Cass Transportation Index Report January 2020
The turn of the calendar didn’t leave the bad news in 2019, as the Cass Freight Index showed continued weakness in the U.S. freight market. Both the shipments and expenditures components of the Cass Freight Index worsened sequentially and showed decelerating y/y growth. According to the broader stock market levels, there is still optimism out there, but the freight trends have yet to turn. And the Covid-19 coronavirus case count continues to grow, creating uncertainty around containment and eventual impact on global supply chains. Some Chinese factories resumed operation this past week, but they are still not close to 100% production levels. Others have pushed re-opening back to March 1.
As stated last month, we expect 2Q20 to have the best chance of showing actual y/y growth in domestic U.S. shipments and freight costs, if traditional seasonal freight patterns hold, because 2Q19 was below average in terms of the seasonal surge in activity. Plus, depending on how the aforementioned coronavirus affects supply chains, there could be a 2Q20 wave of import activity (and therefore truck and intermodal) when the Chinese export machine starts churning again.
Shipment volumes dropped 9.4% in January vs 2019 levels (Chart 1), as the index posted its lowest absolute reading in roughly three years. It was also the steepest y/y decline since 2009. This follows a sluggish end to 2019, where many blamed last month’s weakness on timing of the holidays. There could have been a residual impact post-New Years, but with the negative y/y and sequential decline, and the deceleration in the y/y growth rate, we don’t see much good news in this volume number.
Worst y/y growth in shipment volumes since late 200
Even before the coronavirus issues have any impact on the U.S. transportation market, the freight market is weak, partially due to elevated inventories (although the inventory situation has at least stabilized and is likely improving). On 4Q19 earnings calls, we heard manufacturers and distributors say inventories look like they’re returning to normal levels, but the optimism for 2020 was only modest. Orders are still soft, and the most positive commentary was around the consumer and residential construction.
Empire State Manufacturing Conditions Strengthen
The Empire State Manufacturing Index of General Business Conditions increased to a nine-month high of 12.9 during February, extending modest gains during the prior two months. A reading of 5.0 had been expected in the Action Economics Forecast Survey. Thirty-four percent of survey respondent reported improved business conditions while 21 percent reported a decline.
The ISM-Adjusted Index, constructed by Haver Analytics, surged to 56.9, the highest level since June 2018. During the last 20 years, there has been 59% correlation between the level of the index and q/q change in real GDP.
Leading this month’s improvement was the new orders index as it surged to 22.1, the highest level since September 2017. The shipments series also jumped roughly ten points. The delivery times returned to positive territory, indicating slower delivery speeds. The inventories index surged to a two-year high while the unfilled orders index turned positive after falling for roughly one year.
Working lower was the employment series to 6.6, its lowest level in six months. Nineteen percent of survey respondents reported increased hiring while nine percent reported a decline. During the last 20 years, there has been a 73% correlation between the index level and the m/m change in factory sector payrolls. The average workweek reading also turned negative. (…)
Virus Update
China death toll tops 2,000, global confirmed cases exceed 75,000. (…)
A growing number of China’s private companies have cut wages, delayed paychecks or stopped paying staff completely, saying that the economic toll of the coronavirus has left them unable to cover their labor costs. To slow the spread of the virus, Chinese authorities and big employers have encouraged people to stay home. Shopping malls and restaurants are empty; amusement parks and theaters are closed; non-essential travel is all but forbidden. (…)
A Tax-Cut Idea for Trump By Stephen Moore and Adam Michel
The White House is expected to announce details of its tax cuts for the Trump second term. One idea on the table is to create tax-free investment accounts for lower- and middle-income families.
The plan we’ve suggested to the president would allow families to put up to $10,000 a year tax-free into a savings fund. Ideally, the money would be invested in a stock index fund. The goals would be to increase woefully low private household savings, to make Americans more financially stable, and to reduce dependence on government entitlements. (…)
These new accounts would expand ownership of stock to millions of Americans, thus democratizing the market and sharing the gains, while minimizing risk by investing in a diverse portfolio. This may be the most effective way to reduce wealth inequality.
These accounts would be voluntary, and employers would be encouraged to match contributions. Funds could be used after five years for home purchase or improvement, emergency medical expenses, starting a new business, private-school or college tuition, supplementing income after a job loss, or retirement. (…)
Mixed Signals for Chip-Making Gear The specter of export controls hangs over the sector despite President Trump’s backpedal.
The Wall Street Journal reported on Monday that the U.S. Commerce Department was drafting new rules that could restrict semiconductor manufacturers from producing chips for Huawei using equipment from U.S. companies. The changes would require such companies to get a license from the government if they intend to continue producing components for Huawei on American-made gear. Because Huawei is one of the largest chip buyers on the market and purchases them from nearly every major producer, such a rule could have “wide-ranging supply impacts to the semiconductor and consumer markets,” wrote Atif Malik of Citigroup in a note to clients.
It therefore didn’t take long for the backpedal to emerge: In a set of tweets Tuesday morning, President Trump declared that the U.S. “cannot, & will not, become such a difficult place to deal with in terms of foreign countries buying our product, including for the always used National Security excuse, that our companies will be forced to leave in order to remain competitive.” (…)
Chinese Trade Spat Isn’t About Soybeans
(…) The Wall Street Journal reported Sunday that the Trump administration could stop CFM International, a joint venture of General Electric and France’s Safran, from selling more engines to China’s Comac. The engines are used in the flagship C919 jet, and the U.S. fears that they could be reverse engineered. (…)
Unfortunately for investors, the real trade conflict has much more to do with Huawei and CFM than it does with how many soybeans China buys.
The C919 is a central piece of the “Made in China 2025” initiative. Airbus and Boeing don’t appear too worried because the jet is still a generation behind their own A320neo and 737 MAX aircraft, respectively. But the Chinese state owns aircraft maker Comac and can pour a lot more resources into it. It also owns the main domestic airlines, so it can ensure orders. Commitments for the C919 already top 1,000. (…)
Canada: Adding fuel to the housing market
The Minister of Finance, Bill Morneau, announced today a change in the qualifying rate for insured mortgages in Canada (buyers with a downpayment less than 20%). Recall that since October 2016, the federal government requires homebuyers to qualify at the higher 5-year posted rate instead of the contractual rate, a measure put in place to curb household debt. In the current context, this represents a 22% reduction in purchasing power.
Starting in April 2020, the new benchmark rate for homebuyers will be “the weekly median 5-year fixed insured mortgage rate from mortgage insurance applications, plus 2%”, which will be more representative of market conditions as opposed to the more static posted rate. What does this mean for homebuyers looking for an insured mortgage? Given that the new benchmark rate is lower than the posted rate, the maximum amount that can be borrowed increases by 4% according to the latest data available. This should add further fuel to a vigorous housing market which is already supported by the recent decline in mortgage rates and a vibrant labour market. (NBF)
The ECB is considering including owner-occupied housing in the consumer inflation calculations.
Source: The Economist; Read full article (The Daily Shot)
- Here is the potential impact on the CPI.
Source: Pantheon Macroeconomics
Outside of the big 5 tech companies, earnings growth is zero
As discussed last week, there is a clear split between cyclicals and non-cyclicals in Q4 (chart from Refinitiv/IBES)
GS adds that a lower-than-expected effective tax rate (17% vs. 20%) helped Q4 earnings, assuming one has taxable income.
Mega-cap earnings strength contrasts with small-cap earnings weakness. The Russell 2000 experienced a 7% earnings decline during the fourth quarter, as many smaller firms posted weak top-line growth and had difficulty absorbing rising wages and other input costs.
Meanwhile, in Europe, we now have 156 (48%) of the STOXX 600 index reported. The beat rate is 51% and the miss rate 41%
- Fourth quarter earnings are expected to decrease 0.2% from Q4 2018. It was +5.5% in November. Excluding the Energy sector, earnings are expected to increase 1.3%.
- Fourth quarter revenue is expected to increase 1.4% from Q4 2018. Excluding the Energy sector, revenues are expected to increase 3.2%.