THE DAILY EDGE (2 April 2018): PMIs; Saudi’s losing bet.

China Hits Back at Tariffs With Duties on U.S. Meat, Fruit China imposed tariffs on a range of U.S. goods, following through on a promise to retaliate against the Trump administration’s penalties on imports of Chinese steel and aluminum

(…) Penalties range from 25% on American pork and eight other kinds of goods to 15% on fruit and 120 types of commodities, the ministry said. (…)

At the same time, the ministry suggested that Beijing’s response is designed to be limited and doesn’t seek to escalate tensions. (…)

These are mild retaliations to the U.S. actions on steel and aluminum only. Beijing has promised retaliatory measures in response to eventual U.S. actions under Section 301 of the Trade Act for the use of intimidation and other unfair practices to acquire American technology.

This week, the Trump administration is expected to release a list of potentially targeted products for China’s alleged intellectual-property violations. Senior administration officials have said they are looking at 1,300 different product categories, including such high-tech areas as semiconductors, communications and aerospace.

U.S. industry will have 30 days to comment. After that, the U.S. has at least 180 days to decide which products—if any—to hit with tariffs.

• China Urges More Trade Talks  to Prevent Greater Damage

MARCH PMIs

• March U.S. PMI indicates strongest manufacturing growth for three years

The seasonally adjusted IHS Markit final U.S. Manufacturing Purchasing Managers’ Index™ (PMI™) registered 55.6 in March, up from 55.3 in February. The latest PMI reading indicated the strongest improvement in manufacturing business conditions since March 2015. The average PMI reading over the opening three months of 2018 meanwhile indicated the best quarterly performance since the third quarter of 2014.

Output levels at manufacturing firms continued to expand strongly in March. Although the rate of growth softened to a four-month low, the pace of expansion remained comfortably above the long-run series average. Panellists commonly reported that the latest rise was driven by firmer client demand.

In a reflection of more favourable demand conditions, new orders received by manufacturers expanded sharply, despite growth edging down to a three-month low. Anecdotal evidence commonly attributed the upturn to the acquisition of new clients. Furthermore, new export orders continued to increase, extending the current sequence of expansion to eight months.

On the price front, cost burdens faced by goods producers rose sharply in March. Notably, the rate of inflation accelerated to the fastest since November 2012, with companies stating that price rises often stemmed from recently announced tariffs and higher raw material costs. Average prices charged also continued to increase, with the rate of inflation quickening to the fastest since December 2013.

Firmer demand conditions drove the strongest expansion in buying activity since September 2014, though firms also increased efforts to stockpile inputs. Consequently, firms signalled greater pressure on supply chains, with delivery times lengthening to the greatest extent since February 2014.

In line with sustained growth in new orders, employment rose further in March. The rate of job creation remained strong, albeit dipping to a four-month low.

Finally, expectations towards the year-ahead outlook for production among manufacturing firms were the most positive for just over three years.

• China manufacturing PMI dips to four-month low in March

Adjusted for seasonal factors, the headline Purchasing Managers’ Index™ (PMI™) posted 51.0 in March, down from 51.6 in February. Although the reading signalled a further improvement in the health of the sector, the latest upturn was only slight and the weakest recorded since last November.

The amount of total new work placed with Chinese manufacturers increased again in March, though the pace of expansion softened to a four-month low. Weaker growth in overall new orders was in part driven by relatively muted foreign demand, as new export work increased only slightly at the end of the first quarter.

Reflective of the trend for new work, production levels rose to the softest extent since last November, and only modestly overall. Concurrently, relatively subdued sales contributed to a marginal increase in inventories of finished items.

Companies continued to reduce staff numbers, with the rate of job shedding quickening slightly to the most marked for seven months. A number of respondents mentioned that efforts to lower costs had been behind the latest drop in employment.

A combination of lower staff and higher order volumes led to a further increase in backlogs of work. Furthermore, the rate of accumulation quickened slightly since February.

Sustained growth in new orders underpinned a further rise in purchasing activity across China’s manufacturing sector. In line with the trend for new orders and output, the rate of growth was the weakest seen for four months. Nonetheless, the rise was sufficient to lead to a further increase in stocks of inputs, albeit one that was marginal.

Environmental inspection policies were cited as the key driver of longer lead times for inputs during March. Vendor performance has now deteriorated for 19 months in a row.

Average input price inflation continued to soften from September’s recent peak, with cost burdens rising to the weakest extent for nine months in March. At the same time, factory gate prices increased only modestly.

• Japan manufacturing sector growth eases further

The headline Nikkei Japan Manufacturing Purchasing Managers’ IndexTM (PMI)® fell to 53.1 in March, from 54.1 in February to signal a solid, albeit weaker, improvement in operating conditions for Japanese manufacturers.

Anecdotal evidence suggested that favourable order receipts had prompted them to increase production. That said, the rate of growth eased to an eight-month low. Similarly, new business expanded at a softer rate during the latest survey period. Nevertheless, the pace of growth was broadly in line with the average seen across the current 18-month sequence of rising demand. Firms attributed higher new orders to new customer wins and product launches. Sales to overseas clients also rose during March. Panellists noted Europe, China and South Korea as destinations for export orders.

As a result of increased incoming new business, capacity pressures were tested across the Japanese manufacturing sector. Backlogs of work rose, with production lines incapable of meeting demand requirements. Consequently, firms completed orders using their stocks of finished goods. To help clear outstanding work, businesses recruited additional staff in March. That said, the rate of job creation slowed to a three-month low.

Survey data also signalled that the sustained upturn in demand had impacted supply chains. Average lead times for inputs lengthened markedly in March and to the sharpest extent since May 2011. This encouraged businesses to bolster their holdings of raw materials and semi-manufactured goods. Input stocks increased for a third successive month.

Operating expenses faced by Japanese manufacturers rose sharply during March. Higher prices for food, fuel and metals were reported by panellists. In an effort to guard against profit margin erosion, businesses raised selling prices. The rate of output price inflation accelerated to the second fastest pace since October 2008.

• Japan’s industrial production was weaker than expected.

Subprime New-Car Buyers Suddenly Go Missing From U.S. Showrooms

Rising interest rates and new-vehicle prices are squeezing shoppers with shaky credit and tight budgets out of the market. In the first two months of this year, sales were flat among the highest-rated borrowers, while deliveries to those with subprime scores slumped 9 percent, according to J.D. Power. (…)

Through February, sales of vehicles priced at $40,000 and up rose by 4 percent, J.D. Power said, while those priced at less than $20,000 fell by 19 percent. (…)

The silver lining for those who now find new models too expensive is that millions of lightly used cars and SUVs are now coming off lease, providing a good supply of better-equipped, nearly new models at falling prices. (…)

The US government will soon be paying over 20% of the federal revenue in interest on its debt.

The key word here is “soon”. What will then happen to all these “entitlements”. Another kind of crowding out!

Source: @Schuldensuehner; Read full article (Via The Daily Shot)

Iowa’s Conundrum: Not Enough People for the Jobs State can’t find enough trainees for its programs; the Midwest is the only region where openings outnumber out-of-work job seekers

(…) Other states, like Indiana and Wisconsin, are undertaking similar moves. (…) If every unemployed person in the Midwest was placed into an open job, there would still be more than 180,000 unfilled positions, according to the most recent Labor Department data. (…)

The Midwest has seen an outflow of people. A net 1.3 million people living in the Midwest in 2010 had left by the middle of last year, according to census data. The area also attracts fewer immigrants than the rest of the country. (…)

Why Teachers’ Strikes Are Becoming a Nationwide Movement Teachers are threatening a state-wide walkout in Oklahoma, one of several states where educators are looking at the lessons learned from West Virginia teachers pressuring their legislature to increase their pay.

(…) union leaders have taken to heart the lessons of the nine-day West Virginia walkout that concluded in early March. It ended with teachers getting a bigger pay raise. (…)

The $6,000 pay raise, passed by the [Oklahoma] legislature on Wednesday, would be funded in part through a new 5% tax on oil and gas production, a feat thought unthinkable here several months ago. Unions in the state have demanded a $10,000 raise, and the debate over whether they should accept the smaller sum has divided teachers.

(…) some analysts also see a new willingness in the Republican party to embrace populist messages. (…)

BTW:

More on this here.

‘We probably have to wait until after the election, which isn’t that long.’ —President Donald Trump, on his infrastructure plan.

Mall Vacancies Reach Six-Year High as Retail Slump Batters Local Economies Empty space in regional shopping malls reached a six-year high in the first quarter, adding further stress to regions being hit by a retail earthquake that is shaking up the job market across the U.S.

The vacancy rate in big U.S. malls increased to 8.4% in the first quarter of 2018, up from 8.3% in the fourth quarter and the highest since the fourth quarter of 2012, according to real-estate data firm Reis Inc., which studies 77 metropolitan areas. Meanwhile, neighborhood and community shopping centers in 41 of the 77 areas experienced an increase in vacancy during the 12 months ending on March 31. (…)

The completion of 712,000 square feet of new shopping center space also was “much lower” than average, Reis said. (…)

OIL

Something got to happen soon in Saudi Arabia’s:

The Saudis are losing their bet on shale. This from a recent Dallas Fed Energy Survey

• What WTI oil price does your firm need to cover operating expenses for existing wells?

Average prices necessary to cover operating expenses across regions range from $25 to $40 per barrel. Almost all respondents can cover operating expenses for existing wells at current prices. Overall, operating expenses are near those observed in last year’s first-quarter survey, with the average across the sample at approximately $35 per barrel, versus $33 per barrel last year.

• What WTI oil price does your firm need to profitably drill a new well?

Average breakeven prices to profitably drill a new well range from $47 to $55 per barrel, depending on the region. For the entire sample, firms need $52 per barrel on average to profitably drill a new well, up from $50 per barrel when the same question was asked last year but lower than the $54 per barrel in 2016. Average breakeven prices in the Permian Basin rose to $50 per barrel this year from $48 last year.

House-Flipper Opendoor Raising Funds at $2 Billion Valuation

Open Door Labs Inc., which buys and resells houses, is in talks with investors to raise at least $200 million at a roughly $2 billion valuation, a deal that would help it purchase more homes and expand to new cities, according to people familiar with the company. (…)

The company, which does business as Opendoor, is the largest of a new class of companies that offer cash to buy homes online, and then seek to resell them at a slightly higher price after making basic improvements. Smaller companies include OfferPad LLC and Knockaway Inc.

(…) It juices returns with leverage, borrowing about 90% of the purchase price of the home, a person familiar with the matter said. (…)

Executive Chairman Keith Rabois said at a recent technology conference that Opendoor bought $1 billion of real estate in 2017 and plans to buy $3 billion to $4 billion this year.

Opendoor’s impact is growing in the Phoenix real-estate market, where it first set up operations three years ago. In February it bought $60 million worth of homes in that area, about 3% of all purchases, according to Mike Orr, publisher of The Cromford Report, which analyzes Phoenix real estate. The prior February it bought $13 million worth of Phoenix homes, or about 1% of the market, he estimates. (…)

TECHNICALS WATCH

Lowry’s Research says that investors should not be distracted by price movements but rather “focus on the forces of Supply and Demand behind these price movements – forces which continue to indicate an ongoing and healthy bull market with months more to run.”

EARNINGS WATCH

Why 2018’s Profits May Disappoint Thanks to the U.S. tax overhaul, first-quarter earnings are going to be very good. But analysts are too optimistic that the goodness will persist through the following quarters.

With earnings season around the corner, analysts polled by Thomson Reuters I/B/E/S estimate first-quarter profits for companies in the S&P 500 will be up an estimated 18.5% above the year-earlier level. (…)

Analysts project that gains related to the tax cut will persist through the year. Current estimates put second-quarter earnings growth at 19.8%. For the year, analysts now forecast earnings growth of 19.8%. But these expectations may be too optimistic about how much of the tax cut will effectively flow into investors’ pockets as opposed to heading elsewhere.

(…) Analysts are an optimistic bunch and typically they lower their estimates as reality sets in. Earnings will still get a boost, but there are too many variables including more capital spending, higher labor costs, a weaker economy or a trade war, to bank on double-digit growth for the whole year. Skepticism regarding these rosy predictions may be one reason behind the stock market’s recent stumbles, and may increasingly drive the market in the coming months.

The reality is that analysts have normally reduced their full year estimates during the first quarter as corporate guidance often dictated. This year, there has been no trimming and analysts have upped their estimates by the amount provided by the new tax bill, around 6-7% on average.

Corporate guidance has remained positive throughout the quarter, even though the economy is not all that buoyant:

(…) a larger percentage of S&P 500 companies have raised the bar for earnings for Q1 2018 relative to recent averages. Of the 105 companies that have issued EPS guidance for the first quarter, 52 have issued negative EPS guidance and 53 have issued positive EPS guidance. The percentage of companies issuing negative EPS guidance is 50% (52 out of 105), which is well below the 5-year average of 74%.

If 52 is the final number of companies issuing positive EPS guidance for the first quarter, it will mark the highest number of S&P 500 companies issuing positive EPS guidance for a quarter since FactSet began tracking EPS guidance in Q2 2006.

So the bar is higher than normal this earnings season and this could be a risk if profits are only boosted by lower taxes while pretax results disappoint. Half of the positive Q1 guidance is from IT companies. Ex-IT, there have been almost 2 negative for each positive guidance…

US subprime mortgage bonds back in fashion Yield-hungry investors turn to assets blamed for financial crisis a decade ago

Here’s What Trump Could Do to Amazon