FLASH PMI
Eurozone downturn deepens in September as price pressures intensify
A eurozone recession is on the cards as companies report worsening business conditions and intensifying price pressures linked to soaring energy costs.
The early PMI readings indicate an economic contraction of 0.1% in the third quarter, with the rate of decline having accelerated through the three months to September to signal the worst economic performance since 2013, excluding pandemic lockdown months.
With demand slumping and companies growing increasingly pessimistic about the outlook, the survey’s forward-looking indicators point to a steepening economic decline for the eurozone in the fourth quarter, adding to the likelihood of the region falling into recession.
The surge in energy costs has meanwhile reignited inflationary pressures which, having shown some signs of cooling in prior months amid easing supply shortages, have reaccelerated.
The seasonally adjusted S&P Global Eurozone PMI® Composite Output Index fell from 48.9 in August to 48.2 in September, according to the preliminary ‘flash’ reading based on approximately 85% of usual survey responses. The PMI has now registered below the neutral 50.0 level for three successive months, thereby signalling a continual economic decline throughout the third quarter, with the rate of contraction gathering pace in September to reach the fastest since January 2021. Excluding the pandemic shocks, the latest reading was the lowest since May 2013.
Manufacturing led the downturn, with factory output falling for a fourth straight month. Moreover, the rate of decline quickened slightly to the fastest since May 2020.
Service sector output also fell, down for a second consecutive month, contracting at a rate not seen since February 2021. The service sector decline was notable in being the sharpest since 2013 excluding the falls seen as a result of pandemic containment measures, led by steepening losses for travel, tourism, recreation, real estate and insurance.
By country, as seen throughout the past three months, Germany recorded reduced activity, with the composite PMI sinking to 45.9, its lowest since May 2020 and, excluding the pandemic, its weakest since June 2009. Besides the initial COVID-19 lockdown in early-2020, Germany’s service sector decline was also the severest since June 2009. Manufacturing output continued to fall across Germany, albeit with the rate of decline moderating thanks in part to reduced supply chain constraints.
Output rose only modestly in France, the composite PMI registering 51.2. Although the increase exceeded the near-stalling seen in August, the survey indicated a marked slowing in French growth during the third quarter compared to the second quarter. An acceleration of service sector growth helped offset a deepening manufacturing downturn. French factories reported a drop in output which, barring the initial collapse during closures at the start of the pandemic, was the largest since March 2013.
Elsewhere across the region, output fell for the first time since February 2021, as a third successive monthly drop in manufacturing production was accompanied by the first fall in service sector activity since January.
New orders for goods and services meanwhile fell sharply for a third straight month, the rate of loss accelerating to a pace not seen since April 2013 barring periods of pandemic restrictions. Manufacturing orders fell especially severely, but service sector new business inflows also fell at an increased rate, in both cases declining faster than output to hint at a further acceleration of output losses in October.
Similarly, backlogs of uncompleted orders fell at a steepening rate, down for a third month in a row. An accelerated decline in manufacturing was joined by a renewed fall in services. Such declines point to excess capacity relative to demand growth.
While employment growth was unchanged during the month, August’s gain had been the lowest for 17 months. The recent cooling in the job market reflects increased caution in respect to hiring amid rising costs and growing economic uncertainty.
Although factory output was again constricted in many cases by component shortages, with some evidence of energy market developments also limiting production capabilities, supplier delivery times lengthened to the smallest extent since October 2020 amid reports of fewer component shortages and improved logistics and shipping in some sectors.
While easing raw material supply constraints helped alleviate some inflationary pressures, rising energy prices were widely blamed on a renewed acceleration of input cost inflation across both manufacturing and services. The overall increase in costs was the steepest since June.
Higher cost pressures meant that, after four months of cooling, the rate of increase of prices charged for goods and services also accelerated to the sharpest since June as firms sought to protect margins.
Looking ahead, business expectations for the coming year slumped sharply lower, dropping to the weakest since May 2020 and, excluding the pandemic, the lowest since November 2012. By far the steepest collapse in confidence was evident in Germany. In contrast, a slight improvement in future sentiment was recorded in France and a comparatively resilient mood was seen in the rest of the region as a whole, albeit in both cases down sharply from earlier in the year.
The gloomy outlook principally reflected concerns over soaring energy prices and the detrimental impact of rising inflation on firms’ costs and customer demand. Higher interest rates, the Ukraine war, and ongoing supply chain shortages were also widely cited, as was a further shift towards destocking in manufacturing, both among producers and their customers.
U.S. Index of Leading Indicators Continue to Decline in August
The Conference Board’s Composite Leading Economic Indicators Index fell 0.3% (-1.0 y/y) in August following a 0.5% July decline, revised from -0.4%. The Action Economics Forecast Survey expected no change in the Leading Indicators index for last month.
Four of the Leading Index’s ten components made negative contributions in August. Declines came from the factory sector workweek, the ISM new orders index, building permits and consumer expectations for business/economic conditions. Initial jobless insurance claims, the slope of the yield curve, nondefense capital goods orders less aircraft, stock prices and the leading credit index contributed positively to the index change. Factory orders for consumer goods held steady.
The Index of Coincident Economic Indicators improved 0.1% (2.2% y/y) in August following a 0.5% July increase, revised from 0.3%. Payroll employment, personal income and business sales made positive contributions to the August increase. Industrial production contributed negatively.
The Index of Lagging Economic Indicators increased 0.7% (7.1% y/y) in August following an unrevised 0.4% July gain. Three of the index’s seven components made positive contributions, one made a negative contribution and three were unchanged.
The ratio of the Coincident index to the Lagging index also is seen as a leading indicator. The ratio has been steadily declining since November, another indication of rising recession risks.
The 6-m m.a. of the 6-m rate of change is now negative as this Advisor Perspective chart shows. Since 1965, 8 of the 11 negative signals preceded a recession by between 2 and 15 months.
The 12-m version, still positive, has never missed but it can lag.
The bond market is not sniffing a recession. Or is QT in action?
Middle-Income Households Feel Bigger Pinch From Inflation, Report Finds Congressional Budget Office says price increases have outpaced income gains for midlevel households
This report defines luxury homes as those estimated to be in the top 5% based on market value, and non luxury homes as those estimated to be in the 35th-65th percentile based on market value. (…)
“For a luxury buyer, a higher interest rate can equate to a monthly housing bill that’s thousands of dollars more expensive,” Fairweather said. “Someone who was in the market for a $1.5 million home last year may now have a maximum budget of $800,000 thanks to higher mortgage rates. Luxury goods are often the first thing to get cut when uncertain times force people to reexamine their finances.” (…)
The supply of non luxury homes fell 3.5% year over year during the three months ending Aug. 31. That’s the first time in roughly two years that luxury-home supply fell at a slower clip than non luxury supply. (…)
Nationwide, new listings of luxury homes rose 1.2% year over year during the three months ending Aug. 31, while new listings of non luxury homes fell 5.9%. (…)
Home-price growth in the luxury market is slowing as demand cools. The median sale price of luxury homes rose 10.5% year over year to $1.1 million during the three months ending Aug. 31, compared with an annual increase of 20.3% a year earlier and a record gain of 27.8% during the three months ending June 30, 2021.
Prices of luxury homes are rising at a slower pace than prices of non luxury homes, which increased 15.5% year over year to $335,000 during the three months ending Aug. 31. That’s down slightly from an annual increase of 17.2% a year earlier and a record gain of 19.7% during the three months ending March 31, 2022.
In August 2022, the U.S. rental market experienced its first single-digit growth over the past 13 months. The median rent growth across the top 50 metros slowed to 9.8% year-over-year for 0-2 bedroom properties but is still three times as fast as the growth rate seen just before the pandemic hit in March 2020.
The median asking rent was $1,771, down by $10 from last month. It is the first time we have seen rents decline since last November, perhaps a sign that more typical seasonal cooling is returning to the rental market, like we’ve seen in recent for-sale data. (…)
FedEx to Raise Shipping Rates by 6.9% as It Combats Slowdown The delivery giant says it plans to eliminate another $4 billion in annual costs.
Freight Labor Unrest Is Going Global and Weighing on Supply Chains Walkouts at U.K. ports, last-minute negotiations for U.S. railroads are among a growing series of conflicts involving workers critical to trade
(…) The conflicts count a range of workers that handle freight around the world, from truck drivers in South Korea to package sorters at Amazon distribution centers in New York, who are newly emboldened to press for higher pay and better working conditions after more than two years of stressed business during the pandemic. (…)
Workers at Liverpool’s port rejected a contract offer that included an 8.3% annual pay increase, and the Unite union said that fell short of increases in consumer prices.
In South Korea, truck drivers snarled the country’s export-driven supply chains in June when they stopped working for a week in a dispute over pay and the drivers’ demand for subsidies to cover rising fuel costs. (…)
Dockworkers at Felixstowe walked off the job for eight days in August and plan a second eight-day strike starting Sept. 27 in a push for higher wage increases. A series of strikes at North Sea ports in Germany, including Hamburg, one of Europe’s busiest container ports, disrupted operations for months before a contract agreement was reached in late August. (…)
“This has been the first time that we’ve seen a combination all across the world of different labor unrest.” (…)
China Manufacturing Sector Stagnates, and Services Sinking Fast No less than 44% of respondents to the September Sales Managers Survey stated they were still affected by city shutdowns.
Both Market and Sales Growth Indexes registered data in negative territory, with the latter index at a 29 month low.
Better news came from the steady rise of the Staffing Index, but it too remained marginally below the 50 line. In relation to Covid induced shortages the best news clearly came from the Prices Index, which fell once again to a level of 47.1, a 16 month low, suggesting that the massive price hikes of the covid period are now well and truly over.
The apparent stagnation of the Manufacturing sector, was more than mirrored in the large Services area of business activity. Both Business Confidence and Staffing Indexes fell to the lowest levels ever recorded by the Sales Managers survey.
All the Services sector indexes recorded index values below the 50 line, suggesting China has some way to go before it can benefit from overall economic growth at levels anywhere near to those recorded pre Covid.
Measured over all sectors, the Chinese economy does not look well placed, with Covid still impacting negatively on many of the companies in our survey.
U.K. Announces Package of Sweeping Tax Cuts The new chancellor said the government would cut payroll taxes, freeze corporation tax, ditch a cap on banker bonuses and spend billions to subsidize energy bills over the next two years.
(…) “This cycle of stagnation has led to the tax burden being forecast to reach the highest levels since the late 1940s,” said Mr. Kwarteng. “We are determined to break that cycle. We need a new approach for a new era focused on growth.”
The package of subsidies and tax cuts—which will be funded by borrowing—will cost more than 150 billion pounds, equivalent to $169 billion, over the next couple of years, analysts say, in what amounts to a big play by new Prime Minister Liz Truss to jump-start the economy with a large dose of Reaganomics. The government said it would borrow an additional £72.4 billion to fund the package.
Mr. Kwarteng said the top rate of tax for people who earn more than £150,000 a year would be 40%, compared with 45% currently. Basic income tax will be cut by one penny to 19% from 2023, a year earlier than planned. The government also announced lower taxes on property transactions for first time buyers. The government is reversing the 1.25-percentage-point increase in dividend tax rates that would have landed in 2023. This was announced alongside a series of cuts to regulation and the creation of new investment zones. (…)
The energy subsidy alone is expected to cost around £60 billion over the next six months. The cost of the tax cuts will be £26.7 billion next year, £31.4 billion in 2024 and £44.8 billion by 2026, the U.K. Treasury said. (…)
RISK OFF!
BofA Says Cash Is King as Investor Pessimism Hits 2008-Era High Sentiment ‘unquestionably’ worst since global financial crisis
Investors are flocking to cash and shunning almost every other asset class as they turn the most pessimistic since the global financial crisis, according to Bank of America Corp. strategists.
Cash had inflows of $30.3 billion, while global equity funds saw outflows of $7.8 billion in the week through Sept. 21, the bank said in a note, citing EPFR Global data. Bond funds lost $6.9 billion, while $400 million left gold, the data showed.
Investor sentiment is “unquestionably” the worst it’s been since the crisis of 2008, with losses in government bonds being the highest since 1920, strategists led by Michael Hartnett wrote in the note. They see cash, commodities and volatility continuing to outperform bonds and stocks, with Bank of America’s custom bull and bear indicator returning to the maximum level of bearishness. (…)
His forecast for corporate earnings suggests the S&P 500 will trade between 3,300 and 3,500 points — at least 7% below current levels. Goldman Sachs Group Inc. strategists slashed their year-end target for the US benchmark index late on Thursday, also warning that a dramatic upward shift in the outlook for interest rates will weigh on valuations. (…)
By trading style, US large caps had inflows, while value, growth and small caps all saw outflows.
Capitulation? Wait for large caps.
- Goldman Sachs:
The higher interest rate scenario that we now incorporate into our valuation model supports a P/E of 15x (vs. prior forecast of 18x) and implies a year-end (3-month) S&P 500 target of 3600 (-5%) and 6-month and 12-month forecasts of 3600 (-5%) and 4000 (+6%). (…)
The outlook is unusually murky. The forward paths of inflation, economic growth, interest rates, earnings, and valuations are all in flux more than usual with a wider distribution of potential outcomes. Based on our client discussions, a majority of equity investors have adopted the view that a hard landing scenario is inevitable and their focus is on the timing, magnitude, and duration of a potential recession and investment strategies for that outlook.
We previously published that in a recession falling S&P 500 EPS could cause the index to decline to 3150 (-17%). A 11% drop in EPS would be consistent with modestly negative real GDP growth and the 13% median EPS drop during prior recessions. Under a “hard landing” scenario, the yield gap would rise and the 3-, 6-, and 12-month S&P 500 targets would be 3400 (-10%) / 3150 (-17%) / 3750 (-1%).
More than half of all bitcoin trades are fake (Forbes)
Within the emerging and turbulent market for cryptocurrencies, where there are no fewer than 10,000 tokens, bitcoin, is the great granddaddy, the blue-chip, representing 40% of the $1 trillion in crypto assets outstanding. Bitcoin is crypto’s gateway drug. An estimated 46 million adult Americans already own it according to New York Digital Investment Group, and an increasing number of institutional investors and corporations are warming to the nascent alternative asset. (…)
The reason why some traders engage in wash trading is to inflate the trading volume of an asset to give the appearance of rising popularity. In some cases trading bots execute these wash trades in tokens, increasing volume, while at the same time insiders reinforce the activity with bullish remarks, driving up the price in what is effectively a pump and dump scheme. Wash trading also benefits exchanges because it allows them to appear to have more volume than they actually do, potentially encouraging more legitimate trading. (…)