JULY MANUFACTURING PMIs
Eurozone: Manufacturing growth remains strong despite slight loss of momentum
Manufacturers in the euro area recorded another resilient outturn in July as the headline PMI® signalled a sharp improvement in the health of the goods-producing sector. At 62.8, the final reading of the PMI was slightly firmer than July’s flash figure of 62.6, but down slightly from 63.4 in June and the lowest since March. Nevertheless, the sector has now recorded successive months of expansion since July 2020, with the latest reading only slightly below June’s survey record high.
The sub-sector splits of the data showed sharp expansions across consumer, intermediate and investment goods makers once again in July, with the latter boasting the fastest upturn of the three. However, a higher PMI reading at consumer goods producers contrasted with lower prints from the other two sectors.
With the exception of Germany, there was a broad decrease across the national Manufacturing PMIs in July. That said, in countries where rates of improvement slowed, expansions were still historically sharp. In Germany, the rate of growth hit a three-month high that was the third-highest on record, behind March and April. Elsewhere, the Netherlands and Greece retained their positions as the fastest and slowest growing countries within the euro area respectively.
The decline seen in headline PMI reflected a similar trend in the survey’s output index, which signalled the softest increase in eurozone production since February. That said, the overall rate of expansion was still notable. The Netherlands, Germany and Austria registered particularly sharp rates of growth.
Higher output volumes were underpinned by a continued improvement in demand for euro area goods. As has been the case over the past few months, the rate of growth in new business was steep and held close to March’s survey record. Meanwhile, new export orders expanded at a sharp rate, albeit one that was the weakest in five months.
Operating capacities were tested in July, as evidenced by a considerable increase in backlogs of work across euro area goods producers. Firms responded by hiring additional staff at a rate unseen in 24 years of data collection. Job creation was especially marked in Germany and Austria.
Furthermore, purchasing activity was expanded as part of efforts to meet growing production requirements. That said, manufacturers continued to face substantial supply-side challenges, with input lead times lengthening to one of the greatest degrees ever recorded by the survey.
The combination of scarce input availability and growing order books led firms to utilise their inventories in July. Stocks of purchases were depleted in line with rising output, while warehoused goods were also used to complete sales.
Widespread shortages of materials and poor transport availability pushed up manufacturing input prices in July at a survey-record rate. Indeed, national level data showed rates of cost inflation accelerating to fresh highs across a slew of countries including Austria, Germany and the Netherlands.
A record increase in input costs was accompanied by a record rise in selling charges as firms sought to pass the cost burden on to their clients. Overall, output charges across the eurozone have risen for ten consecutive months.
Lastly, euro area manufacturers retained their optimistic outlook for the next 12 months as the global economic recovery continues and business adjust to fewer pandemic-related restrictions. Overall, output expectations remained in firm positive territory, although the level of confidence slipped to a seven-month low.
Chris Williamson, Chief Business Economist at IHS Markit:
(…) the July survey also brought further signs that manufacturers and their suppliers are struggling to raise production fast enough to meet demand, driving prices ever higher. (…) the July survey showed inflows of new orders outstripping production to an extent unprecedented in the survey’s 24-year history. (…)
Safety stock building also remains widespread amid ongoing speculation about future supply difficulties. Mounting concerns about how the Delta variant poses further threats to supply chains and staff availability have helped push future growth expectations to the lowest so far this year. (…)
China: Operating conditions improve only slightly in July
Manufacturers in China signalled a softer improvement in operating conditions at the start of the third quarter. Output expanded at the slowest rate for 16 months, while overall new work fell slightly for the first time since May 2020. The COVID-19 pandemic meanwhile continued to dampen export sales, which rose only slightly in July. Relatively subdued demand conditions resulted in broadly unchanged employment across the sector. At the same time, inflationary pressures eased, with both input costs and output charges increasing at softer rates.
The headline seasonally adjusted Purchasing Managers’ Index™ (PMI™) slipped from 51.3 in June to 50.3 in July, to point to a softer improvement in the health of the sector that was only slight. Notably, it signalled the slowest improvement for 15 months.
A key factor weighing on the headline reading was a renewed fall in total new business during July. Though only marginal, it marked the first decline in sales for 14 months. Some companies noted that higher factory gate prices had dampened customer demand. At the same time, new export orders rose only slightly as the pandemic continued to hinder sales overseas.
Concurrently, the rate of output growth softened for the third month in a row. The latest increase was the slowest seen for 16 months and only marginal. Where production had increased, it was generally linked to improved capacity and firmer market conditions.
In line with the trend for output, purchasing activity rose again in July, albeit only slightly. Notably, it was the softest increase in input buying for four months. Stocks of purchased items meanwhile declined slightly during the latest survey period. Panel members indicated that some firms increased their usage of current inventories due to rising raw material prices. Meanwhile, the delivery of goods to clients led to a further reduction in stocks of finished goods.
Supply chain delays persisted in July, with average delivery times for inputs increasing solidly. Anecdotal evidence indicated that material shortages and transport delays due to the pandemic had driven the latest increase in lead times.
Capacity pressures eased at the start of the third quarter, with backlogs of work rising at the softest pace for five months. Employment levels meanwhile were little-changed in July, after a slight uptick in payroll numbers in June.
The latest survey data also saw inflationary pressures soften. Input prices rose at the weakest rate since November 2020, albeit still sharply overall. Higher expenses were frequently linked to increased prices for a range of raw materials and greater transport fees. The rate of output charge inflation likewise slowed in July, with selling prices rising only slightly overall.
Chinese manufacturers were generally optimistic that output would increase over the next year. However, the level of confidence slipped to a three-month low amid concerns over how long it would take to get the global pandemic under control and ongoing supply chain disruption.
Japan: Stronger expansion in manufacturing in July
Japanese manufacturers signalled a quicker improvement in operating conditions in July, as respondents registered faster expansions in production and new order volumes. At the same time, businesses continued to report significant supply chain disruption had dampened demand somewhat, with manufacturers commenting that raw material shortages and delays in receiving inputs had contributed to the sharpest rise in cost burdens for nearly 13 years. As a result, firms in the Japanese manufacturing sector signalled softer optimism regarding the year-ahead outlook for output.
The headline au Jibun Bank Japan Manufacturing Purchasing Managers’ Index™ (PMI) rose from 52.4 in June to 53.0 in July. This signalled the joint-strongest improvement in the health of the sector since April, reflecting a sustained recovery from the impact of the COVID-19 pandemic.
The improvement in operating conditions stemmed from a sixth successive rise in production volumes in July, and at a quicker pace than the previous survey period. Firms often attributed this to improved orders in key manufacturing industries in Japan, notably automotive and semiconductors. The rate of production growth was modest overall, however, constrained by reports of difficulties in sourcing and receiving raw materials.
Japanese manufacturers signalled a further expansion in new order inflows in the latest survey period. This extended the current sequence of growth to seven months, with the rise in July was the sharpest registered for three months. Businesses reported that client demand had continued to recover as sales were boosted by strong demand in key manufacturing sectors. That said, new export orders increased at a softer pace, with anecdotal evidence suggesting that external demand was concentrated in key Asian economies including Taiwan and Mainland China.
Additional pressure on capacity led to Japanese manufacturers expanding employment levels for the fourth month running. The rate of job creation remained only marginal, however, little-changed compared with the second quarter trend . Backlogs of work also continued to increase, providing further evidence of pressure on existing capacity during July.
Input cost inflation strengthened further in July. The pace of inflation was robust overall and the strongest since September 2008. Manufacturers widely linked a rise in average input prices with higher raw material costs. Concurrently, average prices charged for Japanese manufactured goods rose at the quickest pace since November 2018 as firms sought to pass through increased input costs to customers.
Supply chain disruption continued to hinder manufacturing activity during July with average lead times lengthening to the most marked extent since April 2020 and the second-greatest in over a decade. Delays in receiving shipments led manufacturers to increase purchasing activity for the fifth month in a row in a bid to build safety stocks of inputs. That said, stocks of purchases increased at the softest pace in the current three-month sequence of expansion as firms drew down existing holdings to fulfil orders.
Looking forward, business confidence regarding output over the year ahead remained positive with sentiment underpinned by hopes that an accelerating vaccine rollout would trigger a broad-based recovery in manufacturing, as well as ease pressure on supply chains.
The official manufacturing purchasing managers’ index fell to 50.4 from 50.9 in June, the National Bureau of Statistics said Saturday, below the 50.8 median estimate in a Bloomberg survey of economists. The non-manufacturing gauge, which measures activity in the construction and services sectors, eased to 53.3, in line with forecasts. (…)
Manufacturing was hindered in July as some factories usually embark on equipment maintenance, the statistics bureau said. Extreme weather conditions — high temperatures and flooding in some areas — also affected production, it said.
- New orders sub-index fell to 50.9 from 51.5
- New export orders index dropped to 47.7 from 48.1
- Sub-index for manufacturing jobs rose slightly to 49.6; non-manufacturing employment increased to 48.2
- Construction subindex declined to 57.5
Price pressures on manufacturers rebounded in the month, with both input and output prices gaining. (…)
Fed’s Brainard Says Labor Market Hasn’t Satisfied Goals for Reducing Bond Purchases Fed governor Lael Brainard says the labor market is, however, on track to reach a key threshold around the end of the year.
(…) In her remarks, she said the Fed would be in a better position to assess the job market’s progress in October, when spending, school and work patterns “should settle into a post-pandemic normal.” (…)
If the pace of job growth during the second quarter continues for the rest of the year, about two-thirds of job losses as of December 2020 and nearly half of the gap relative to the pre-pandemic trend would be closed by year’s end, she said. A more notable acceleration in job growth could reach those levels somewhat sooner, she said. (…)
Ms. Brainard said she expects forces that have fueled rapid price gains in recent months to dissipate by this time next year, though she said she was watching for evidence that inflation pressures could broaden or that recent high inflation readings would push longer-term inflation expectations to uncomfortably high levels. “Currently, I do not see such signs,” she said.
Ms. Brainard said she sees risks of both stronger- and weaker-than-expected growth and spending resulting, respectively, from high levels of household savings and from risks associated with the Delta variant of the Covid-19 virus. Fears related to the more contagious variant risk dampening a rebound in services and complicate the return to in-person school and work in some areas, she said. (…)
- Polaris Considers More Price Increases After increases across its portfolio by an average of 2.5% in May, sports-vehicle maker weighs boosting prices further amid supply shortages, higher logistics costs
(…) The company’s cost of sales grew 32.8% to $1.57 billion for the quarter ended June 30 compared with the prior-year period. Polaris declined to provide an estimate of its extra costs due to inflation, but stated that the increases are significant. (…)
Polaris’s sales grew 40% to $2.12 billion for the period ended June 30, compared with the prior-year period.
North American retail sales fell 28% in the past quarter largely due to low product availability. Sales in the U.S. and Canada make up about 85% of total revenue. (…) Polaris expects inventories of its recreational sports vehicles to normalize in late 2022 or early 2023. (…)
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Half full or half empty? Heineken doubles profit, warns on costs Rising commodity costs, including for barley, sugar and aluminium for cans, would start affecting Heineken in the second half of 2021 and would have a “material effect” in 2022, when hedging contracts were no longer mitigating the increases.
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“We are seeing inflationary pressures primarily in the U.S., much more mark there than in our global footprint outside the U.S. represent 60% of our business” – Yum! Brands (YUM) CEO David Gibbs
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“I would lastly just say, the pricing that we’ve taken this year, roughly around 6% or so I think in the U.S., that is about in line, maybe a little bit ahead of where the overall inflation is when you add in the labor inflation with food inflation.” – McDonald’s (MCD) CEO Chris Kempczinski
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Food service employees now earn an average of $17.23 per hour, a rise of a full $1 per hour, or 6.2%, just in the four months between January and May. That is up 7.7% from pre-pandemic levels.
Data: BLS. Chart: Axios Visuals
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“The other thing is wage pressure has become evident, we’ve talked about this a bit…It’s very competitive labor market out there. And certainly the biggest contributor to inflationary pressures that we’re seeing in business.” – Amazon.com (AMZN) CFO Brian Olsavsky
How the Fed Is Hedging Its Inflation Bet Though few have noticed, the central bank is already slowing the growth of the money supply.
By Phil Gramm and Thomas R. Saving
(…) In monetary policy, as in all else, actions speak louder than words. The Fed has expanded its reverse-repo borrowing to an unprecedented $1.26 trillion at the end of June from $272 billion in April, pulling almost a trillion dollars of liquidity out of the financial system. Reverse-repo borrowing has reduced bank reserves, even as the Fed has continued to buy Treasurys and mortgage-backed securities.
Not surprisingly, money supply growth is starting to moderate. The growth of the M2 money stock fell from around 25% in 2020 to around 10% on an annualized basis in the first six months of 2021. It was less than 4% in the last quarter. Remarkably in an economy awash in money, Fed action to reduce liquidity by $1 trillion in three months has thus far gone largely unnoticed, but this stealth action represents a dramatic change in monetary policy. The magnitude of the explosion in reverse-repo borrowing is roughly the equivalent of the impact of selling rather than buying $120 billion of securities to the public a month for more than eight months. (…)
Mr. Powell assures us that the inflation spike is temporary and interest rates won’t rise until 2023. Yet the Fed has raised both the interest rate it pays on reverse-repo borrowing and on reserves. If market interest rates start to rise, the Fed must raise the rate it pays on reserves and reverse-repo borrowing, engage in huge open-market security sales, or raise reserve requirements to stop the money supply from exploding as banks use the overhang of excess reserves to increase lending.
The good news is that the Fed is already using its capacity to borrow in the reverse-repo market to reduce money supply growth. But the excess reserves of the private-banking system are still almost $4 trillion. The bad news is that if the inflation problem doesn’t go away and market interest rates start to rise, the reserve overhang has the potential to cause a money-supply eruption. The use of any of the Fed’s powers to stop the growth in the money supply and inflation will only send interest rates higher.
TECHNICALS WATCH
My favorite technical analysis firm is getting more forceful in its advice for prudence. The deterioration in the main technical indicators continues. Increased volatility, persistent poor breadth and rising selling pressures are masked by still positive price actions in some of the main indices.
Looking at the various indices, the smaller the capitalization, the higher the volatility and the flatter the trend:
The Russell 2000 stalled in mid-February, the S&P 600 in mid-March, the S&P mid-caps in mid-May with all three displaying increasing weakness in June and July. The Renaissance IPO index had its bear market between mid-February and mid-May (-29%) and is still down 17%. The main SPAC index (SPAK) crashed 36% during the same Feb-May period and remains down 32.8%. ARK’s Innovation ETF also lost 36% at some point and is still down 23%.
Meanwhile, many of the retail crowd’s favorites are hurting big time. AMC lost 41% in the last 2 months, GME 47% in the last 6 weeks. Robinhood is down 7.5% already.
Horan Capital Advisors informs us that
- nearly 40% of the S&P 500 stocks are down greater 10% from their 52-week high and the average decline for stocks from their 52-week highs is 9.1%.
- The mid cap index is down 2.4% from its high yet the average decline for the stocks in the index is 13.5% and nearly 57% of the stocks are down more than 10%.
- The S&P 600 Small Cap Index has seen even broader weakness with almost 70% of the index’s stocks down more than 10% from their 52-week highs. The percentage of stocks down more than 20% is 37.4% with the average decline equaling 31.7%. The small cap index is down 5.15% from its high and the average decline of the stocks in the index from their 52-week high is 18.4%.
That said, CMG Wealth’s Steve Blumenthal’s dashboard is mostly green with Steve concluding that “the weight of trend evidence remains bullish for equities, high grade bonds, and gold,” in stark contrast to Lowry’s Research’s analysis which concludes that the risk/reward picture “has become unfavorable”. To my recollection, this is the most cautious Lowry’s has been in several years. In early July, the warning was that a topping process might be underway. It looks like the then seemingly short term problems are not being resolved and that this could be the topping process.
Steve’s 13/34–Week EMA Trend Chart on the S&P 500 Index remains bullish but the 13W line is uncharacteristically extended, 5.3% above its 34W trend line.
This is happening as we enter the last month of summer heading into the more dangerous September-October period. This topdowncharts.com table highlights September’s bad numbers but also the often painful October.
Topdown’s Callum Thomas yesterday:
And here is the seasonal pattern by itself, as I’ve noted before, seasonality is simply a statistical characterization of the past (past performance does not necessarily = future performance); it is an average (averages can deceive); and there are many exceptions to the seasonal rule. That said, it is an interesting point to note – maybe after such a strong run, the market is due for a bit of a breather.
Ned Davis Research has this intriguing Cycle Composite (mix of seasonality signal, presidential cycle, and decennial cycles) chart:
Source: @dnl8201
Bank of America presents seasonality in its own way:
Also from BofA:
Investors have to come to terms with some contradictory trends:
- large cap equity markets are strong but most equities are not;
- profits are exploding but nobody cares about rising costs that cannot indefinitely be offset by booming revenues;
- the bond market is telling us that the economy may not be as strong as everybody expects;
- the USD seems to say the same;
- the Fed is openly telling us that excess liquidity will soon dry up;
- the China MSCI index is down 26.7% since mid-February, -13.5% in the last 2 months;
- the Delta variant is a rising threat: Fauci predicts worse to come in US Covid resurgence Biden’s chief medical adviser rejects new lockdowns despite rising cases and falling vaccination rates. China is confronting its broadest coronavirus outbreak since the pathogen emerged in late 2019, with cases now in 14 of 32 provinces. Israel’s public health officials are beginning to see signs of more serious disease among the vaccinated elderly.
EARNINGS WATCH
From Refinitiv:
Through Jul. 30, 296 companies in the S&P 500 Index have reported earnings for Q2 2021. Of these companies, 88.5% reported earnings above analyst expectations and 8.4% reported earnings below analyst expectations. In a typical quarter (since 1994), 66% of companies beat estimates and 20% miss estimates. Over the past four quarters, 83% of companies beat the estimates and 14% missed estimates.
In aggregate, companies are reporting earnings that are 16.7% above estimates, which compares to a long-term (since 1994) average surprise factor of 3.9% and the average surprise factor over the prior four quarters of 20.1%.
Of these companies, 86.8% reported revenue above analyst expectations and 13.2% reported revenue below analyst expectations. In a
typical quarter (since 2002), 61% of companies beat estimates and 39% miss estimates. Over the past four quarters, 74% of companies beat the estimates and 26% missed estimates.In aggregate, companies are reporting revenue that are 4.2% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.1% and the average surprise factor over the prior four quarters of 3.5%.
The estimated earnings growth rate for the S&P 500 for 21Q2 is 89.8%. If the energy sector is excluded, the growth rate declines to 75.0%. The estimated revenue growth rate for the S&P 500 for 21Q2 is 21.8%. If the energy sector is excluded, the growth rate declines to 18.1%.
The estimated earnings growth rate for the S&P 500 for 21Q3 is 29.7%. If the energy sector is excluded, the growth rate declines to 23.4%.
Trailing EPS are now $181.34. Full year 2021e: $200.53 up 1.5% from 197.47 last Friday. 2022e: $221.59, up 2.3% from last Friday.
Heavyweight Companies Enjoy Outsize Rewards as Economy Rebounds Corporate titans during the Covid-19 pandemic have extended their lead over smaller rivals
(…) Evidence since the global financial crisis a decade ago suggests bigger investment, especially in intangible assets, translates into fatter margins and quicker growth, as titans exert more leverage on consumer prices and wages.
Two-thirds of growth in research and development in the year through the third quarter of 2020 came from big, highly productive companies, according to a McKinsey study of 5,500 U.S. and European companies. Moreover, these companies experienced no decline in sales during the same period while other companies lost 11% of their revenues on average.
The International Monetary Fund warned in March that, due to the pandemic, industry concentration could now increase in advanced economies by at least as much as it did in the 15 years through 2015.
Industry concentration, defined as the ratio of sales of the top four firms to the sales of the top 20 firms in the market, has increased by more than 30% since 1980, according to IMF research across industries and countries. After the pandemic, the top four firms will hold 60% of those sales on average, compared with 56% had the pandemic not happened, according to IMF projections. (…)
During the pandemic, larger companies had the financial firepower and digital capabilities to rapidly retool their business models and develop new products, while many smaller competitors languished and focused on survival. (…)
Big businesses also have their pick of the best candidates, while small firms struggle with worker shortages, and can edge out smaller competitors in procuring materials. (…) Bigger competitors have deeper pockets and suppliers don’t want to disappoint their biggest customers (…).
The net profit margins of the S&P 500 companies rose to a record of 12.8% in the first quarter of 2021, up from about 11% before the pandemic, according to FactSet. Smaller listed companies had margins of about 6% both before and after the crisis. (…)
The importance of scale is a particular challenge for Europe because its economy is dominated by smaller companies, especially in the South. Only around 20% of Italians work for businesses with more than 250 staff, compared with almost 60% of Americans. (…)
Interesting WSJ piece but a comparison of revenues and profits of S&P 500 companies with S&P 600 companies does not verify. Some charts from Ed Yardeni:
And yet:
Hmmm…If the apparent equity market topping process is mainly due to smaller caps, it does not seem to reflect the relative fundamentals. Hmmm…
Anti-Ark ETF to Bet Against Cathie Wood’s Flagship Fund
The Short ARKK ETF would seek to track the inverse performance of the $23 billion Ark Innovation ETF (ticker ARKK) — the largest fund in Ark Investment Management’s lineup — through swaps contracts, according to a filing Friday with the U.S. Securities and Exchange Commission. The fund would trade under the ticker SARK and charge a 0.75% operating expense, in line with ARKK’s fee.
If launched, SARK would serve as a bold bet against one of 2020’s most successful managers. ARKK surged roughly 150% last year with Wood at the helm, frequently doubling down on Tesla Inc. and other high-flying technology shares. However, some of the fund’s hottest stocks have since weighed on its performance as the market’s speculative fervor settles — ARKK is underwater by 3.6% in 2021, versus the S&P 500’s 17% gain. (…)
Ray Dalio: Understanding China’s Recent Moves in Its Capital Markets
(…) As for investing, as I see it the American and Chinese systems and markets both have opportunities and risks and are likely to compete with each other and diversify each other. Hence they both should be considered as important parts of one’s portfolio. I urge you to not misinterpret these sorts of moves as reversals of the trends that have existed for the last several decades and let that scare you away.
And FYI via The Market Ear:
