THE PMIs
(Note: Eurozone PMI will be released tomorrow)
U.S. manufacturing new order growth accelerates to five-month high
U.S. manufacturing firms signalled a strong start to the final quarter of 2018, with operating conditions improving at a faster pace in October. Driving the latest development in the
health of the sector was a sharp increase in new business.The upturn in total new work reached a five-month high, though only a fractional rise in new export orders was registered. Greater production requirements and efforts to clear backlogs meanwhile led to a quicker monthly rise in hiring, the fastest for ten months. Price pressures remained intense, however, with rates of input price and output charge inflation accelerating. At the same time, business confidence picked up from September’s 12-month low.
The seasonally adjusted IHS Markit final U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) posted 55.7 in October, broadly in line with September’s reading of 55.6. The latest figure signalled a further pick up in growth momentum and a strong improvement in the health of the manufacturing sector. Moreover, October’s reading reached a five-month high.
The headline PMI was driven by a stronger expansion in new business received by goods producers in October. The upturn in new orders accelerated to a five-month high and
was widely attributed to greater client demand across the domestic market. Conversely, new export orders grew only fractionally and at the weakest pace in the current three month sequence of growth.Production levels expanded strongly in October and at a rate that was broadly in line with the series trend. Panellists commonly attributed the rise in output to greater client
demand and increased efforts to clear backlogs.In line with another rise in backlogs and a sustained increase in new business, employment growth accelerated in October. The rate of job creation reached a ten-month high and was strong overall. Respondents also noted that anticipations of greater new orders during the fourth quarter had led to the upturn.
Manufacturing firms recorded pressures on profit margins in October, with the rate of input price inflation quickening to a marked pace. The rate of increase reached a three-month high and was largely linked to higher raw material and metal prices stemming from the ongoing effects of tariffs.
Consequently, manufacturers tried to partly pass on higher cost burdens to their clients through increased output charges. Although the rate of output price inflation accelerated to the fastest since July, it remained well below that seen for input costs.
Meanwhile, firms registered a strong rise in buying activity amid reports of greater efforts to stockpile. Pre-production inventories increased for the seventeenth month running, albeit modestly, as longer input deliveries curbed stock building efforts.
Finally, output expectations towards the coming 12 months improved, with firms suggesting that anticipations of further new order growth drove optimism.
China manufacturing production stagnates in October
Operating conditions in China’s manufacturing sector were little-changed from the previous month in October. Production was broadly unchanged, as total new business rose only slightly. Subdued sales were partly linked to weaker foreign demand, with export sales declining for the seventh month in a row. Relatively soft market conditions contributed to a further drop in workforce numbers, albeit modest, while buying activity rose only slightly. Furthermore, confidence regarding the business outlook for output dipped to an 11-month low.
The headline seasonally adjusted Purchasing Managers’ Index™ (PMI™) rose only slightly from 50.0 in September to 50.1 in October. This signalled that operating conditions were broadly unchanged at the start of the fourth quarter, after stagnating in the previous month. Prior to September, the health of the sector had improved for 15 consecutive months.
After rising in the preceding 27 months, manufacturing production in China was little-changed in October. According to panellists, output schedules were largely unchanged due to relatively subdued market demand.
After stagnating in September, total new orders expanded slightly in October. According to panellists, sluggish market conditions had dampened client demand, with some firms also citing reduced foreign demand. The amount of new export business fell for the seventh month running in October, though the rate of decline softened from September.
Employment fell again in October, thereby extending the current sequence of job shedding to five years. That said, the rate of reduction was the slowest seen since May. Lower workforce numbers were often linked to company down-sizing plans and staff retirements. However, a combination of payroll cuts and insufficient production led to a further modest rise in backlogs of work.
October survey data pointed to a renewed increase in buying activity among Chinese manufacturers. Reflective of the trend for new orders, however, the rate of expansion was marginal. Consequently, stocks of purchased items rose only slightly. Stocks of finished items meanwhile declined for the sixth month in a row, albeit marginally.
The time taken for purchased inputs to be delivered to manufacturers continued to lengthen in October. The rate at which vendor performance deteriorated was slightly quicker than seen in September.
Prices data signalled a further squeeze on operating margins as input costs continued to rise at a faster rate than output charges. Notably, the rate of cost inflation accelerated to the second-sharpest in nine months.
Although firms were generally optimistic that output would increase over the next year, sentiment dipped to an 11-month low amid concerns over current subdued market conditions and the impact of the ongoing China-US trade dispute.
Japan manufacturing sector grows at fastest rate since June
October survey data indicated that Japan’s goods producing sector began the final quarter of 2018 in growth territory, with the key measures of macroeconomic health (output, new orders and employment) all showing stronger rates of increase. New export sales also returned to growth following a recent soft patch in international demand. Prices data pointed to a sharper rate of input cost inflation, prompting firms to raise output prices to the greatest extent for ten years. Input delivery times were hampered by strong sales performances encouraging higher buying activity.
The headline Nikkei Japan Manufacturing Purchasing Managers’ IndexTM (PMI)® increased from 52.5 in September to 52.9 in October, therefore indicating a faster rate of improvement. Moreover, it was the strongest expansion since June, albeit only moderate overall.
Underpinning the latest improvement in business conditions was sharper output growth, following September’s 14-month low. According to panellists, production levels were supported by healthy inflows of new work. There were some reports that output was raised to cover for shortfalls resulting from adverse weather conditions in September.
Survey data pointed to robust demand conditions at Japanese manufacturers in October. Moreover, the rate of new order growth was relatively solid and quickened to a four-month high. Higher sales to new and existing clients in domestic and international markets, promotional work and new product launches all helped to drive the latest upturn. Data also indicated growth in demand from overseas clients for the first time since May.
Encouraged by order book volume growth, firms expanded staffing levels in October to boost operating capacities. The rate of job creation was solid and the strongest in six months. However, the level of incomplete work at Japanese manufacturers increased, despite greater employment. Delayed input deliveries and on-going disruption from recent natural disasters weighed on capacity.
Amid reports from panellists of supply chain pressures, survey data indicated that average lead times for the delivery of inputs lengthened in October, extending the current period of deterioration to two-and-a-half years. While strong input demand was cited as one factor impacting vendor performance, logistical issues arising from the recent poor weather were also mentioned.
Firms were motivated to raise buying levels in October to accommodate for greater production requirements. Delayed input shipments and expectations of price increases encouraged manufacturers to stockpile some of these items, however. Input price inflation accelerated at the fastest pace since March 2011 amid higher metal and fuel costs. To offset profit margin erosion, output prices were increased at the fastest rate in ten years.
Looking ahead, the outlook towards output over the coming year was positive overall; however, the degree of optimism edged down to a 23-month low, with some firms projecting less supportive demand conditions.
Amid trade war, China premier says Sino-U.S. ties can improve China and the United States can overcome their differences and get relations back on track if they work together in a spirit of mutual respect, Chinese Premier Li Keqiang told a group of visiting U.S. politicians on Thursday.
(…) “The sound and stable growth of China-U.S. relations serves the common interests and the fundamental interests of the people of our two countries,” Li said.
“We do hope that China and the United States will meet each other halfway and work together in the spirit of mutual respect and equality,” he added.
(…) Trump has not “set in stone” any decisions on escalating tariffs on Chinese goods and may withdraw some duties if there are promising policy discussions with China, White House economic adviser Larry Kudlow said on Wednesday. (…)
Trump said in a television interview on Monday he thinks there will be “a great deal” with China on trade, but warned that he has billions of dollars worth of new tariffs ready to go if a deal isn’t possible. (…)
Workers’ Pay Rises at Fastest Rate in a Decade Wages for private-sector workers accelerated in the third quarter, but benefit gains cooled
Wages and salaries paid to private-sector U.S. workers rose 3.1% from a year earlier in the third quarter, the Labor Department said Wednesday. That was strongest year-over-year gain since the second quarter of 2008. (…)
The overall index rose a seasonally adjusted 0.8% in July through September. The gain was an increase from the second quarter’s 0.6% advance and matched expectations of economists surveyed by the Journal.
Wages and salaries, which account for about 70% of total compensation, rose 0.9% on the quarter. Benefit costs—which include health coverage, retirement benefits and paid leave—advanced a slower 0.4%.
From a year earlier, overall compensation, including that paid to state and local government workers, increased 2.8% in the third quarter. (…)
Wednesday’s report showed total compensation for private-sector workers increased 0.8% on the quarter and 2.9% from a year earlier. State and local government employees’ compensation increased 0.8% on the quarter and was up 2.5% from a year earlier. (…)
Treasury Department to Increase Size of Debt Auctions Swelling deficits and a shrinking Federal Reserve portfolio increase government’s borrowing needs
(…) The Treasury said this week it expects to issue $1.34 trillion in debt by the end of 2018, the most since 2010, when the U.S. economy was struggling to regain its footing following a deep recession. (…)
The department said Wednesday it expects to boost the size of its 2-, 3-, and 5-year note auctions by $1 billion a month in November and December, and would increase the size of its floating-rate note auction by $1 billion in November.
The Treasury also said it would increase auction sizes for its 7- and 10-year notes and its 30-year bonds by $1 billion in November, and would hold the rate steady at that level through January. (…)
The central bank expects for an indefinite period to cut back its holdings by about $30 billion a month in Treasury securities and $20 billion a month in mortgage debt. (…)
Source: @jessefelder; Read full article
OVERSOLD?
I like long-term, stable High-Low charts like this one (via David Rosenberg):
However, there is a bottoming process that normally takes place. If you had bought in early 2008 at 1400, you regretted it until 2012…
Never really knowing what the market really “knows”, the more prudent investor will wait until the averages cross back above their 200dma, and preferably a rising 200dma which is currently only sported by the NDX:
There are several fundamental reasons to be careful with “oversold” technical indicators at this time. The most important is that we must respect investors’ nervous behavior when the central bank is openly hawkish, already restrictive and about to cause an inversion of the yield curve. We are entering a regime change as the Fed and the ECB are switching into their respective “neutral” gear.
Investors are right to question 2019 earnings given that the U.S. economy is unlikely to maintain its current momentum given a slower China and an even slower Eurozone. This when tariffs are creating much uncertainty about costs and operating logistics amid a highly indebted corporate sector and an American government that essentially discharged itself of most, if not all, its dry powder.
So far, negative earnings revisions are concentrated outside the U.S. but recall that some 44% of S&P 500 revenues are foreign.
But we are done with the often tricky September-October period and the Rule of 20 P/E, so far, has held its lows since September 2013. Its recent worse reading of 2599 on Oct. 29 clocked 18.5 on the Rule of 20 compared with 18.3 in January 2016 (and 23.5 in January 2018 at 2866). Current “Fair Value” (yellow line below) is 2825, a level likely to rise further in early 2019 given expected Q4 earnings bringing trailing EPS to $162.10 by late February and current subdued inflation trends.
November is a seasonally positive month for the S&P 500 based on data back to 1950. In fact, on average, it is the second strongest month of the year behind December. Note however that performance tends to be stronger in the later weeks of the month. (Chaikin Analytics)
