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Inflation Hit Fed’s 2% Target in March
The Commerce Department’s price index for personal-consumption expenditures, the Fed’s preferred inflation gauge, was up 2% from a year earlier in March, the first time in more than a year it was on target. (…)
Makers of everything from sticky notes, household paint and washing machines are signaling they plan to raise prices to offset rising bills for steel, oil and other inputs amid pressure from higher labor and transportation costs.
3M Co. , the St. Paul, Minn., maker of myriad products including office supplies like Post-it Notes as well as industrial adhesives and films, highlighted the cost of crude oil as a major driver of inflation. (…)
“For the year, we expect price growth to remain strong and that it will more than offset raw material inflation,” 3M Chief Financial Officer Nick Gangestad said in a call with analysts in April. (…)
Some American manufacturers say they plan to pass along mounting raw-material costs to their customers in the months ahead.
“It’s a scramble,” said Nicholas Heymann, an industrials analyst at William Blair. “They’re raising prices big time.” (…)
United Technologies Corp. said a price increase of up to 6% for its Carrier Corp. and other heating and air-conditioning systems would start in July as the company grapples with increased input costs.
“Copper has gone up, aluminum has gone up, steel has gone up, second-tier supply has gone up,” Chief Executive Gregory Hayes said in a call with analysts in April.
Core PCE prices rose at a 2.4% annualized rate in Q1, after +1.9% in Q4’17, +1.3% in Q3’17 and +0.9% in Q2’17. See a trend there?
True, we have been there before. But this time around, resource utilization is very high and manufacturers see improved pricing power to pass higher costs on.
We shall see if the ultimate consumer can support the trend.
U.S. Personal Spending Improves; Income Growth Is Stable
Personal consumption expenditures in March bounced back an expected 0.4% (4.4% y/y) following stability in February. The gain matched expectations in the Action Economics Forecast Survey. Real personal spending also rose 0.4% (2.4% y/y) as prices were stable. The increase followed declines during the prior two months. Motor vehicle spending in constant dollars strengthened 1.4% (3.7% y/y) after declines in three of the prior four months. (…)
Personal income increased 0.3% (3.6% y/y) during March, the same as in February which was revised from 0.4%. A 0.4% increase had been expected. Wages & salaries improved 0.2% (4.4% y/y), the weakest gain in five months. (…)
Disposable personal income grew 0.3% (3.7% y/y) for the second consecutive month. Adjusted for price inflation, take-home pay rose 1.7% y/y.
As growth in outlays outpaced income growth, the personal savings rate fell to 3.1% from 3.3%. It compared to the 2.4% low three months earlier. The level of personal savings declined 17.2% y/y.
Real expenditures declined in 2 of the last 3 months and are up at a miserable 0.4% annualized rate in Q1 as Americans are feeling the inflation bite. Real income rose 1.4% in 2016 and 1.2% in 2017. Consumers dipped severely in their savings (really meaning that they borrowed heavily) to grow their real expenditures at twice the rate of income growth but that cannot go on.
Real income rose 0.5% MoM in January as increased minimum wages took effect and some companies paid bonuses after tax reform. But real income rose only 0.36% in total in February and March, a 2.1% annualized rate which cannot support real spending above a 2% rate. Based on company conference calls so far, April sales don’t look any stronger.
- Most US households’ net worth has not fully recovered to pre-recession highs. (The Daily Shot)
Source: Deutsche Bank Research
Also worrisome: Germany’s retail sales were disappointing. (The Daily Shot)
Source: Pantheon Macroeconomics
U.S. Pending Home Sales Edge Up in March
The National Association of Realtors (NAR) reported that pending sales of existing homes increased 0.4% (-3.0% year-on-year) in March to an index level of 107.6 (2001=100). Sales have slowed somewhat with the first quarter averaging 106.4 versus 109.7 in the fourth quarter and 108.9 for the entirety of 2017. The National Association of Realtors noted that while demand is strong, buyers are constrained by a limited inventory of housing. (…)
Pending sales rose 2.4% (-6.0% y/y) in the Midwest and 2.5% (0.3 y/y) in the South. Meanwhile sales in the Northeast dropped 5.6% (-8.1% y/y) and were down 1.1% (-2.2%) in the West. Pending sales in the South are at their highest level in 12 years, while sales in the West touched a nearly four-year low.
Companies Cry the Transportation Blues Company after company is complaining that the tight labor market is making it harder and more expensive for them to get their products to customers, creating a potential drag on profits
(…) “We’re paying $5,000 signing bonuses in places to attract drivers.” (…)
In a tight shipping market, railroads and trucking companies can pass increased costs on to their customers. But it can be harder for customers to pass them on, which can cut profits. Specialty polymer company PolyOne said an 8% increase in freight costs knocked $2 million off its bottom line in the first quarter. (…)
(…) U.S. railroads posted a 6.5% increase in intermodal traffic in March, according a report from the Association of American Railroads, making the month “easily the best” March in history. The trade group said intermodal volume is tracking to top records set last year, with growth accelerating in April.
The AAR said the number of truck trailers moving on major railroad networks expanded 15.3% in the first quarter from the same period a year ago. (…)
]Norfolk Southern] volume rose 8% while revenue per unit rose 10%, a sign that shipping customers were paying more to get their goods on trains.
“We’ve seen 11 consecutive weeks of increases in truckload spot rates,” said Alan Shaw, Norfolk Southern’s chief marketing officer. “So we’re very confident that as the year progresses, we’ll be able to continue to lean into price reflecting the value of our service.” (…)
How Bad Is the Labor Shortage? Cities Will Pay You to Move There Instead of offering incentives to employers, towns with unfilled jobs are handing out money, student-debt relief and home-purchase assistance to lure potential employees–one by one. It’s an uphill battle to compete with the opportunity and amenities found in larger U.S. cities.
Oil Prices Fall as U.S. Output Hits Record Oil prices slipped amid signs of rising U.S. crude production and stockpiles, despite continuing uncertainty about whether America will pull out of the Iran nuclear deal.
(…) The U.S. Energy Information Administration reported Monday that oil production rose to a record 10.264 million barrels a day in February. (…)
A growing consensus that President Donald Trump will abandon the deal—reimposing economic sanctions on Iran that would frustrate its oil output and lessen global supply—has been the main oil market driver in recent weeks. (…)
Venezuela’s oil decline reaches new depths Output has plummeted, companies are nervous and China is no longer lending
Trump Delays Steel Tariff Decision for EU, Other U.S. Allies President Trump eased trade pressure on top U.S. allies, giving the EU and some nations outside the bloc until June 1 to negotiate deals that would exempt them from U.S. steel and aluminum tariffs.
(…) Europe will have an additional month to keep talking with the U.S. about a new pact to avoid the tariffs.
As expected, Canada and Mexico were given an extension, also until June 1, while talks about rewriting the North American Free Trade Agreement proceed.
The White House said it has agreements in principle with Argentina, Brazil and Australia to avoid the tariffs. (…)
One sticking point is whether European allies will accept quotas on their metals exports, something they resisted, and which they said violated rules of the World Trade Organization. (…)
The European steel industry has already felt the fallout of U.S. tariffs. Big exporters to the U.S.—countries like Brazil, Turkey, Russia, South Korea, Egypt and China—have ramped up exports to the European market to avoid American trade barriers, dragging down prices for domestic producers.
Steel imports in the EU rose 300,000 metric tons to 2.9 million tons in the first quarter of 2018, versus the same period a year ago, according to Eurofer. The European Commission, the bloc’s antitrust regulator, is considering whether to impose safeguards to prevent a surge of imports. (…)
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Mexican Auto Industry Opposes Latest U.S. Proposal on Nafta Rules U.S. Nafta negotiating team proposes requiring 40% of parts used in light vehicles and 45% of parts used in pickup trucks to originate in high-wage countries
(…) “The U.S. proposal isn’t acceptable. The percentage, the transitions, the restrictions. You have to understand the U.S. proposal is like putting padlocks on padlocks,“ Mr. Solis said of the two-layered rule of origin. ”Imagine a car that does comply with the percentage, but doesn’t comply with all the core parts. Or you comply with core parts but don’t meet the steel and aluminum requirements. Or you comply with the first three but you don’t meet the wage requirements…It has the potential to influence investments, influence production in all three countries.”
Mr. Solis [president of the Mexican Automotive Industry Association] said the Mexican auto industry is working on its own proposal for rules of origin and hoping to have it ready for next week. Ministerial talks resume May 7 in Washington. (…)
THE PMIs
U.S. manufacturing operating conditions improve at fastest rate since September 2014
April survey data signalled a steep improvement in operating conditions across the U.S. manufacturing sector. The latest PMI reading was the highest since September 2014, supported by stronger expansions in output and new orders. Moreover, new business rose at the sharpest pace in over three-and-a-half years. Meanwhile, rates of input price and output charge inflation accelerated to the fastest since mid-2011.
The seasonally adjusted IHS Markit final U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) registered 56.5 in April, up from 55.6 in March and indicated the strongest manufacturing growth in over three-and-a-half years. The pace of improvement was also well above the series trend. Quicker rates of output and new order growth and a greater deterioration in vendor performance contributed to the higher index reading.
Growth of goods production accelerated in April, with the rate of increase reaching the fastest since January 2017. Anecdotal evidence suggested the steep rise was due to greater new order volumes and the acquisition of new clients.
Reflective of stronger client demand, new business received by manufacturers rose at an accelerated rate that was the quickest since September 2014. However, new export sales continued to increase at a modest pace that was similar to that seen in March.
As the pace of new order growth continued to exceed that of output, the level of outstanding business increased again in April. At the same time, employment growth softened slightly, with the pace of job creation dipping to an eight-month low, albeit remaining solid.
Greater global demand for raw materials and recently introduced tariffs were reportedly key factors behind greater cost burdens in April. Moreover, the rate of input price inflation accelerated to the sharpest in almost seven years.
Meanwhile, average prices charged rose at the quickest pace since June 2011, with the rate of inflation accelerating for the fourth successive month. Survey respondents commonly noted that higher charges were due to increased costs being passed on to clients.
Purchasing activity increased further in April, with growth quickening to the strongest in over three-and-a-half years. That said, firms expressed difficulties in sourcing inputs as supplier delivery times lengthened to the greatest extent since February 2014. Stockpiling activity was impacted by delays, with pre-production inventories rising only fractionally.
Finally, business confidence toward the year-ahead output outlook remained robust amid a sustained rise in new orders. Optimism was the second-highest since June 2015.
The upturn is being led by large firms, with smaller companies trailing behind but nonetheless also seeing some of the best business conditions for three years. (…)
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The U.S. ISM PMI
Of the 18 manufacturing industries, 17 reported growth in April.
WHAT RESPONDENTS ARE SAYING
- “We are seeing strong sales in the U.S., Europe and Asia.” (Chemical Products)
- “Business is off the charts. This is causing many collateral issues: a tightening supply chain market and longer lead times. Subcontractors are trading capacity up, leading to a bidding war for the marginal capacity. Labor remains tight and getting tighter.” (Transportation Equipment)
- “Shortages of trucks and drivers has impacted delivery times.” (Food, Beverage & Tobacco Products)
- “The recent steel tariffs have made it difficult to source material, and we have had to eliminate two products due to availability and cost of raw material.” (Fabricated Metal Products)
- “Demand is up for products. Commodity pricing for steel and other materials increased due to the proposed tariffs. We are seeing commodity futures coming down. A lot of suppliers are asking for increases, and the team is battling those requests.” (Machinery)
- “[The] 232 and 301 tariffs are very concerning. Business planning is at a standstill until they are resolved. Significant amount of manpower [on planning and the like] being expended on these issues.” (Miscellaneous Manufacturing)
- “Production orders at this time are still strong and being driven partially by construction factors and customers purchasing ahead to avoid potential price increases.” (Plastics & Rubber Products)
- “The general outlook for 2018 remains positive and upbeat as we see continued signs of a growing economy and investment in housing and infrastructure.” (Nonmetallic Mineral Products)
- “Business conditions have been good; order book is full and running around 98 percent capacity.” (Primary Metals)
- “Backorders remain strong. New order rate exceeds shipment rate.” (Computer & Electronic Products)
JAPAN: Solid manufacturing sector growth recorded in April
The headline Nikkei Japan Manufacturing Purchasing Managers’ IndexTM (PMI)® posted 53.8 in April, up from 53.1 in March to signal a solid improvement in operating
conditions for Japanese manufacturers. For the first time since January, the headline PMI figure increased and thereby signalled a stronger rate of growth in the sector.
The rate of growth in output was solid overall and the fastest since January.
According to anecdotal evidence, production line activity was raised in line with greater sales and rising backlogs of work. The gain in new business was equally solid and faster than the previous survey period. Panellists attributed the improvement in demand to new product launches. That said, sales to overseas clients increased at a markedly slower rate during April. The rate of new export order growth was marginal overall and the weakest observed across the current 20-month expansionary sequence.
In keeping with the favourable demand environment, Japanese manufacturers bolstered production line capabilities by recruiting additional staff during April. The current stint of employment growth extends back to September 2016. Despite larger workforces, outstanding business increased and to a greater extent. Although the accumulation of backlogs was only moderately sized, it was the joint-largest in five months (on a par with December 2017). (…)
Greater workloads also encouraged firms to increase input buying during April. In fact, the rate of expansion in purchasing activity quickened from March’s eight-month low. That said, average lead times for the delivery of inputs slowed markedly amid reports of material shortages. To guard against further supply chain troubles, firms raised pre-production inventories.
Input prices continued to inflate sharply, with panellists reporting higher food, fuel and metal costs. To counteract this, output prices were increased, albeit to the softest extent in three months.
Lastly, businesses remained strongly positive towards output prospects in April. In fact, the degree of confidence strengthened for the first time since the start of the year amid forecasts of a sustained upturn in demand.
China and the Eurozone PMIs are released tomorrow.
EARNINGS WATCH
274 reports in. The beat rate is 79% and the surprise factor is 7.5% (+1.5% on revenues).
The blended earnings growth rate is 24.6%.
Trailing EPS are now $139.59, up from $133.00 after Q4’17. Pro Forma adjusted for tax reform, trailing EPS are about $146.50. On that basis, the S&P 500 Index is back on its long term median. With a range normally between 16 and 24, the upside from valuation (24/20 = +20%) is equal to the downside risk (16/20 = –20%).
The key now is the trend in the “Rule of 20 Fair Value” (yellow line in chart) which is [(trailing EPS) X (20 – inflation)]. So, with the market fairly valued (valuation risk neutral, i.e. valuation upside = downside), this is now a race between profits and inflation, currently favoring profits which are truly booming.
You can dismiss the 25% earnings jump like David Rosenberg does to fit his negative view (“Strip out the USD, buybacks and tax cuts, all transitory, and S&P 500 earnings are running at +10% YoY, not 24%! Good but not great.”), but the true facts (!) are:
- the USD is always part of the equation and is almost impossible to forecast. In any case, the USD is down only 2.8% QoQ in Q1 and has yet to show a reversal.
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Whatever you think of buybacks, they are also part of the equation. Why would one want to strip them out from per share results? But even if you do, realized buybacks (as opposed to announced) only added 0.8% to Q1 EPS growth per S&P data.
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The tax cut is real, totally operational and legit and not transitory (tax rates don’t go back up next year). The consensus is that the lower tax rates will boost S&P 500 earnings by 7% this year. Tax rates were cut from 35% to 21% but the effective tax rate was around 26%. Stephanie Pomboy at MacroMavens says that tax rates at companies having reported so far are down 6%.
In total, the “normal run rate” as per Rosie is a lot more than 10% in Q1. So far, companies having reported are showing EPS up 28.2% on a 10.0% revenue gain. Ten percent revenue gains will generally lead to much more than 10% earnings gains.
With more than halfway in the reporting season and conference calls, analysts are not cutting their Q2 estimates (+19.9%) nor their full year estimate (+21.1%). Not that it won’t happen, but so far, so good. Corporate guidance also remains upbeat.
Mall Owners and Retailers Clash Over Avalanche of Online Returns
David Simon, chief executive officer of Simon Property Group Inc., says a “significant number” of tenants are underreporting sales and that the company, the largest U.S. mall owner, is negotiating with them to find a solution.
For America’s beleaguered retail landlords, sales per square foot is a crucial metric, used by investors to gauge their financial health. In addition to the dollars lost themselves, a low number can damage a mall’s reputation on Wall Street.
The issue Simon is flagging arises from rents that are based on how much a retailer sells in its physical store. It’s common for a tenant to pay a base amount and then give the landlord a cut of sales that exceed a set threshold. Occasionally a retailer has no base rent and is obligated to pay only a percentage of sales rung up at the property. (…)
The rate of returns for online purchases is estimated to be as much as four times the rate for physical-store sales, according to David Sobie, CEO of Happy Returns Inc., which operates in malls and other shopping venues, taking online returns from consumers for retailers that don’t have a lot of physical stores.
Bad for both store and landlord, right? Not necessarily. When it comes time to seek a refund, people prefer to get it in person instead of printing up a label, making a trip to the post office and waiting weeks for the cash to show up in their bank accounts, Sobie said. That typically works in the landlord’s favor, since anything that triggers a trip to the mall can drive additional purchases.
“Returns from internet purchases as a source of foot traffic are valuable,” Sobie said. “Of course you’re going to browse, and maybe get something to eat.” (…)