate of 2-2.5% growth in Q1 GDP runs counter to most recent estimates forecasting an acceleration. David Rosenberg would agree with Markit, arguing that aggregate hours worked in January point to 2.5% GDP growth.
We have another period when Markit and the ISM go different ways:
So far, it’s been wiser to rely on Markit, even though most Americans only care about the ISM.
The final IHS Markit Eurozone PMI® Composite Output Index posted 58.8 in January, its highest level since June 2006 and above the earlier flash estimate of 58.6. Growth of manufacturing production continued to outpace that of service sector activity in January. Although easing over the month, the rate of expansion in manufacturing output stayed close to December’s near-record high. The performance of the service sector continued to strengthen, with business activity growth accelerating to its best since August 2007. (…)
The corollary of the sustained period of economic improvement was greater price pressures, in part reflecting improved pricing power as demand outpaced supply, as well as rising oil prices. Input costs and output charges both rose at the sharpest rates since mid-2011, with accelerations signalled in both the manufacturing and service sectors.
Th
e sustained upturn in economic activity also tested capacity at euro area manufacturers and service providers alike, leading to further accumulation of backlogs of work in both sectors. This in turn encouraged job creation, with employment again rising at a pace matching November’s 17-year high. (…)
The level of new business placed with euro area service providers rose at the quickest pace in over a decade in January. This exerted pressure on capacity, leading to a further solid increase in outstanding business. This combination of higher new orders and rising backlogs of work encouraged firms to take on additional staff. Employment rose at an identical pace to November and December, making the recent phase of jobs growth the strongest seen in a decade.(…)
If this level is maintained over February and March, the PMI is indicating that first quarter GDP would rise by approximately 1.0% quarter-on-quarter. (…) The strong upturn is also broad-based, which adds to the potential for the growth to become more self sustaining as demand rises across the single currency area, feeding through to higher job creation as spare capacity is increasingly eroded.
The Caixin China Composite PMIâ„¢ data (which covers both manufacturing and services) indicated that growth momentum across China picked up for the third straight month in January. Furthermore, the Composite Output Index rose to a seven-year high of 53.7, from 53.0 in December, to signal a solid pace of expansion.
January survey data signalled accelerated rates of activity growth across both the manufacturing and service sectors in China. The steeper pace of expansion was registered by services companies, which saw the most marked increase in activity since May 2012. This was highlighted by the seasonally adjusted Caixin China General Services Business Activity Index posting 54.7 at the start of 2018, up from 53.9 in December. At the same time, manufacturers signalled the quickest upturn in production levels since December 2016.
Similar to the trends for activity, both service providers and manufacturers noted a further increase in new business during the opening month of the year amid reports of firmer client demand. Furthermore, new order growth accelerated to a 32-month record across the service sector. Meanwhile, goods producers registered a modest increase in new work that was softer than in December. At the composite level, total new orders rose at a solid pace that was similar to that recorded at the end of 2017.
Employment data continued to signal divergent trends, with rising headcounts at services companies contrasting with further job cuts at manufacturers. Service sector staff numbers have now risen for seventeen months in succession, with some firms adding to their payrolls due to greater business requirements. Moreover, the rate of job creation edged up to a five-month high. Manufacturing workforce numbers meanwhile declined at the softest pace for nearly three years. As a result, composite employment rose slightly, after broadly stagnating between August and December last year.
After falling in each of the prior four months, backlogs of work were unchanged at services companies in January. In contrast, manufacturers signalled sustained pressures on operating capacity, with outstanding work rising for the twenty-third month in a row and to the greatest extent since March 2011. Consequently, unfinished business rose at a stronger, albeit modest, pace at the composite level.
The rate of input price inflation continued to soften across China’s manufacturing sector at the start of the year. Though sharp overall, the pace of increase was the weakest since last August. Service providers meanwhile registered a faster rise in cost burdens, with the rate of inflation the steepest since April 2012. Nonetheless, the marked slowdown in the manufacturing sector led composite input prices to increase at the slowest pace for five months.
Despite strong cost pressures, manufacturers and service providers raised their output charges at softer rates in January. In fact, selling prices rose only marginally in both cases. At the composite level, average charges increased at the slowest pace in seven months.
What on Earth Happened to Stocks? Here’s Where to Cast the Blame
- Surge in Yields
- Fed Questions
- Stretched Technical Indicators
- Short Volatility Pressure
- Extended Valuations
Anybody surprised?
Steep Selloff Can End Two Ways We shouldn’t put too much weight on any given day’s price moves, but recent market action feeds two narratives, either of which could develop into a bigger selloff.
(…) Over the past two trading days, the S&P 500 fell by 6.1%—the steepest such drop since August 2015, but something that has happened on average once every two years since 1964. (…)
If the stock-market drop of the past two days was a knee-jerk reaction to tighter credit, then the bull market can resume so long as the economy and corporate profits remain strong. If, however, the lesson is that, after years of calm, inflation is about to get wild, the conclusion is darker.
(…) stocks sold off without a tight link to bond yields on Friday, and fell in lockstep with yields on Monday.
Explanation No. 1 is that the initial shock of the brief fears of a hawkish Fed first hit bonds, and that was enough to startle shareholders, and the drop gathered momentum. (…) investors had piled into bets that low volatility would continue, leading to panic selling as volatility measures rose fast. (…) If this explanation is right, what happens next depends on how many people are left waiting to buy the dip, after a year or more of buying into any slight drop.
The fewer buy-the-dippers are left, the bigger the dip has to be to attract buyers. The longer-run story would be little changed, given Fed expectations are back down again, but at its worst on Monday the dip from January’s high was more than 8%. That is quite a dip already, so if you were waiting to buy the dip, now is the time.
More threatening for shareholders is the second explanation, which relies instead on volatility, prompted by rising uncertainty about inflation. Long-dated Treasury yields rose relentlessly from early December until the 10-year note hit 2.885% early on Monday, the highest since January 2014, before falling back.
Friday’s rise in long-dated Treasury yields wasn’t prompted mainly by forecasts of faster Fed rate increases. Instead, in this explanation, inflation uncertainty mattered as much or more than the actual level of inflation. (…)
If investors think U.S. tax cuts will mostly stoke inflation and inequality rather than growth-enhancing capital spending and productivity, that will be bad for both bonds and stocks. If the tax cuts lead to the faster real growth promised by the White House, bonds will still suffer, but stocks should do well once the uncertainty is resolved. (…)
VIX at 38 Is Waterloo for the Beloved Short Volatility Trade
Of all the harrowing things seen in the stock market Monday, one was a special nightmare for investors in what has become one of the stock market’s favorite strategies.
It’s short volatility, a bet against equity turbulence that traders have been piling into for years, lifting assets in related exchange-traded products to more than $3 billion, a record. Estimates of how much money is tied up in the tactic overall vary but one estimate from Chris Cole of the Artemis Capital Advisers hedge fund puts the total at more than $2 trillion. (…)
Those products “have effectively been wiped out,” Pravit Chintawongvanich, head of derivatives strategy at Macro Risk Advisors, wrote in a note. Still, “the short vol products have covered 95 percent of their risk, meaning that the ‘VIX blowup’ event has effectively already happened. If the upward pressure on VIX (and to a lesser extent, downward pressure on S&P futures) was driven mostly by the VIX ETPs, that source of pressure is gone,” he wrote. (…)
Outflows from systematic strategies, including short volatility and volatility targeting, could amount to about $100 billion in the days ahead, JPMorgan Chase & Co.’s Marko Kolanovic wrote in a note, while adding that “the ongoing market sell-off ultimately presents a buying opportunity.†(…)
“There’s such an active market in volatility itself that volatility can drive the market,†said Luke Oliver, the head of ETF capital markets at Deutsche Asset Management.
Authers’ Note: The market parallels with 2007
(…) It appears that we have a precedent in which stocks briefly move in the opposite direction to bond yields (as happened last week), and then morph into a classic “risk-off†move, as investors move from equities into the safe haven of bonds. The fright and the sense of risk may have originated in the bond market, but the ultimate direction of flow is towards bonds as a haven. (…)
Inflation Set to Appear ‘With a Vengeance,’ Paul Tudor Jones Says
(…) “We are replaying an age-old storyline of financial bubbles that has been played many times before,†Jones, founder of Tudor Investment Corp., wrote in a Feb. 2 letter to clients seen by Bloomberg. “This market’s current temperament feels so much like either Japan in 1989 or the U.S. in 1999. And the events that have transpired so far this January make me feel more convinced than ever of this repeating history.†(…)
Cryptocurrencies Could Threaten Financial Stability, Says Head of BIS
Central banks must be prepared to intervene to stem risks from digital currencies, as Bitcoin has become a “combination of a bubble, a Ponzi scheme and an environmental disaster,†central banking official Agustin Carstens said Tuesday. (…)
“Cryptocurrencies piggyback on the institutional infrastructure that serves the wider financial system, gaining a semblance of legitimacy from their links to it,†said Mr. Carstens, general manager of the Bank for International Settlements, a Basel, Switzerland-based institution that acts as a lender and think tank for central banks.
“There is a strong case for ,†said Mr. Carstens, general manager of the Bank for International Settlements, or BIS, a Switzerland-based institution that acts as a lender and think tank for central banks. (…)
Mario Draghi, president of the European Central Bank, said Monday that digital currencies should be regarded as “very risky assets,†and said the ECB was looking into the potential risks they pose for eurozone banks.
Federal Reserve Governor Randal Quarles, the U.S. central bank’s regulation chief, said in November that digital currencies like bitcoin could pose “more serious financial stability issues†if adopted widely.
Mr. Carstens, a former governor of Mexico’s central bank, said digital currencies exhibit many of the flaws that historically undermined private currencies and led to economic crises and hyperinflation.
“The current fascination with these cryptocurrencies seems to have more to do with a speculative mania than any use as a form of electronic payment, except for illegal activities,†said Mr. Carstens in a speech at Frankfurt’s university.
“If authorities do not act pre-emptively, cryptocurrencies could become more interconnected with the main financial system and become a threat to financial stability,†Mr. Carstens said.
Central bank experiments also show that the technology behind Bitcoin is very expensive to run and slower and much less efficient to operate than conventional payment and settlement systems, he added.
IPO Shortcuts Put Burden on Investors to Identify Risk Rules giving small companies a quicker path to public listings aren’t doing investors any favors.
Seven of the eight companies that listed on U.S. exchanges in 2017 under a provision of the Jumpstart Our Business Startups Act known as Reg A+ are trading an average 42% below their offer prices, according to Dealogic. The S&P has risen 18% since the start of 2017. The average traditional initial offering on the major U.S. exchanges in 2017 have climbed roughly 22% since their IPOs through Friday’s close, Dealogic said. (…)
Reg A+ offerings aren’t the only area of light-touch-regulation to raise some investors’ eyebrows.
Last month, maniaTV Inc. launched a stock sale using new loosened SEC social media rules. The offering is operating under Regulation D, which lets companies sell securities to accredited investors, or those with a high net worth, while exempting the company from going through the SEC’s registration and reporting requirements for public offerings. (…)
1 thought on “THE DAILY EDGE (6 February 2018):”
It may be hard to get bond traders into the flight to quality mode until the TNX tags the 3% yield.
That’s a technically important level which should have buyers lined up, ready to push it to back-test the 2.6% area.
Ultimately, the 3% area will eventually be breached to the upside, but technical traders would like to see the 2.6% area back-tested before that happens.
The equity market appeared to be following the extreme volatility, which is quite unusual in my experience.
Outside of 2008-2009, a VIX spike to 50 like today would normally be a buy signal for equities.
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